As filed with the Securities and Exchange Commission on July 30, 1999.
1933 Act File No. 2-97908
1940 Act File No. 811-4308
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
Post-Effective Amendment No: 22 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 23
--
LEGG MASON TOTAL RETURN TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
MARIE K. KARPINKSI ARTHUR C. DELIBERT, ESQ.
100 Light Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts
Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C.20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on JULY 31 , 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on __________, 1999 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , _______, 1999 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason Total Return Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus--Primary Shares
Prospectus--Navigator Shares
Part B -Statement of Additional Information
Part C -Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Total Return Trust, Inc.
FORM N-1A CROSS REFERENCE SHEET
<TABLE>
PART A ITEM NO. PRIMARY SHARES PROSPECTUS CAPTION
- --------------- ---------------------------------
<CAPTION>
<S> <C>
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your
Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management; How to Invest
9 Financial Highlights Information Financial Highlights
PART A ITEM NO. NAVIGATOR SHARES PROSPECTUS CAPTION
- --------------- -----------------------------------
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares;
Account Policies; Services for Investors;
Dividends and Taxes
8 Distribution Arrangements Management
9 Financial Highlights Information Financial Highlights
STATEMENT OF ADDITIONAL INFORMATION
PART B ITEM NO. CAPTION
- -------------- -------
10 Cover Page and Table of Contents Same
11 Fund History Description of the Funds
12 Description of the Fund and Its Description of the Funds; Fund Policies;
Investments and Risks Investment Strategies and Risks
13 Management of the Fund Management of the Funds
14 Control Persons and Principal Holders Management of the Funds
of Securities
15 Investment Advisory and Other Services Management Agreement; Investment Advisory
Agreement; The Funds' Distributor
16 Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
17 Capital Stock and Other Securities Capital Stock Information
18 Purchase, Redemption, and Pricing of Additional Purchase and Redemption Information;
Shares Valuation of Fund Shares
19 Taxation of the Fund Additional Tax Information; Tax-Deferred Retirement
Plans
</TABLE>
<PAGE>
20 Underwriters The Funds' Distributors
21 Calculation of Performance Data Performance Information
22 Financial Statements Financial Statements
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Investors Trust, Inc.:
Legg Mason American Leading Companies Trust
Legg Mason Balanced Trust
Legg Mason U.S. Small-Capitalization Value Trust
PRIMARY SHARES PROSPECTUS JULY 31, 1999
logo
HOW TO INVEST (SERVICEMARK)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C O N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
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LEGG MASON EQUITY FUNDS
[icon] I N V E S T M E N T O B J E C T I V E S
LEGG MASON VALUE TRUST, INC.:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities that, in the adviser's opinion,
offer the potential for capital growth. The adviser follows a value discipline
in selecting securities, and therefore seeks to purchase securities at large
discounts to the adviser's assessment of their intrinsic value. Intrinsic value,
according to the adviser, is the value of the company measured, to different
extents depending on the type of company, on factors such as, but not limited
to, the discounted value of its projected future free cash flows, the company's
ability to earn returns on capital in excess of its cost of capital, private
market values of similar companies, the value of its assets, and the costs to
replicate the business. Qualitative factors, such as an assessment of the
company's products, competitive positioning, strategy, industry economics and
dynamics, regulatory frameworks and more, are also important. Securities may be
undervalued due to uncertainty arising from the availability of accurate
information, economic growth and change, changes in competitive conditions,
technological change, changes in government policy or geo-political dynamics,
and more. The adviser takes a long-term approach to investing, generally
characterized by long holding periods and low portfolio turnover. The fund
generally invests in companies with market capitalizations greater than $5
billion, but may invest in companies of any size.
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
The fund may also invest in debt securities of companies having one or more of
the above characteristics. The fund may invest up to 25% of its total assets in
long-term debt securities. Up to 10% of its total assets may be invested in debt
securities rated below investment grade (commonly referred to as "junk bonds").
For temporary purposes, or when cash is temporarily available, the fund may
invest without limit in investment grade, short-term debt instruments, including
government, corporate and money market securities. The fund may not achieve its
investment objective when so invested.
LEGG MASON TOTAL RETURN TRUST:
INVESTMENT OBJECTIVE: Capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for long-term capital growth and attractive current income. The
fund invests primarily in common stocks, debt securities, and securities
convertible into common stocks, but is not limited to these types of securities.
The fund may invest in securities that do not pay current income but do, in the
adviser's opinion, offer prospects for capital appreciation and/or future
income. The adviser follows a value discipline in selecting securities, and
therefore seeks to purchase securities at large discounts to the adviser's
assessment of their intrinsic value. Intrinsic value, according to the adviser,
is the value of the company measured, to different extents depending on the type
of company, on factors such as, but not limited to, the discounted value of its
projected future free cash flows, the company's ability to earn returns on
capital in excess of its cost of capital, private market values of similar
companies, the value of its assets, and the costs to replicate the business.
3
<PAGE>
Qualitative factors, such as an assessment of the company's products,
competitive positioning, strategy, industry economics and dynamics, regulatory
frameworks and more, are also important. Securities may be undervalued due to
uncertainty arising from the availability of accurate information, economic
growth and change, changes in competitive conditions, technological change,
changes in government policy or geo-political dynamics, and more. The fund may
invest in companies of any size.
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer long-term attractive total returns at
reasonable risk, when a more compelling investment opportunity is found, or when
the investment basis no longer applies.
The fund may invest in money market securities for temporary defensive purposes,
or when cash is temporarily available. The fund may not achieve its investment
objective when so invested. Consistent with the investment objective, the fund
may also invest in debt securities when the adviser believes the return on
certain debt securities may equal or exceed the return on equity securities. The
fund may invest in debt securities of any maturity of both foreign and domestic
issuers without regard to rating, and may invest its assets in debt securities
without regard to a percentage limit. The adviser currently anticipates that
under normal market conditions, the fund will invest no more than 50% of its
total assets in intermediate-term and long-term debt securities and no more than
5% of its total assets in debt securities not rated investment grade (commonly
referred to as "junk bonds").
LEGG MASON SPECIAL INVESTMENT TRUST:
INVESTMENT OBJECTIVE: capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities, and securities convertible into
equity securities, of companies whose market capitalization are typically
classified as small to mid-sized. The adviser defines small to mid-sized
companies as those below the top 500 U.S. companies in terms of market
capitalization. It also invests in "special situations" without regard to market
capitalization. Special situations are companies undergoing unusual or possibly
one-time developments that, in the opinion of the adviser, make them attractive
for investment. Such developments may include actual or anticipated: sale or
termination of an unprofitable part of the company's business; change in the
company's management or in management's philosophy; a basic change in the
industry in which the company operates; introduction of new products or
technologies; or the prospect or effect of acquisition or merger activities.
The adviser follows a value discipline in selecting securities, and therefore
seeks to purchase securities at large discounts to the adviser's assessment of
their intrinsic value. Intrinsic value, according to the adviser, is the value
of the company measured, to different extents depending on the type of company,
on factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate the business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more.
The fund also invests in debt securities of companies having one or more of the
above characteristics. The fund may invest up to 35% of its net assets in debt
securities rated below investment grade (commonly referred to as "junk bonds").
The fund may invest up to 20% of its total assets in securities of companies
involved in actual or anticipated reorganizations or restructurings.
4
<PAGE>
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
For temporary defensive purposes, or when cash is temporarily available, the
fund may invest without limit in investment grade, short-term debt instruments,
including government, corporate and money market securities. The fund may not
achieve its investment objective when so invested.
LEGG MASON AMERICAN LEADING COMPANIES TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income
consistent with prudent investment risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for capital appreciation and potential for current income. Under
normal circumstances, the fund will seek to achieve its objective by investing
at least 75% of its total assets in common stocks of Leading Companies that have
market capitalizations of at least $5 billion, and at least 75% of stocks held
by the fund will be dividend-paying stocks. The adviser defines a "Leading
Company" as one that, in the opinion of the adviser, has attained a major market
share in one or more products or services within its industry(ies) and possesses
the financial strength and management talent to maintain or increase market
share and profit in the future. Such companies are typically well known as
leaders in their respective industries; most are found in the top half of the
S&P 500.
The adviser follows a value discipline in selecting securities, and therefore
seeks to purchase securities at large discounts to the adviser's assessment of
their intrinsic value. Intrinsic value, according to the adviser, is the value
of the company measured, to different extents depending on the type of company,
on factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate the business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more.
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
Under normal circumstances, the fund expects to own a minimum of 35 different
securities. The adviser currently anticipates that the fund will not invest more
than 25% of its total assets in foreign securities.
During periods when the adviser believes the return on certain debt securities
may equal or exceed the return on equity securities, the fund may invest up to
25% of its total assets in debt securities, including government, corporate and
money market securities, consistent with its investment objective. The fund may
invest in debt securities of any maturity of both foreign and domestic issuers.
The debt securities in which the fund may invest will be rated at least A by
Standard & Poor's or Moody's, or deemed by the adviser to be of comparable
quality.
When cash is temporarily available, or for temporary defensive purposes, the
fund may invest without limit in repurchase agreements and money market
instruments, including high-quality short-term debt securities. The fund may not
achieve its investment objective when so invested.
5
<PAGE>
LEGG MASON BALANCED TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
Under normal conditions, the fund invests up to 75% of its assets in equity
securities. The adviser emphasizes dividend-paying equity securities that, in
the opinion of the adviser, offer the potential for long-term growth and common
stocks or securities convertible into common stocks that do not pay current
dividends but offer prospects for capital appreciation and future income. Stocks
are selected based on value-oriented selection criteria, taking into
consideration adequate portfolio diversification -- by sector and by industry,
as well as by equity characteristics.
The fund invests at least 25% of its assets in fixed income securities,
including, without limitation, preferred stocks, bonds, debentures, municipal
obligations, and mortgage-related securities; certificates of deposit; Treasury
bills, notes, bonds and other obligations of the U.S. government, its agencies
and instrumentalities; high-quality commercial paper and other money market
instruments; and repurchase agreements. The fund may invest in securities of any
maturity, but, under normal circumstances, expects to maintain its portfolio of
fixed income securities so as to have an average dollar-weighted maturity of
between four and five years. No more than 5% of the fund's total assets will be
invested in fixed income or convertible securities not rated at least BBB or Baa
at the time of purchase, or comparable unrated securities.
Fixed income security selection is based upon identifying those fixed income
securities that the adviser deems to be undervalued, taking into consideration
sector analysis, yield curve analysis and credit analysis. Absent the ability to
find undervalued securities outside the Treasury sector, the adviser will hold
Treasury securities. The adviser avoids making interest rate forecasts and,
accordingly, the fund's fixed income portfolio maintains a duration that is
similar to that of the fund's benchmark.
The fund is managed as a balanced fund. This approach attempts to "balance" the
potential for growth and greater volatility of stocks with the historically
stable income and more moderate average price fluctuations of fixed income
securities. The proportion of the fund's assets invested in each type of
security will vary from time to time in accordance with the adviser's assessment
of investment opportunities. It is currently anticipated that the fund will
invest an average of 60% of its total assets in common stocks and preferred
stocks and the remaining 40% in various fixed income securities. These
percentages may vary in attempting to increase returns or reduce risk.
The adviser typically sells a stock when, in the adviser's assessment, the gap
between market price and intrinsic value is narrowed by reason of higher market
prices or downward reassessment of intrinsic value by the adviser.
The adviser typically sells a fixed income security when one of the following
criteria are met: (1) a security reaches fair value and is no longer deemed to
be undervalued based upon the adviser's analysis; (2) the adviser continues to
find value in a particular sector but has identified a security in that sector
that appears to offer more attractive valuation characteristics; or (3) a change
in fundamentals has occurred that alters the adviser's view of the prospects for
that particular security or sector.
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests at least 65% of its assets in domestic equity securities
of small-capitalization value companies. The adviser regards
small-capitalization companies as those whose market capitalizations at the time
6
<PAGE>
of investment range between $10 million and the median of the NYSE market
capitalizations, currently about $________ billion. Value companies are those in
the lower quartile of price/earnings valuation.
The adviser's security selection process starts with a universe of
small-capitalization value companies. From this universe, the adviser follows a
disciplined security exclusion process focusing on eliminating companies with
characteristics that the adviser has found to detract from long-term portfolio
returns.
First, the adviser adjusts stated earnings for any unusual and non-recurring
gains or losses to reach true operating earnings and eliminates companies which
no longer meet the adviser's low price/earnings criteria. Second, the adviser
eliminates companies that have pre-announced earnings declines. Third, the
adviser excludes companies which have experienced excessive price appreciation
over and above the market. Fourth, the adviser reviews company-specific
fundamentals to eliminate stocks that the adviser regards as having minimal
potential to increase in value or that the adviser believes have substantial
risk of decline.
Portfolios are constructed from the companies that have passed through the
adviser's stock exclusion process. Positions are purchased with attention to low
cost transactions.
The adviser sells companies when the adviser believes they are no longer
valuable, no longer small-cap or if the fundamentals deteriorate.
When cash is temporarily available, or for temporary defensive purposes, the
fund may invest without limit in repurchase agreements and money market
instruments. The fund may not achieve its investment objective when so invested.
The adviser does not currently intend to invest in foreign securities.
7
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[icon] P R I N C I P A L R I S K S
IN GENERAL
Investors could lose money by investing in the funds. There is no assurance that
a fund will meet its investment objective. As with all mutual funds, an
investment in any of these funds is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Unless otherwise
stated, the following risks apply to each of the funds.
MARKET RISK -
Prices of equity securities generally fluctuate more than those of other
securities. A fund may experience a substantial or complete loss on an
individual stock. Market risk, the risk that stock prices will go down, may
affect a single issuer, industry or sector of the economy or may affect the
market as a whole.
VALUE STYLE RISK -
The value approach to investing involves the risk that those stocks may remain
undervalued. Value stocks as a group may be out of favor and underperform the
overall equity market for a long period of time, while the market concentrates
on "growth" stocks.
Value funds often concentrate much of their investments in certain industries,
and thus will be more susceptible to factors adversely affecting issuers within
that industry than would a more diversified portfolio of securities.
SMALL AND MID-SIZED COMPANY STOCKS- SPECIAL INVESTMENT TRUST AND SMALL-CAP
VALUE
Investing in the securities of smaller companies involves special risks. Among
other things, the prices of securities of small and mid-sized companies
generally are more volatile than those of larger companies; the securities of
small companies generally are less liquid; and smaller companies generally are
more likely to be adversely affected by poor economic or market conditions.
It is anticipated that some of the portfolio securities of either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a fund to dispose of such
securities quickly at prevailing market prices.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation but also may
involve greater risks than customarily are associated with more established
companies. The securities of smaller companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small cap stocks may, to a degree, fluctuate independently
of larger cap stocks, I.E., small cap stocks may decline in price as the prices
of large cap stocks rise or vice versa.
COMPANY RISK- SPECIAL INVESTMENT TRUST
Special Investment Trust invests in special situations, which are companies
undergoing unusual or possibly one-time developments. These investments may
involve greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating patterns.
There is always a risk that the adviser will not properly assess the potential
for an issuer's future growth, or that an issuer will not realize that
potential.
8
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Investments in securities of companies being reorganized involve special risks,
including difficulty in obtaining information as to the financial condition of
such issuers and the fact that the market prices of such securities are subject
to above-average price volatility.
FOREIGN SECURITIES RISK - ALL BUT SMALL CAP VALUE TRUST
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.
INVESTMENT MODELS -
The proprietary models used by each adviser to evaluate securities or securities
markets are based on the adviser's understanding of the interplay of market
factors and do not assure successful investment. The markets, or the prices of
individual securities, may be affected by factors not foreseen in developing the
models.
INTEREST RATE AND CREDIT RISK OF DEBT SECURITIES -
Debt securities are subject to interest rate risk, which is the possibility that
the market prices of the funds' investments may decline due to an increase in
market interest rates. Generally, the longer the maturity of a fixed income
security, the greater is the effect on its value when rates change.
Debt securities are also subject to credit risk, I.E., the risk that an issuer
of securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which each fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Debt securities rated Baa/BBB or better, and unrated securities considered by a
fund's adviser to be of equivalent quality, are considered investment grade.
Moody's considers debt securities rated Baa to have speculative characteristics.
Debt securities rated below Baa/BBB are deemed by the ratings agencies to be
speculative and may involve major risk or exposure to adverse conditions. Those
in the lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding the
individual issuer are more likely to cause price volatility and weaken the
capacity of such securities to make principal and interest payments than is the
case for higher grade debt securities.
Securities rated below Baa/BBB are subject to greater fluctuations in value and
risk of loss of income and principal due to default by the issuer, than are
higher rated securities. These securities may be less liquid than higher-rated
securities, which means a fund may have difficulty selling them at times, and
may have to apply a greater degree of judgment in establishing a price.
CALL RISK -
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, the funds may reinvest the proceeds
of the payoff at current yields, which are lower than those paid by the security
that was paid off.
9
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SPECIAL RISKS OF MORTGAGE-BACKED SECURITIES - BALANCED TRUST
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and
mortgage-backed securities are paid off earlier than expected. The effect on the
fund's return is similar to that discussed above for call risk. When market
interest rates increase, the market values of mortgage-backed securities
decline. At the same time, however, mortgage refinancing slows, which lengthens
the effective maturities of these securities. As a result, the negative effect
of the rate increase on the market value of mortgage securities is usually more
pronounced than it is for other types of fixed income securities.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula.
The value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
into the underlying common stock. Convertible securities are typically issued by
smaller capitalized companies whose stock prices may be volatile. The price of a
convertible security often reflects such variations in the price of the
underlying common stock in a way that non-convertible debt does not.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S. Treasury and
obligations issued by U.S. government agencies and instrumentalities, including
securities that are supported by: (1) the full faith and credit of the United
States; (2) the right of the issuer to borrow from the U.S. Treasury; (3) the
discretionary authority of the U.S. Treasury to lend to the issuer; and (4)
solely the creditworthiness of the issuer. There is at least some possibility
that Government securities not backed by the U.S. Treasury will default. Neither
the U.S. government nor any of its agencies or instrumentalities guarantees the
market value of the securities they issue. Therefore, the market value of such
securities can be expected to fluctuate in response to changes in interest
rates.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, their advisers, distributors and
other outside service providers and could impact companies in which the funds
invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to help
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
10
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[icon] P E R F O R M A N C E
Each fund has two authorized classes of shares: Primary class shares and
Navigator class shares. Each class is subject to different expenses. The
information below provides an indication of the risks of investing in Primary
shares of Value Trust, Total Return Trust, Special Investment Trust, American
Leading Companies Trust, and Balanced Trust by showing changes in their
performance from year to year. Performance information is not provided for
Small-Cap Value Trust because as of December 31, 1998 the fund had not been in
operation for a full year. Annual returns assume reinvestment of dividends and
other distributions. Historical performance of a fund does not necessarily
indicate what will happen in the future.
VALUE TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40.76 48.04
40%
38.43 37.05
35%
34.73
30%
25%
20.19
20%
15%
11.44 11.26
10%
5%
1.39
0%
- -15% -16.95
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 18.0%.
DURING THE TEN CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
--------------------------------------------------------------
Best quarter: December 31, 1998 35.86%
--------------------------------------------------------------
Worst quarter: September 30, 1998 -21.28%
--------------------------------------------------------------
11
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index, a broad-based unmanaged index of common stocks,
commonly used to measure general stock market activity.
--------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
--------------------------------------------------------------------------
Value Trust - Primary Shares(c) +48.04% +32.01% +20.92% +21.38%(a)
--------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +19.21% +18.94%(b)
--------------------------------------------------------------------------
(a) April 16, 1982 (commencement of operations) to December 31, 1998.
(b) April 30, 1982 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
TOTAL RETURN TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40.48
40%
37.50
35%
30.36 31.14
30%
25%
20%
16.37
15%
14.32 14.08
10%
0% -0.39
-7.12
- -15% -16.82
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 8.06%.
DURING THE TEN CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
--------------------------------------------------------------
Best quarter: March 31, 1991 +14.35%
--------------------------------------------------------------
Worst quarter: September 30, 1990 -18.90%
--------------------------------------------------------------
12
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
-------------------------------------------------------------------------
Total Return Trust - Primary
Shares(c) - 0.39% +16.81% +14.45% +12.02%(a)
-------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +19.21% +18.12%(b)
-------------------------------------------------------------------------
(a) November 21, 1985 (commencement of operations) to December 31, 1998.
(b) November 30, 1985 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
SPECIAL INVESTMENT TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
38.44
35%
32.08
30%
28.85
25%
24.13 22.50 22.12 23.31
20%
15.36
15%
10%
0.52
0%
- -10%
-13.07
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 14.14%.
DURING THE TEN CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
--------------------------------------------------------------
Best quarter: December 31, 1998 +40.13%
--------------------------------------------------------------
Worst quarter: September 30, 1998 -20.49%
--------------------------------------------------------------
13
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
----------------------------------------------------------------------------
Special Investment Trust - +23.31% +15.58% +18.52% +15.18%(a)
Primary Shares(c)
----------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +19.21% +17.76%(b)
----------------------------------------------------------------------------
(a) December 30, 1985 (commencement of operations) to December 31, 1998.
(b) December 31, 1985 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
AMERICAN LEADING COMPANIES TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30%
28.36
25%
22.94 23.75 21.33
20%
15%
10%
0% -4.19
- -15%
1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 14%.
DURING THE FIVE CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
--------------------------------------------------------------
Best quarter: December 31, 1996 +12.47%
--------------------------------------------------------------
Worst quarter: December 31, 1994 -4.11%
--------------------------------------------------------------
14
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
------------------------------------------------------------------------
American Leading Companies +21.33% +17.82% +16.79%(a)
Trust - Primary Shares(c)
------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +22.78(b)
------------------------------------------------------------------------
(a) September 1, 1993 (commencement of operations) to December 31, 1998.
(b) September 30, 1993 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
BALANCED TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30%
25%
20%
18.71
15%
10%
5.60
5%
0%
1997 1998
* The fund's year-to-date total return as of June 30, 1999 is 0.59%.
DURING THE TWO CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
--------------------------------------------------------------
Best quarter: December 31, 1998 +9.00%
--------------------------------------------------------------
Worst quarter: September 30, 1998 -7.07%
--------------------------------------------------------------
15
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
-------------------------------------------------------
1 YEAR LIFE OF CLASS
-------------------------------------------------------
Balanced Trust - Primary +5.60% +12.42%(a)
Shares(c)
-------------------------------------------------------
S&P 500 Index +28.58% +31.69%(b)
-------------------------------------------------------
(a) October 1, 1996 (commencement of operations) to December 31, 1998.
(b) September 30, 1996 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
16
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets. Other expenses include transfer agency, custody, professional
and registration fees. The funds have no initial sales charge but are subject to
12b-1 fees.
The fees shown are current fees, and the expenses shown are based on expenses
for the fiscal year ended March 31, 1999. The fees and expenses are calculated
as a percentage of average net assets.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
------------------------------------------------------------------------------
VALUE TOTAL SPECIAL AMERICAN BALANCED SMALL-CAP
TRUST RETURN INVEST- LEADING TRUST VALUE
TRUST MENT COMPANIES TRUST
TRUST TRUST
------------------------------------------------------------------------------
Management fees (a) 0.67% 0.75% 0.73% 0.75% 0.75% 0.85%
------------------------------------------------------------------------------
Distribution and 0.95% 1.00% 1.00% 1.00% 0.75% 1.00%
Service (12b-1) fees
------------------------------------------------------------------------------
Other expenses 0.07% 0.12% 0.11% 0.18% 0.40% 0.53%
------------------------------------------------------------------------------
Total Annual Fund 1.69% 1.87% 1.84% 1.93% 1.90% 2.38%
Operating
Expenses (a)
------------------------------------------------------------------------------
(a) The manager has a voluntary agreement to waive fees so that Primary Share
expenses (exclusive of taxes, interest, brokerage and extraordinary expenses)
do not exceed the following annual rates of average daily net assets: for
Total Return Trust and American Leading Companies Trust, 1.95% indefinitely;
for Balanced Trust, 1.85% until July 31, 2000; and for Small-Cap Value Trust,
2.00% until July 31, 2000. These agreements are voluntary and may be
terminated by Legg Mason Fund Adviser at any time. With these waivers,
management fees and total annual fund operating expenses were .70% and 1.85%
for Balanced Trust and .47% and 2.0% for Small-Cap Value Trust. During the
fiscal year ended March 31, 1999, no fee waivers were necessary for Total
Return Trust or American Leading Companies Trust.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
-------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Value Trust $172 $533 $918 $1998
-------------------------------------------------------------------------------
Total Return Trust $190 $588 $1011 $2190
-------------------------------------------------------------------------------
Special Investment Trust $187 $579 $995 $2159
-------------------------------------------------------------------------------
American Leading Companies Trust $196 $606 $1042 $2254
-------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Balanced Trust $193 $597 $1026 $2222
-------------------------------------------------------------------------------
Small-Cap Value Trust $241 $742 $1270 $2716
-------------------------------------------------------------------------------
18
<PAGE>
[icon] M A N A G E M E N T
MANAGEMENT AND ADVISERS:
Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the investment adviser for Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies Trust. The adviser is
responsible for making investment decisions and placing orders to buy or sell a
particular security. The adviser has delegated investment advisory functions for
Balanced Trust and Small-Cap Value Trust to separate advisers as described
below.
The adviser is also obligated to provide each fund with investment management
and administrative services and to oversee the funds' relationships with outside
service providers, such as the custodian, transfer agent, accountants, and
lawyers.
For its services during the fiscal year ended March 31, 1999, each fund paid the
adviser a percentage of its average daily net assets (net of any fee waivers) as
follows:
-------------------------------------------------------
Value Trust 0.67%
-------------------------------------------------------
Total Return Trust 0.75%
-------------------------------------------------------
Special Investment Trust 0.73%
-------------------------------------------------------
American Leading Companies Trust 0.75%
-------------------------------------------------------
Balanced Trust 0.70%
-------------------------------------------------------
Small-Cap Value Trust 0.47%
-------------------------------------------------------
The adviser acts as manager or adviser to private accounts and investment
company portfolios with aggregate assets of over $19 billion as of June 30,
1999.
LMFA has entered into investment advisory agreements with Bartlett & Co.
("Bartlett") and Brandywine Asset Management, Inc. ("Brandywine") to provide
investment advisory services to Balanced Trust and Small-Cap Value,
respectively.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, as investment adviser
to Balanced Trust, is responsible for the actual investment management of this
fund which includes making investment decisions and placing orders to buy or
sell particular securities. LMFA pays Bartlett a monthly fee of 66 2/3% of the
fee it receives from Balanced Trust. Fees paid to Bartlett are net of any
waivers. Bartlett provides investment advice to individuals, corporations,
pension and profit sharing plans, trust accounts and mutual funds. Aggregate
assets under management of Bartlett were approximately $3.0 billion as of June
30, 1999.
Brandywine, 201 North Walnut Street, Wilmington, Delaware 19801, as investment
adviser to Small-Cap Value Trust is responsible for the actual investment
management of this fund which includes making investment decisions and placing
orders to buy or sell particular securities. LMFA pays Brandywine a monthly fee
of 58.8% of the fee it receives from Small-Cap Value Trust, or 0.50% of
Small-Cap Value Trust's average daily net assets. Fees paid to Brandywine are
net of any waivers. Brandywine acts as adviser or sub-adviser to individuals,
public funds, corporations, pension and profit sharing plans, Taft-Hartley
Plans, endowments and foundations, as well as to three investment company
portfolios.
19
<PAGE>
PORTFOLIO MANAGEMENT:
William H. Miller, III, President of LMFA, has had primary responsibility for
the day-to-day management of Value Trust since 1990. From Value Trust's
inception, in 1982, to November 1990, Mr. Miller co-managed that fund. Mr.
Miller has also been primarily responsible for the day-to-day management of
Special Investment Trust since its inception in 1985. Lisa O. Rapuano is
assistant portfolio manager of Special Investment Trust. Mrs. Rapuano has been
the analyst responsible for the technology, media and telecommunication sectors,
as well as for some special situations outside these sectors, since joining LMFA
in September 1994. From July 1991 to September 1994 she was an analyst at
Franklin Street Partners, a money management firm.
Nancy T. Dennin, Senior Vice President of LMFA, has primary responsibility for
the day-to-day management of Total Return Trust. Prior to April 1, 1997, Mrs.
Dennin and Mr. Miller co-managed the fund for slightly over six years.
Mrs. Dennin has been employed at LMFA since 1985.
David E. Nelson, Senior Vice President of LMFA, has had primary responsibility
for the day-to-day management of American Leading Companies since March 9, 1998.
Mr. Nelson was employed at Investment Counselors of Maryland from 1989-1998,
where he was the portfolio manager for the UAM ICM Equity Portfolio from its
inception on October 1, 1993 until 1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced Trust.
Both are senior portfolio managers of Bartlett. Mr. Rabiner has been employed by
Bartlett since 1983 and has served since then as Managing Director of its Fixed
Income Group. Mr. Uible has been employed by Bartlett since 1980, and has been a
senior portfolio manager for over five years. He chairs Bartlett's Equity
Investment Group, and is responsible for Bartlett's equity investment processes.
Mr. Uible is a member of Bartlett's Management Committee, and Mr. Rabiner and
Mr. Uible are members of Bartlett's Investment Policy Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value. Both
are Managing Directors of Brandywine. Mr. Otto is a senior portfolio manager
and has been employed at Brandywine since 1987. Mr. Tonkovich is a senior
portfolio manager and analyst and has been employed at Brandywine since
1989.
DISTRIBUTOR OF EACH FUND'S SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares. Each fund has adopted a plan
that allows it to pay distribution fees and shareholder service fees for the
sale of its shares and for services provided to shareholders. Under each plan, a
fund may pay the distributor an annual distribution fee equal to 0.75% of the
fund's average daily net assets (0.70% for Value Trust and 0.50% for Balanced
Trust) and an annual service fee equal to 0.25% of its average daily net assets
attributable to Primary Shares.
Because these fees are paid out of each fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell Primary
Shares of each fund. The distributor pays these brokers up to 90% of the
distribution and service fee that it receives from a fund for those sales.
The advisers and distributor are wholly owned subsidiaries of Legg Mason, Inc.,
a financial services holding company.
20
<PAGE>
[icon] H O W T O I N V E S T
To open a regular account or a retirement account with one or more of the funds,
contact a Legg Mason financial adviser or other entity that has entered into an
agreement with the funds' distributor to sell shares of the Legg Mason family of
funds. A Legg Mason financial adviser will explain the shareholder services
available from the funds and answer any questions you may have. The minimum
initial investment is $1,000 and the minimum for each purchase of additional
shares is $100, except as noted below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. Contact your Legg Mason
financial adviser or other entity offering the funds to discuss which one might
be appropriate for you.
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
-----------------------------------------------------------------------------
IN PERSON Give your financial adviser a check for $100 or more payable
to the fund
-----------------------------------------------------------------------------
MAIL Mail your check, payable to the fund, for $100 or more to
your financial adviser
-----------------------------------------------------------------------------
TELEPHONE OR Call your financial adviser to transfer available cash
WIRE balances in your brokerage account or to transfer money
from your bank directly to Legg Mason. Wire transfers may
be subject to a service charge by your bank.
-----------------------------------------------------------------------------
FUTURE FIRST Contact your Legg Mason financial adviser to enroll in Legg
SYSTEMATIC Mason's Future First Systematic Investment Plan. Under this
plan, you may arrange for automatic monthly investments in a
INVESTMENT fund of $50 or more. The fund's transfer agent will transfer
PLAN funds monthly from your Legg Mason account or from your
checking account to purchase shares of that fund.
-----------------------------------------------------------------------------
AUTOMATIC Arrangements may be made with some employers and financial
INVESTMENTS institutions for regular automatic monthly investments of
$50 or more in shares of a fund. You may also reinvest
dividends from certain unit investment trusts in shares of
a fund.
-----------------------------------------------------------------------------
Call your financial adviser or another entity offering the funds for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
Purchase orders received by your financial adviser or the entity offering the
funds before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close of
the exchange on that day. Orders received after the close of the exchange will
be processed at the fund's net asset value as of the close of the exchange on
21
<PAGE>
the next day the exchange is open. Payment must be made within three business
days to Legg Mason.
Navigator Shares are offered through a separate prospectus only to certain
investors.
22
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
-----------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial adviser or entity offering the fund
and request a redemption. Please have the following information
ready when you call: the name of the fund, the number of shares
(or dollar amount) to be redeemed and your shareholder account
number.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you. Wire
requests will be subject to a fee of $18. Be sure that your
financial adviser has your bank account information on file.
The funds will follow reasonable procedures to ensure the validity
of any telephone redemption request, such as requesting
identifying information from callers or employing identification
numbers. Unless you specify that you do not wish to have telephone
redemption privileges, you may be held responsible for any
fraudulent telephone order.
-----------------------------------------------------------------------------
MAIL Send a letter to the fund requesting redemption of your shares.
The letter should be signed by all of the owners of the account
and their signatures guaranteed without qualification. You may
obtain a signature guarantee from most banks or securities
dealers.
-----------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial adviser or another entity.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Each fund has reserved the right under certain conditions to redeem its shares
in kind by distributing portfolio securities.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
23
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Primary Share is determined daily as of the close of the New
York Stock Exchange, on every day the exchange is open. To calculate each fund's
Primary Share price, the fund's assets attributable to Primary Shares are valued
and totaled, liabilities attributable to Primary Shares are subtracted, and the
resulting net assets are divided by the number of Primary Shares outstanding.
Each fund's securities are valued on the basis of market quotations or, lacking
such quotations, at fair value as determined under the guidance of the Board of
Directors.
Where a security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by the
adviser to be the primary market. Securities with remaining maturities of 60
days or less are valued at amortized cost. The fund will value its foreign
securities in U.S. dollars on the basis of the then-prevailing exchange rates.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds. A fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a
period of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
24
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial adviser or other entity offering the funds for sale.
CONFIRMATIONS AND ACCOUNT STATEMENTS:
You will receive from Legg Mason a confirmation after each transaction involving
Primary Shares (except a reinvestment of dividends or capital gain distributions
and purchases made through the Future First Systematic Investment Plan or
through automatic investments). Legg Mason or the entity through which you
invest will send you account statements monthly unless there has been no
activity in the account. Legg Mason will send you statements quarterly if you
participate in the Future First Systematic Investment Plan or if you purchase
shares through automatic investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares with a net asset value of $5,000 or
more, you may elect to make systematic withdrawals from the fund. The minimum
amount for each withdrawal is $50. If you are making withdrawals from a fund
pursuant to the systematic withdrawal plan, then you should not purchase shares
of that fund.
EXCHANGE PRIVILEGE:
Primary fund shares may be exchanged for Primary Shares of any of the other Legg
Mason funds, provided these funds are eligible for sale in your state of
residence. You can request an exchange in writing or by phone. Be sure to read
the current prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. In addition, an exchange of a
fund's shares will be treated as a sale of the shares and any gain on the
transaction may be subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' written notice to
shareholders
25
<PAGE>
[icon] D I S T R I B U T I O N S A N D T A X E S
Each fund declares dividends to holders of Primary Shares out of its investment
company taxable income (which generally consists of net investment income, any
net short-term capital gain and any net gains from certain foreign currency
transactions) attributable to those shares. Value Trust, Total Return Trust and
Balanced Trust declare and pay dividends from net investment income quarterly;
they pay dividends from any net short-term capital gains and foreign currency
gains annually. Special Investment Trust, American Leading Companies and
Small-Cap Value declare and pay dividends from investment company taxable income
following the end of each taxable year.
Distributions of substantially all of each fund's net capital gain (the excess
of net long-term capital gain over net short-term capital loss) are generally
declared and paid after the end of the taxable year in which the gain is
realized.
A second distribution may be necessary in some years to avoid imposition of a
federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Primary Shares of the distributing fund. If you wish to begin
receiving dividends and/or other distributions in cash, you must notify the
distributing fund at least 10 days before the next dividend and/or other
distribution is to be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to most investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional shares of the fund. Dividends from investment company
taxable income are taxable as ordinary income. Distributions of a fund's net
capital gain are taxable as long-term capital gain, regardless of how long you
have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number or who are otherwise subject to backup withholding. Each fund will also
withhold 31% of all dividends and capital gain distributions payable to such
shareholders who are otherwise subject to backup withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
26
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand each fund's
financial performance for the past five years or since its inception. Total
return represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and other
distributions. Certain information reflects financial results for a single fund
share. For Value Trust, Total Return Trust and Special Investment Trust, this
information has been audited by their independent accountants,
PricewaterhouseCoopers LLP, whose report, along with the funds' financial
statements, is incorporated by reference into the Statement of Additional
Information (see back cover) and is included in the annual report for these
funds. For American Leading Companies Trust, Balanced Trust and Small-Cap Value
Trust, this information has been audited by their independent auditors, Ernst &
Young LLP, whose report, along with the funds' financial statements, is
incorporated by reference into the Statement of Additional Information and is
included in the annual report for these funds. The annual reports are available
upon request by calling toll-free 1-800-822-5544.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Investment Operations Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
For Net From
the Asset Net Net Realized Total From Net Total Net
Years Value, Investment Unrealized From Net Realized Distri- Asset
Ended Beginning Income Gain (Loss) Investment Investment Gain on butions Value,
Mar. 31, of Year (Loss) On Investments Operations Income Investments End of
Year
- ------------------------------------------------------------------------------------------------------------------------------------
Value Trust - Primary Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
1999 $50.10 $(.18) $24.58 $24.40 $--- $(1.41) $(1.41) $73.09
-------------------------------------------------------------------------------------------------------------------------------
1998 34.11 (.02) 18.37 18.35 (.04) (2.32) (2.36) 50.10
-------------------------------------------------------------------------------------------------------------------------------
1997 26.99 .13 8.68 8.81 (.16) (1.53) (1.69) 34.11
-------------------------------------------------------------------------------------------------------------------------------
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41) 26.99
-------------------------------------------------------------------------------------------------------------------------------
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09) 20.21
-------------------------------------------------------------------------------------------------------------------------------
Special Investment Trust - Primary
Shares
-------------------------------------------------------------------------------------------------------------------------------
1999 $36.02 $(.32) $5.78 $5.46 $--- $(2.66) $(2.66) $38.82
-------------------------------------------------------------------------------------------------------------------------------
1998 26.55 (.31) 11.28 10.97 --- (1.50) (1.50) 36.02
-------------------------------------------------------------------------------------------------------------------------------
1997 25.09 (.23) 3.10 2.87 --- (1.41) (1.41) 26.55
-------------------------------------------------------------------------------------------------------------------------------
1996 19.96 --- 5.60 5.60 --- (.47) (.47) 25.09
-------------------------------------------------------------------------------------------------------------------------------
1995 21.56 (.06) (1.31) (1.37) --- (.23) (.23) 19.96
-------------------------------------------------------------------------------------------------------------------------------
27
<PAGE>
---------------------------------------------------------------------------------------
Investment Operations Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
For Net From
the Asset Net Net Realized & Total From Net Total Net
Years Value, Investment Unrealized From Net Realized Distri- Asset
Ended Beginning Income Gain (Loss) Investment Investment Gain on butions Value,
Mar. 31, of Year (Loss) On Investments Operations Income Investments End of
Year
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Trust - Primary Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $24.63 $.38 $(2.35) $(1.97) $(.38) $(1.20) $(1.58) $21.08
- ------------------------------------------------------------------------------------------------------------------------------------
1998 19.39 .44 7.23 7.67 (.40) (2.03) (2.43) 24.63
- ------------------------------------------------------------------------------------------------------------------------------------
1997 16.45 .46 3.47 3.93 (.43) (.56) (.99) 19.39
- ------------------------------------------------------------------------------------------------------------------------------------
1996 12.79 .48 3.69 4.17 (.51) --- (.51) 16.45
- ------------------------------------------------------------------------------------------------------------------------------------
1995 13.54 .33 (.19) .14 (.29) (.60) (.89) 12.79
- ------------------------------------------------------------------------------------------------------------------------------------
American Leading Companies Trust- Primary Shares
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $17.78 $(.06) $3.38 $3.32 $ --- $(.72) $(.72) $20.38
- ------------------------------------------------------------------------------------------------------------------------------------
1998 14.74 (.04)A 4.93 4.89 --- $(1.85) (1.85) 17.78
- ------------------------------------------------------------------------------------------------------------------------------------
1997 12.23 .01A 3.00 3.01 (.02) (.48) (.50) 14.74
- ------------------------------------------------------------------------------------------------------------------------------------
1996 10.18 .07A 2.08 2.15 (.10) --- (.10) 12.23
- ------------------------------------------------------------------------------------------------------------------------------------
1995 9.69 .12A .48 .60 (.11) --- (.11) 10.18
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Trust - Primary Shares
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $12.62 $.22B $(.56) $(.34) $(0.19) $(.11) $(.30) $11.98
- ------------------------------------------------------------------------------------------------------------------------------------
1998 10.16 .21B 2.58 2.79 (.21) (.12) (.33) 12.62
- ------------------------------------------------------------------------------------------------------------------------------------
1997D 10.00 .09B .11 .20 (.04) --- (.04) 10.16
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Small-Cap Value - Primary Shares
- ------------------------------------------------------------------------------------------------------------------------------------
1999E $10.00 $(.02)C $(2.17) $(2.19) $ --- $ --- $ --- $7.81
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
--------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------
Net
Investment
Expenses Income to Portfolio Net Assets,
Total to Average Average Net Turnover End of Year
Return Net Assets Assets Rate (thousands)
----------------------------------------------------------------------------
Value Trust - Primary Shares
----------------------------------------------------------------------------
1999 49.93% 1.69% (.4)% 19.3% $10,097,527
----------------------------------------------------------------------------
1998 55.34% 1.73% (.1)% 12.9% 4,810,409
----------------------------------------------------------------------------
1997 33.59% 1.77% .4% 10.5% 2,236,400
----------------------------------------------------------------------------
1996 42.09% 1.82% .8% 19.6% 1,450,774
----------------------------------------------------------------------------
1995 9.77% 1.81% .5% 20.1% 986,325
----------------------------------------------------------------------------
Special Investment Trust - Primary Shares
----------------------------------------------------------------------------
1999 16.85% 1.84% (1.0)% 47.8% $1,850,289
----------------------------------------------------------------------------
1998 42.88% 1.86% (1.1)% 29.8% 1,555,336
----------------------------------------------------------------------------
1997 11.58% 1.92% (.9)% 29.2% 947,684
----------------------------------------------------------------------------
1996 28.47% 1.96% --- 35.6% 792,240
----------------------------------------------------------------------------
1995 (6.37)% 1.93% (.2)% 27.5% 612,093
----------------------------------------------------------------------------
Total Return Trust - Primary Shares
----------------------------------------------------------------------------
1999 (8.13)% 1.87% 1.7% 44.2% $565,317
----------------------------------------------------------------------------
1998 42.44% 1.88% 2.1% 20.6% 700,535
----------------------------------------------------------------------------
1997 24.33% 1.93% 2.6% 38.4% 380,458
----------------------------------------------------------------------------
1996 33.23% 1.95% 3.2% 34.7% 267,010
----------------------------------------------------------------------------
1995 1.09% 1.93% 2.5% 61.9% 194,767
----------------------------------------------------------------------------
American Leading Companies Trust - Primary Shares
----------------------------------------------------------------------------
1999 19.52% 1.93% (.37)% 47.6% $288,957
----------------------------------------------------------------------------
1998 35.18% 1.95%A (.28)%A 51.4% 200,326
----------------------------------------------------------------------------
1997 24.73% 1.95%A .05%A 55.7% 104,812
----------------------------------------------------------------------------
1996 21.24% 1.95%A .69%A 43.4% 76,100
----------------------------------------------------------------------------
1995 6.24% 1.95%A 1.21%A 30.5% 59,985
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balanced Trust - Primary Shares
----------------------------------------------------------------------------
1999 (2.69)% 1.85%B 1.96%B 50.0% $55,900
----------------------------------------------------------------------------
1998 27.80% 1.85%B 2.08%B 34.5% 47,761
----------------------------------------------------------------------------
1997D 2.02%F 1.85%G 2.52%B,G 5.1%G 17,948
----------------------------------------------------------------------------
29
<PAGE>
--------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------
Net
Investment
Expenses Income to Portfolio Net Assets,
Total to Average Average Net Turnover End of Year
Return Net Assets Assets Rate (thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Small-Cap Value - Primary Shares
----------------------------------------------------------------------------
1999E (21.90)%F 2.00%C, G (.44)%C,G 29.5%G $58,365
----------------------------------------------------------------------------
----------------------------------------------------------------------------
A Net of fees waived in excess of a voluntary expense limitation of 1.95% of
average daily net assets. If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for the years ended March 31,
1995, 1996, 1997, and 1998 would have been 2.12%, 2.20%, 2.06%, and 1.99%,
respectively.
B Net of fees waived in excess of a voluntary expense limitation of 1.85% of
average daily net assets. If no fees had been waived by LMFA, the annualized
ratio of expense to average daily net assets for the period October 1, 1996
to March 31, 1997, and for the years ended March 31, 1998 and 1999 would
have been 3.03%, 2.14%, and 1.90%, respectively.
C Net of fees waived in excess of a voluntary expense limitation of 2.00% of
average daily net assets. If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for the period June 15, 1998
to March 31, 1999 would have been 2.38%.
D For the period October 1, 1996 (commencement of operations) to March 31,
1997.
E For the period June 15, 1998 (commencement of operations) to March 31, 1999.
F Not annualized.
G Annualized.
30
<PAGE>
L e g g M a s o n E q u i t y F u n d s
The following additional information about each fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about each fund, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC (phone 1-800-SEC-0330).
Reports and other information about each fund are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. The SEC charges a fee for making
copies.
LMF-001 SEC file numbers: 811-3380; 811-4308; 811-4451; 811-7692
31
<PAGE>
Navigator Class of Legg Mason Value Trust, Inc.
Navigator Class of Legg Mason Special Investment Trust, Inc.
Navigator Class of Legg Mason Total Return Trust, Inc.
Legg Mason Investors Trust, Inc.
Navigator Class of Legg Mason American Leading Companies Trust
Navigator Class of Legg Mason Balanced Trust
Navigator Class of Legg Mason U.S. Small-Capitalization Value Trust
NAVIGATOR SHARES PROSPECTUS JULY 31, 1999
logo
HOW TO INVEST(SERVICEMARK)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C 0 N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Distributions and taxes
xx Financial highlights
2
<PAGE>
LEGG MASON EQUITY FUNDS
[icon] I N V E S T M E N T O B J E C T I V E S
LEGG MASON VALUE TRUST, INC.:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities that, in the adviser's opinion,
offer the potential for capital growth. The adviser follows a value discipline
in selecting securities, and therefore seeks to purchase securities at large
discounts to the adviser's assessment of their intrinsic value. Intrinsic value,
according to the adviser, is the value of the company measured, to different
extents depending on the type of company, on factors such as, but not limited
to, the discounted value of its projected future free cash flows, the company's
ability to earn returns on capital in excess of its cost of capital, private
market values of similar companies, the value of its assets, and the costs to
replicate the business. Qualitative factors, such as an assessment of the
company's products, competitive positioning, strategy, industry economics and
dynamics, regulatory frameworks and more, are also important. Securities may be
undervalued due to uncertainty arising from the availability of accurate
information, economic growth and change, changes in competitive conditions,
technological change, changes in government policy or geo-political dynamics,
and more. The adviser takes a long-term approach to investing, generally
characterized by long holding periods and low portfolio turnover. The fund
generally invests in companies with market capitalizations greater than $5
billion, but may invest in companies of any size.
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
The fund may also invest in debt securities of companies having one or more of
the above characteristics. The fund may invest up to 25% of its total assets in
long-term debt securities. Up to 10% of its total assets may be invested in debt
securities rated below investment grade (commonly referred to as "junk bonds").
For temporary purposes, or when cash is temporarily available, the fund may
invest without limit in investment grade, short-term debt instruments, including
government, corporate and money market securities. The fund may not achieve its
investment objective when so invested.
LEGG MASON TOTAL RETURN TRUST:
INVESTMENT OBJECTIVE: Capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for long-term capital growth and attractive current income. The
fund invests primarily in common stocks, debt securities, and securities
convertible into common stocks, but is not limited to these types of securities.
The fund may invest in securities that do not pay current income but do, in the
adviser's opinion, offer prospects for capital appreciation and/or future
income. The adviser follows a value discipline in selecting securities, and
therefore seeks to purchase securities at large discounts to the adviser's
assessment of their intrinsic value. Intrinsic value, according to the adviser,
is the value of the company measured, to different extents depending on the type
of company, on factors such as, but not limited to, the discounted value of its
projected future free cash flows, the company's ability to earn returns on
capital in excess of its cost of capital, private market values of similar
companies, the value of its assets, and the costs to replicate the business.
3
<PAGE>
Qualitative factors, such as an assessment of the company's products,
competitive positioning, strategy, industry economics and dynamics, regulatory
frameworks and more, are also important. Securities may be undervalued due to
uncertainty arising from the availability of accurate information, economic
growth and change, changes in competitive conditions, technological change,
changes in government policy or geo-political dynamics, and more. The fund may
invest in companies of any size.
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer long-term attractive total returns at
reasonable risk, when a more compelling investment opportunity is found, or when
the investment basis no longer applies.
The fund may invest in money market securities for temporary defensive purposes,
or when cash is temporarily available. The fund may not achieve its investment
objective when so invested. Consistent with the investment objective, the fund
may also invest in debt securities when the adviser believes the return on
certain debt securities may equal or exceed the return on equity securities. The
fund may invest in debt securities of any maturity of both foreign and domestic
issuers without regard to rating, and may invest its assets in debt securities
without regard to a percentage limit. The adviser currently anticipates that
under normal market conditions, the fund will invest no more than 50% of its
total assets in intermediate-term and long-term debt securities and no more than
5% of its total assets in debt securities not rated investment grade (commonly
referred to as "junk bonds").
LEGG MASON SPECIAL INVESTMENT TRUST:
INVESTMENT OBJECTIVE: capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities, and securities convertible into
equity securities, of companies whose market capitalization are typically
classified as small to mid-sized. The adviser defines small to mid-sized
companies as those below the top 500 U.S. companies in terms of market
capitalization. It also invests in "special situations" without regard to market
capitalization. Special situations are companies undergoing unusual or possibly
one-time developments that, in the opinion of the adviser, make them attractive
for investment. Such developments may include actual or anticipated: sale or
termination of an unprofitable part of the company's business; change in the
company's management or in management's philosophy; a basic change in the
industry in which the company operates; introduction of new products or
technologies; or the prospect or effect of acquisition or merger activities.
The adviser follows a value discipline in selecting securities, and therefore
seeks to purchase securities at large discounts to the adviser's assessment of
their intrinsic value. Intrinsic value, according to the adviser, is the value
of the company measured, to different extents depending on the type of company,
on factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate the business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more.
The fund also invests in debt securities of companies having one or more of the
above characteristics. The fund may invest up to 35% of its net assets in debt
securities rated below investment grade (commonly referred to as "junk bonds").
The fund may invest up to 20% of its total assets in securities of companies
involved in actual or anticipated reorganizations or restructurings.
4
<PAGE>
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
For temporary defensive purposes, or when cash is temporarily available, the
fund may invest without limit in investment grade, short-term debt instruments,
including government, corporate and money market securities. The fund may not
achieve its investment objective when so invested.
LEGG MASON AMERICAN LEADING COMPANIES TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income
consistent with prudent investment risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for capital appreciation and potential for current income. Under
normal circumstances, the fund will seek to achieve its objective by investing
at least 75% of its total assets in common stocks of Leading Companies that have
market capitalizations of at least $5 billion, and at least 75% of stocks held
by the fund will be dividend-paying stocks. The adviser defines a "Leading
Company" as one that, in the opinion of the adviser, has attained a major market
share in one or more products or services within its industry(ies) and possesses
the financial strength and management talent to maintain or increase market
share and profit in the future. Such companies are typically well known as
leaders in their respective industries; most are found in the top half of the
S&P 500.
The adviser follows a value discipline in selecting securities, and therefore
seeks to purchase securities at large discounts to the adviser's assessment of
their intrinsic value. Intrinsic value, according to the adviser, is the value
of the company measured, to different extents depending on the type of company,
on factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate the business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more.
The adviser typically sells a security when, in the adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
Under normal circumstances, the fund expects to own a minimum of 35 different
securities. The adviser currently anticipates that the fund will not invest more
than 25% of its total assets in foreign securities.
During periods when the adviser believes the return on certain debt securities
may equal or exceed the return on equity securities, the fund may invest up to
25% of its total assets in debt securities, including government, corporate and
money market securities, consistent with its investment objective. The fund may
invest in debt securities of any maturity of both foreign and domestic issuers.
The debt securities in which the fund may invest will be rated at least A by
Standard & Poor's or Moody's, or deemed by the adviser to be of comparable
quality.
When cash is temporarily available, or for temporary defensive purposes, the
fund may invest without limit in repurchase agreements and money market
instruments, including high-quality short-term debt securities. The fund may not
achieve its investment objective when so invested.
5
<PAGE>
LEGG MASON BALANCED TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
Under normal conditions, the fund invests up to 75% of its assets in equity
securities. The adviser emphasizes dividend-paying equity securities that, in
the opinion of the adviser, offer the potential for long-term growth and common
stocks or securities convertible into common stocks that do not pay current
dividends but offer prospects for capital appreciation and future income. Stocks
are selected based on value-oriented selection criteria, taking into
consideration adequate portfolio diversification -- by sector and by industry,
as well as by equity characteristics.
The fund invests at least 25% of its assets in fixed income securities,
including, without limitation, preferred stocks, bonds, debentures, municipal
obligations, and mortgage-related securities; certificates of deposit; Treasury
bills, notes, bonds and other obligations of the U.S. government, its agencies
and instrumentalities; high-quality commercial paper and other money market
instruments; and repurchase agreements. The fund may invest in securities of any
maturity, but, under normal circumstances, expects to maintain its portfolio of
fixed income securities so as to have an average dollar-weighted maturity of
between four and five years. No more than 5% of the fund's total assets will
be invested in fixed income or convertible securities not rated at least BBB or
Baa at the time of purchase, or comparable unrated securities.
Fixed income security selection is based upon identifying those fixed income
securities that the adviser deems to be undervalued, taking into consideration
sector analysis, yield curve analysis and credit analysis. Absent the ability to
find undervalued securities outside the Treasury sector, the adviser will hold
Treasury securities. The adviser avoids making interest rate forecasts and,
accordingly, the fund's fixed income portfolio maintains a duration that is
similar to that of the fund's benchmark.
The fund is managed as a balanced fund. This approach attempts to "balance" the
potential for growth and greater volatility of stocks with the historically
stable income and more moderate average price fluctuations of fixed income
securities. The proportion of the fund's assets invested in each type of
security will vary from time to time in accordance with the adviser's assessment
of investment opportunities. It is currently anticipated that the fund will
invest an average of 60% of its total assets in common stocks and preferred
stocks and the remaining 40% in various fixed income securities. These
percentages may vary in attempting to increase returns or reduce risk.
The adviser typically sells a stock when, in the adviser's assessment, the gap
between market price and intrinsic value is narrowed by reason of higher market
prices or downward reassessment of intrinsic value by the adviser.
The adviser typically sells a fixed income security when one of the following
criteria are met: (1) a security reaches fair value and is no longer deemed to
be undervalued based upon the adviser's analysis; (2) the adviser continues to
find value in a particular sector but has identified a security in that sector
that appears to offer more attractive valuation characteristics; or (3) a change
in fundamentals has occurred that alters the adviser's view of the prospects for
that particular security or sector.
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests at least 65% of its assets in domestic equity securities
of small-capitalization value companies. The adviser regards small-
capitalization companies as those whose market capitalizations at the time
6
<PAGE>
of investment range between $10 million and the median of the NYSE market
capitalizations, currently about $________ billion. Value companies are those in
the lower quartile of price/earnings valuation.
The adviser's security selection process starts with a universe of
small-capitalization value companies. From this universe, the adviser follows a
disciplined security exclusion process focusing on eliminating companies with
characteristics that the adviser has found to detract from long-term portfolio
returns.
First, the adviser adjusts stated earnings for any unusual and non-recurring
gains or losses to reach true operating earnings and eliminates companies which
no longer meet the adviser's low price/earnings criteria. Second, the adviser
eliminates companies that have pre-announced earnings declines. Third, the
adviser excludes companies which have experienced excessive price appreciation
over and above the market. Fourth, the adviser reviews company-specific
fundamentals to eliminate stocks that the adviser regards as having minimal
potential to increase in value or that the adviser believes have substantial
risk of decline.
Portfolios are constructed from the companies that have passed through the
adviser's stock exclusion process. Positions are purchased with attention to low
cost transactions.
The adviser sells companies when the adviser believes they are no longer
valuable, no longer small-cap or if the fundamentals deteriorate.
When cash is temporarily available, or for temporary defensive purposes, the
fund may invest without limit in repurchase agreements and money market
instruments. The fund may not achieve its investment objective when so invested.
The adviser does not currently intend to invest in foreign securities.
7
<PAGE>
[icon] P R I N C I P A L R I S K S
IN GENERAL
Investors could lose money by investing in the funds. There is no assurance that
a fund will meet its investment objective. As with all mutual funds, an
investment in any of these funds is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Unless otherwise
stated, the following risks apply to each of the funds.
MARKET RISK -
Prices of equity securities generally fluctuate more than those of other
securities. A fund may experience a substantial or complete loss on an
individual stock. Market risk, the risk that stock prices will go down, may
affect a single issuer, industry or sector of the economy or may affect the
market as a whole.
VALUE STYLE RISK -
The value approach to investing involves the risk that those stocks may remain
undervalued. Value stocks as a group may be out of favor and underperform the
overall equity market for a long period of time, while the market concentrates
on "growth" stocks.
Value funds often concentrate much of their investments in certain industries,
and thus will be more susceptible to factors adversely affecting issuers within
that industry than would a more diversified portfolio of securities.
SMALL AND MID-SIZED COMPANY STOCKS-SPECIAL INVESTMENT TRUST AND SMALL-CAP VALUE
Investing in the securities of smaller companies involves special risks. Among
other things, the prices of securities of small and mid-sized companies
generally are more volatile than those of larger companies; the securities of
small companies generally are less liquid; and smaller companies generally are
more likely to be adversely affected by poor economic or market conditions.
It is anticipated that some of the portfolio securities of either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a fund to dispose of such
securities quickly at prevailing market prices.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation but also may
involve greater risks than customarily are associated with more established
companies. The securities of smaller companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small cap stocks may, to a degree, fluctuate independently
of larger cap stocks, I.E., small cap stocks may decline in price as the prices
of large cap stocks rise or vice versa.
COMPANY RISK-SPECIAL INVESTMENT TRUST
Special Investment Trust invests in special situations, which are companies
undergoing unusual or possibly one-time developments. These investments may
involve greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating patterns.
There is always a risk that the adviser will not properly assess the potential
for an issuer's future growth, or that an issuer will not realize that
potential.
8
<PAGE>
Investments in securities of companies being reorganized involve special risks,
including difficulty in obtaining information as to the financial condition of
such issuers and the fact that the market prices of such securities are subject
to above-average price volatility.
FOREIGN SECURITIES RISK - ALL BUT SMALL CAP VALUE TRUST
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.
INVESTMENT MODELS -
The proprietary models used by each adviser to evaluate securities or securities
markets are based on the adviser's understanding of the interplay of market
factors and do not assure successful investment. The markets, or the prices of
individual securities, may be affected by factors not foreseen in developing the
models.
INTEREST RATE AND CREDIT RISK OF DEBT SECURITIES -
Debt securities are subject to interest rate risk, which is the possibility that
the market prices of the funds' investments may decline due to an increase in
market interest rates. Generally, the longer the maturity of a fixed income
security, the greater is the effect on its value when rates change.
Debt securities are also subject to credit risk, I.E., the risk that an issuer
of securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which each fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Debt securities rated Baa/BBB or better, and unrated securities considered by a
fund's adviser to be of equivalent quality, are considered investment grade.
Moody's considers debt securities rated Baa to have speculative characteristics.
Debt securities rated below Baa/BBB are deemed by the ratings agencies to be
speculative and may involve major risk or exposure to adverse conditions. Those
in the lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding the
individual issuer are more likely to cause price volatility and weaken the
capacity of such securities to make principal and interest payments than is the
case for higher grade debt securities.
Securities rated below Baa/BBB are subject to greater fluctuations in value and
risk of loss of income and principal due to default by the issuer, than are
higher rated securities. These securities may be less liquid than higher-rated
securities, which means a fund may have difficulty selling them at times, and
may have to apply a greater degree of judgment in establishing a price.
CALL RISK -
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, the funds may reinvest the proceeds
of the payoff at current yields, which are lower than those paid by the security
that was paid off.
9
<PAGE>
SPECIAL RISKS OF MORTGAGE-BACKED SECURITIES - BALANCED TRUST
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and
mortgage-backed securities are paid off earlier than expected. The effect on the
fund's return is similar to that discussed above for call risk. When market
interest rates increase, the market values of mortgage-backed securities
decline. At the same time, however, mortgage refinancing slows, which lengthens
the effective maturities of these securities. As a result, the negative effect
of the rate increase on the market value of mortgage securities is usually more
pronounced than it is for other types of fixed income securities.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula.
The value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
into the underlying common stock. Convertible securities are typically issued by
smaller capitalized companies whose stock prices may be volatile. The price of a
convertible security often reflects such variations in the price of the
underlying common stock in a way that non-convertible debt does not.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S. Treasury and
obligations issued by U.S. government agencies and instrumentalities, including
securities that are supported by: (1) the full faith and credit of the United
States; (2) the right of the issuer to borrow from the U.S. Treasury; (3) the
discretionary authority of the U.S. Treasury to lend to the issuer; and (4)
solely the creditworthiness of the issuer. There is at least some possibility
that Government securities not backed by the U.S. Treasury will default. Neither
the U.S. government nor any of its agencies or instrumentalities guarantees the
market value of the securities they issue. Therefore, the market value of such
securities can be expected to fluctuate in response to changes in interest
rates.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, their advisers, distributors and
other outside service providers and could impact companies in which the funds
invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to help
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
10
<PAGE>
[icon] P E R F 0 R M A N C E
Each fund has two authorized classes of shares: Primary class shares and
Navigator class shares. Each class is subject to different expenses. The
information below provides an indication of the risks of investing in a fund by
showing changes in the fund's performance from year to year. Annual returns
assume reinvestment of dividends and other distributions. Historical performance
of a fund does not necessarily indicate what will happen in the future.
Small-Cap Value has been in operation for less than a full calendar year; thus,
no performance information is presented for that fund. As of the date of this
prospectus, the Navigator class of shares of Balanced Trust had not yet
commenced operations. Shares of the Navigator class of American Leading
Companies Trust were held by investors only during the period from October 4,
1996 to December 3, 1998; there were no Navigator shares of that fund
outstanding on the date of this prospectus. The returns presented for Value
Trust, Total Return Trust and Special Investment Trust are those of the
Navigator share class. Returns presented for American Leading Companies Trust
and Balanced Trust are those of the Primary Share class, which is not offered in
this prospectus. Primary Shares and Navigator Shares of each fund are invested
in the same portfolio of securities. The annual returns for Primary Shares and
Navigator Shares would differ only to the extent that the Navigator Shares would
pay lower expenses, and therefore would have higher returns.
VALUE TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
42.18 49.40
40%
39.82 38.49
35%
30%
25%
20%
15%
10%
5%
0%
1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 18.58%.
DURING THE FOUR CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +36.15%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -11.47%
- --------------------------------------------------------------------------------
11
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index, a broad-based unmanaged index of common stocks,
commonly used to measure general stock market activity.
- --------------------------------------------------------------------------------
1 YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------
Value Trust(c) +49.40% +41.88%(a)
- --------------------------------------------------------------------------------
S&P 500 Index +28.58% +29.65%(b)
- --------------------------------------------------------------------------------
(a) December 1, 1994 (commencement of operations) to December 31, 1998.
(b) December 31, 1994 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
TOTAL RETURN TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
39.03
35%
31.65 32.55
30%
25%
20%
15%
10%
5%
0.67
0%
1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 8.62%.
DURING THE FOUR CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: March 31, 1995 +19.29%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -15.63%
- --------------------------------------------------------------------------------
12
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
1 YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------
Total Return Trust(c) 0.67% +23.48(a)
- --------------------------------------------------------------------------------
S&P 500 Index +28.58% +29.65(b)
- --------------------------------------------------------------------------------
(a) December 1, 1994 (commencement of operations) to December 31, 1998.
(b) December 31, 1994 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends
and capital gain distributions, if any.
SPECIAL INVESTMENT TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30.04
30%
25%
23.83 23.44 24.50
20%
15%
10%
5%
0%
1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 14.74%.
DURING THE FOUR CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +40.46%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -20.33%
- --------------------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
- --------------------------------------------------------------------------------
1 YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------
Special Investment Trust(c) +24.50% +24.72(a)
- --------------------------------------------------------------------------------
S&P 500 Index +28.58% +29.65(b)
- --------------------------------------------------------------------------------
13
<PAGE>
(a) December 1, 1994 (commencement of operations) to December 31, 1998.
(b) December 31, 1994 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends
and capital gain distributions, if any.
AMERICAN LEADING COMPANIES TRUST - PRIMARY SHARES*
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)**
50%
40%
35%
30%
28.36
25%
22.94 23.75 21.33
20%
15%
10%
0% -4.19
- -15%
1994 1995 1996 1997 1998
* Shares of the Navigator class of American Leading Companies Trust were held by
invstors only during the period from October 4, 1996, to December 3, 1998; there
were no Navigator shares outstanding on the date of this prospectus. The fund's
annual total return for Navigator Class shares as of December 31, 1997 was
25.29%; its total return for Navigator Class shares for the period January 1,
1998 to December 3, 1998 was 14.04% (not annualized).
**The fund's year-to-date total return for Primary Class shares as of June 30,
1999 is 14.00%.
DURING THE FIVE CALENDAR YEARS OF PRIMARY CLASS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
-------------------------------------------------------------------
Best quarter: December 31, 1996 +12.47%
-------------------------------------------------------------------
Worst quarter: December 31, 1994 -4.11%
-------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
-----------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
-----------------------------------------------------------------------------
American Leading Companies - 21.33% 17.82% 16.79%(a)
Primary Shares(e)
-----------------------------------------------------------------------------
14
<PAGE>
-----------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
-----------------------------------------------------------------------------
S&P 500 Index 28.58% 24.06% 22.78%(b)
-----------------------------------------------------------------------------
American Leading Companies - 12.02%(c) n/a 24.30%(d)
Navigator Shares(e)
-----------------------------------------------------------------------------
S&P 500 Index 28.58% 24.06% 31.37%(f)
-----------------------------------------------------------------------------
(a) September 1, 1993 (commencement of operations of Primary Class) to
December 31, 1998.
(b) September 30, 1993 to December 31, 1998.
(c) December 3, 1997 to December 3, 1998 (redemption of all Navigator Class
shares.
(d) October 4, 1996 (commencement of operations of Navigator Class) to
December 3, 1998 (redemption of all Navigator Class shares).
(e) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(f) October 31, 1996 to December 31, 1998.
BALANCED TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
30%
25%
20%
15% 18.71%
10%
5% 5.6%
0%
1997 1998
*The fund's year-to-date total return as of June 30, 1999 is 0.59%.
DURING THE TWO CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +9.00%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -7.07%
- --------------------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
1 YEAR LIFE OF CLASS
- -------------------------------------------------------------------
Balanced Trust - Primary Shares(c) +5.60% +12.42(a)
- -------------------------------------------------------------------
S&P 500 +28.58% +31.69%(b)
- -------------------------------------------------------------------
(a) October 1, 1996 (commencement of operations of Balanced Trust-Primary
Shares) to December 31, 1998.
(b) September 30, 1996 to December 31, 1998.
(c) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
15
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets. Other expenses include transfer agency, custody, professional
and registration fees.
The fees and expenses shown are for the fiscal year ended March 31, 1999, and
are calculated as a percentage of average net assets. As of the date of this
prospectus Navigator Shares of Balanced Trust have not yet commenced operations.
Shares of the Navigator class of American Leading Companies Trust were held by
investors only during the period from October 4, 1996 to December 3, 1998;
there were no Navigator shares of that fund outstanding on the date of this
prospectus.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- --------------------------------------------------------------------------------
NAVIGATOR SHARES OF: Value Total Special American Balanced Small-Cap
Trust Return Investment Leading Cos. Trust Value
- --------------------------------------------------------------------------------
Management fees (a) 0.67% 0.75% 0.73% 0.75% 0.75% 0.85%
- --------------------------------------------------------------------------------
Distribution and/or none none none none none none
Service (12b-1) fees
- --------------------------------------------------------------------------------
Other Expenses 0.05% 0.07% 0.05% 0.18% 0.40% 0.43%
- --------------------------------------------------------------------------------
Total Annual Fund 0.72% 0.82% 0.78% 0.93% 1.15% 1.28%
Operating Expenses (a)
- --------------------------------------------------------------------------------
(a) Legg Mason Fund Adviser, Inc. has voluntarily agreed to waive the
management fee to the extent necessary to limit total operating expenses
relating to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) as follows: for Total Return Trust and American Leading
Companies Trust, 0.95% of each fund's average daily net assets attributable to
Navigator Shares indefinitely; for Balanced Trust, 1.10% of average daily net
assets attributable to Navigator shares until July 31, 2000; and for Small-Cap
Value, 1.00% of average daily net assets attributable to Navigator Shares until
July 31, 2000. These voluntary waivers may be terminated at any time. With the
waiver, management fees and total annual fund operating expenses for the fiscal
year ended March 31, 1999 would have been 0.47% and 0.90% for Small-Cap Value.
During the fiscal year ended March 31, 1999, no fee waivers were necessary for
Total Return Trust or American Leading Companies Trust.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Value Trust $74 $230 $401 $894
- --------------------------------------------------------------------------------
Total Return Trust $84 $262 $455 $1014
- --------------------------------------------------------------------------------
Special Investment Trust $80 $249 $433 $966
- --------------------------------------------------------------------------------
American Leading $97 $303 $525 $1166
Companies Trust
- --------------------------------------------------------------------------------
Balanced Trust $117 $365 $633 $1398
- --------------------------------------------------------------------------------
Small-Cap Value Trust $130 $406 $702 $1545
- --------------------------------------------------------------------------------
16
<PAGE>
[icon] M A N A G E M E N T
MANAGEMENT AND ADVISERS:
Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the investment adviser for Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies Trust. The adviser is
responsible for making investment decisions and placing orders to buy or sell a
particular security. The adviser has delegated investment advisory functions for
Balanced Trust and Small-Cap Value to separate advisers as described below.
The adviser is also obligated to provide each fund with investment management
and administrative services and to oversee the funds' relationships with outside
service providers, such as the custodian, transfer agent, accountants, and
lawyers.
For its services during the fiscal year ended March 31, 1999, each fund paid the
adviser a percentage of its average daily net assets (net of any fee waivers) as
follows:
-----------------------------------------
Value Trust 0.67%
-----------------------------------------
Total Return Trust 0.75%
-----------------------------------------
Special Investment Trust 0.73%
-----------------------------------------
American Leading Companies Trust 0.75%
-----------------------------------------
Balanced Trust 0.70%
-----------------------------------------
Small-Cap Value Trust 0.47%
-----------------------------------------
The adviser acts as manager or adviser to private accounts and investment
company portfolios with aggregate assets of over $19 billion as of June 30,
1999.
LMFA has entered into investment advisory agreements with Bartlett & Co.
("Bartlett") and Brandywine Asset Management, Inc. ("Brandywine") to provide
investment advisory services to Balanced Trust and Small-Cap Value,
respectively.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, is investment adviser
to Balanced Trust. Bartlett is responsible for the actual investment management
of this fund which includes making investment decisions and placing orders to
buy or sell particular securities. LMFA pays Bartlett a monthly fee of 66 2/3%
of the fee it receives from Balanced Trust. Fees paid to Bartlett are net of any
waivers. Bartlett provides investment advice to individuals, corporations,
pension and profit sharing plans, trust accounts and mutual funds. Aggregate
assets under management of Bartlett were approximately $3.0 billion as of June
30, 1999.
Brandywine, 201 North Walnut Street, Wilmington, Delaware 19801, as investment
adviser to Small-Cap Value, is responsible for the actual investment management
of this fund which includes making investment decisions and placing orders to
buy or sell particular securities. LMFA pays Brandywine a monthly fee of 58.8%
of the fee it receives from Small-Cap Value, or 0.50% of Small-Cap Value's
average daily net assets. Fees paid to Brandywine are net of any waivers.
Brandywine acts as adviser or sub-adviser to individuals, public funds,
corporations, pension and profit sharing plans, Taft-Hartley Plans, endowments
and foundations, as well as to three investment company portfolios.
PORTFOLIO MANAGEMENT:
William H. Miller, III, President of LMFA, has had primary responsibility for
the day-to-day management of Value Trust since 1990. From Value Trust's
inception, in 1982, to November 1990, Mr. Miller co-managed that fund. Mr.
Miller has also been primarily responsible for the day-to-day management of
Special Investment Trust since its inception in 1985. Lisa O. Rapuano is
assistant portfolio manager of Special Investment Trust. Mrs. Rapuano has been
17
<PAGE>
the analyst responsible for the technology, media and telecommunication sectors,
as well as for some special situations outside these sectors, since joining LMFA
in September 1994. From July 1991 to September 1994 she was an analyst at
Franklin Street Partners, a money management firm.
Nancy T. Dennin, Senior Vice President of LMFA, has primary responsibility for
the day-to-day management of Total Return Trust. Prior to April 1, 1997, Mrs.
Dennin and Mr. Miller co-managed the fund for slightly over six years.
Mrs. Dennin has been employed at LMFA since 1985.
David E. Nelson, Senior Vice President of LMFA, has had primary responsibility
for the day-to-day management of American Leading Companies since March 9, 1998.
Mr. Nelson was employed at Investment Counselors of Maryland from 1989-1998,
where he was the portfolio manager for the UAM ICM Equity Portfolio from its
inception on October 1, 1993 until 1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced Trust.
Both are senior portfolio managers of Bartlett. Mr. Rabiner has been employed by
Bartlett since 1983 and has served since then as Director of its Fixed Income
Group. Mr. Uible has been employed by Bartlett since 1980, and has been a senior
portfolio manager for over five years. He chairs Bartlett's Equity Investment
Group, and is responsible for Bartlett's equity investment processes. Mr.
Rabiner and Mr. Uible are members of Bartlett's Management Committee and
Investment Policy Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value. Both
are Managing Directors of Brandywine. Mr. Otto is a senior portfolio manager
and has been employed at Brandywine since 1987. Mr. Tonkovich is a senior
portfolio manager and analyst and has been employed at Brandywine since
1989.
DISTRIBUTOR OF THE FUNDS' SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares under separate Underwriting
Agreements. Each Underwriting Agreement obligates Legg Mason to pay certain
expenses in connection with offering fund shares, including compensation to its
financial advisers, the printing and distribution of prospectuses, statements of
additional information and shareholder reports (after these have been printed
and mailed to existing shareholders at the funds' expense), supplementary sales
literature and advertising materials.
Legg Mason and the manager may pay non-affiliated entities out of their own
assets to support the distribution of Navigator Shares and shareholder
servicing.
Legg Mason and the advisers are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
18
<PAGE>
[icon] H O W T O I N V E S T
Navigator Shares are currently offered for sale only to:
o Institutional Clients of Legg Mason Trust Company for which they exercise
discretionary investment management responsibility and accounts of the
customers with such Institutional Clients ("Customers").
o qualified retirement plans managed on a discretionary basis and having
net assets of at least $200 million
o clients of Bartlett who, as of December 19, 1996, were shareholders of
Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund and for whom
Bartlett acts as an ERISA fiduciary
o any qualified retirement plan of Legg Mason, Inc. or of any of its
affiliates
o Certain institutions who were clients of Fairfield Group, Inc. as of
February 28, 1999 for investment of their own monies and monies for
which they act in a fiduciary capacity
Eligible investors may purchase Navigator Shares through a brokerage account at
Legg Mason. The minimum initial investment is $50,000 and the minimum for each
purchase of additional shares is $100. Institutional Clients may set different
minimums for their Customers' investments in accounts invested in Navigator
Shares.
Customers of certain Institutional Clients that have omnibus accounts with the
funds' transfer agent can purchase shares through those Institutions. The
distributor may pay such Institutional Clients for account servicing.
Institutional Clients may charge their Customers for services provided in
connection with the purchase and redemption of shares. Information concerning
these services and any applicable charges will be provided by the Institutional
Clients. This Prospectus should by read by Customers in connection with any such
information received by Institutional Clients. Any such fees, charges or
requirements imposed by Institutional Clients will be in addition to the fees
and requirements of this Prospectus.
Certain institutions that have agreements with Legg Mason or the funds may be
authorized to accept purchase and redemption orders on their behalf. Once the
authorized institution accepts the order, you will receive the next determined
net asset value. You should consult with your institution to determine the time
by which it must receive your order to get that day's share price. It is the
institution's responsibility to transmit your order to the fund in a timely
fashion.
Purchase orders received by Legg Mason before the Close of the New York Stock
Exchange (normally 4:00 p.m., Eastern time) will be processed at the fund's net
asset value as of the close of the exchange on that day. Orders received after
the close of the exchange will be processed at the fund's net asset value as of
the close of the exchange on the next day the exchange is open. Payment must be
made within three business days to the selling organization.
Primary Shares are offered through a separate prospectus.
19
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
To redeem your shares by telephone:
o Call 1-800-822-5544
Please have available the number of shares (or dollar amount) to be redeemed and
the account number.
The funds will follow reasonable procedures to ensure the validity of any
telephone redemption request, such as requesting identifying information from
callers or employing identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
Customers of Institutional Clients may redeem only in accordance with
instructions and limitations pertaining to their account at the Institution.
Redemption orders received by Legg Mason before the close of the exchange will
be transmitted to the funds' transfer agent. Your order will be processed at
that day's net asset value. Redemption orders received by Legg Mason after the
close of the exchange will be processed at the closing net asset value on the
next day the exchange is open.
Your order will be processed promptly and you will generally receive the
proceeds by mail to the name and address on the account registration within a
week. You may also have your telephone redemption requests paid by a direct wire
to a previously designated domestic commercial bank account.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Each fund has reserved the right under certain conditions to redeem its shares
in kind by distributing portfolio securities.
20
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Navigator Share is determined daily as of the close of the
New York Stock Exchange, on every day the exchange is open. To calculate each
fund's Navigator Share price, the fund's assets attributable to Navigator Shares
are valued and totaled, liabilities attributable to Navigator Shares are
subtracted, and the resulting net assets are divided by the number of Navigator
Shares outstanding. Each fund's securities are valued on the basis of market
quotations or, lacking such quotations, at fair value as determined under the
guidance of the Board of Directors.
Securities for which market quotations are readily available are valued at the
last sale price of the day for a comparable position, or, in the absence of any
such sales, the last available bid price for a comparable position. Where a
security is traded on more than one market, which may include foreign markets,
the securities are generally valued on the market considered by each fund's
adviser to be the primary market. Securities with remaining maturities of 60
days or less are valued at amortized cost.
Each fund will value its foreign securities in U.S. dollars on the basis of
the then-prevailing exchange rates.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds. A fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a
period of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
21
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
CONFIRMATIONS AND ACCOUNT STATEMENTS:
Confirmations will be sent to Institutional Clients after each transaction
involving Navigator Shares which will include the total number of shares being
held in safekeeping by the transfer agent. The transfer agent will send
confirmations of each purchase and redemption transaction (except a reinvestment
of dividends or capital gain distributions). Beneficial ownership of shares by
Customer accounts will be recorded by the Institutional Client and reflected in
their regular account statements.
EXCHANGE PRIVILEGE:
Navigator Shares of a fund may be exchanged for Navigator Shares of any of the
other Legg Mason funds or the Legg Mason Cash Reserve Trust, provided these
funds are eligible for sale in your state of residence. You can request an
exchange in writing or by phone. Be sure to read the current prospectus for any
fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. An exchange of a fund's shares
will be treated as a sale of the shares and any gain on the transaction may be
subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from a fund in one calendar year
o terminate or modify the exchange privilege after 60 days' written notice
to shareholders
Some Institutional Clients may not offer all of the Navigator Funds for
exchange.
22
<PAGE>
[icon] D I S T R I B U T I O N S A N D T A X E S
Each fund declares dividends to holders of navigator shares out of its
investment company taxable income (which generally consists of net investment
income, any net short-term capital gain and net gains from certain foreign
currency transactions) attributable to those shares. Value Trust, Total Return
Trust and Balanced Trust declare and pay dividends from net investment income
quarterly; they pay dividends from any net short-term capital gains and foreign
currency gains annually. Special Investment Trust, American Leading Companies
and Small-Cap Value declare and pay dividends from investment company taxable
income following the end of each taxable year.
Distributions of substantially all of each fund's net capital gain (the excess
of net long-term capital gain over net short-term capital loss) are generally
declared and paid after the end of the taxable year in which the gain is
realized.
A second distribution may be necessary in some years to avoid imposition of a
federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Navigator Shares of the distributing fund. If you wish to begin
receiving dividends and/or other distributions in cash, you must notify the
distributing fund at least 10 days before the next dividend and/or other
distribution is to be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional Navigator Shares of the fund. Dividends from net
investment company taxable income are taxable as ordinary income. Distributions
of a fund's net capital gain are taxable as long-term capital gain, regardless
of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
Each fund's dividend and interest income, and gains realized from disposition of
foreign securities, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. Each fund will also withhold 31% of all dividends and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
23
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand each fund's
financial performance for the past five years or since its inception. Total
return represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and other
distributions. Certain information reflects financial results for a single fund
share. For Value Trust, Total Return Trust and Special Investment Trust,
this information has been audited by their independent accountants,
PricewaterhouseCoopers LLP, whose report, along with the funds' financial
statements, is incorporated by reference into the Statement of Additional
Information (see back cover) and is included in the annual report for these
funds. For American Leading Companies Trust and Small-Cap Value Trust, this
information has been audited by their independent auditors, Ernst & Young LLP,
whose report, along with the funds' financial statements, is incorporated by
reference into the Statement of Additional Information and is included in the
annual report for these funds. The annual reports are available upon request by
calling toll-free 1-800-822-5544.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Investment Operations Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
For Net From
the Asset Net Net Realized & Total From Net Total Net
Years Value, Investment Unrealized From Net Realized Distri- Asset
Ended Beginning Income Gain (Loss) Investment Investment Gain on butions Value,
Mar. 31, of Year (Loss) On Investments Operations Income Investments End of
Year
- ------------------------------------------------------------------------------------------------------------------------------------
Value Trust - Navigator Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
1999 $50.57 $.20 $25.13 $25.33 $ --- $(1.41) $(1.41) $74.49
-------------------------------------------------------------------------------------------------------------------------------
1998 34.30 .35 18.55 18.90 (.31) (2.32) (2.63) 50.57
-------------------------------------------------------------------------------------------------------------------------------
1997 27.08 .41 8.75 9.16 (.41) (1.53) (1.94) 34.30
-------------------------------------------------------------------------------------------------------------------------------
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64) 27.08
-------------------------------------------------------------------------------------------------------------------------------
1995A 18.76 .12 1.40 1.52 (.01) --- (.01) 20.27
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Special Investment Trust - Navigator Shares
-------------------------------------------------------------------------------------------------------------------------------
1999 $37.12 $.03 $6.02 $6.05 $ --- $(2.66) $(2.66) $40.51
-------------------------------------------------------------------------------------------------------------------------------
1998 27.04 --- 11.58 11.58 --- (1.50) (1.50) 37.12
-------------------------------------------------------------------------------------------------------------------------------
1997 25.26 .02 3.17 3.19 --- (1.41) (1.41) 27.04
-------------------------------------------------------------------------------------------------------------------------------
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64) 25.26
-------------------------------------------------------------------------------------------------------------------------------
1995A 19.11 .07 .85 .92 --- --- --- 20.03
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Total Return Trust - Navigator Shares
-------------------------------------------------------------------------------------------------------------------------------
1999 $24.87 $.61 $(2.36) $(1.75) $ (.65) $(1.20) $(1.85) $21.27
-------------------------------------------------------------------------------------------------------------------------------
1998 19.53 .66 7.29 7.95 (.58) (2.03) (2.61) 24.87
-------------------------------------------------------------------------------------------------------------------------------
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12) 19.53
-------------------------------------------------------------------------------------------------------------------------------
1996 12.83 .62 3.72 4.34 (.65) --- (.65) 16.52
-------------------------------------------------------------------------------------------------------------------------------
1995A 12.66 .15 .25 .40 (.06) (.17) (.23) 12.83
-------------------------------------------------------------------------------------------------------------------------------
American Leading Companies Trust - Navigator Shares
-------------------------------------------------------------------------------------------------------------------------------
1999 D $17.95 $.08B $.23 $.31 $ --- $(.46) $(.46) $17.80
-------------------------------------------------------------------------------------------------------------------------------
1998 14.71 .10B 4.99 5.09 --- (1.85) (1.85) 17.95
-------------------------------------------------------------------------------------------------------------------------------
1997E 13.30 .07B 1.94 2.01 (.12) (.48) (.60) 14.71
-------------------------------------------------------------------------------------------------------------------------------
24
<PAGE>
-------------------------------------------------------------------------------------------------------------------------------
Small-Cap Value - Navigator Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
1999F $9.92 $.05C $(2.09) $(2.04) $ --- $ --- $ --- $7.88
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------
Net Investment
Expenses Income to Net Assets,
Total to Average Net Average Net Portfolio End of Year
Return Assets Assets Turnover Rate (thousands)
--------------------------------------------------------------------
---------------------------------------------------------------------------
Value Trust - Navigator Shares
---------------------------------------------------------------------------
1999 51.33% .72% .6% 19.3% $814,403
---------------------------------------------------------------------------
1998 56.90% .73% .9% 12.9% 179,664
---------------------------------------------------------------------------
1997 34.97% .77% 1.4% 10.5% 83,752
---------------------------------------------------------------------------
1996 43.53% .82% 1.8% 19.6% 52,332
---------------------------------------------------------------------------
1995A 8.11%G .82%H 1.8%H 20.1%H 36,519
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Special Investment Trust - Navigator Shares
---------------------------------------------------------------------------
1999 18.01% .78% .1% 47.8% $ 71,492
---------------------------------------------------------------------------
1998 44.42% .80% --- 29.8% 63,299
---------------------------------------------------------------------------
1997 12.81% .85% .1% 29.2% 41,415
---------------------------------------------------------------------------
1996 29.85% .88% 1.0% 35.6% 35,731
---------------------------------------------------------------------------
1995A 4.81%G .90%H 1.0%H 27.5%H 26,123
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total Return Trust - Navigator Shares
---------------------------------------------------------------------------
1999 (7.18)% .82% 2.7% 44.2% $ 15,275
---------------------------------------------------------------------------
1998 43.94% .83% 3.1% 20.6% 17,792
---------------------------------------------------------------------------
1997 25.67% .86% 3.7% 38.4% 10,048
---------------------------------------------------------------------------
1996 34.67% .94% 4.2% 34.7% 7,058
---------------------------------------------------------------------------
1995A 2.28%G .86%H 3.6%H 61.9%H 4,823
---------------------------------------------------------------------------
---------------------------------------------------------------------------
American Leading Companies Trust - Navigator Shares
---------------------------------------------------------------------------
1999D 1.84%G .94%B, H .65%B, H 47.6%H $ ---
---------------------------------------------------------------------------
1998 36.68% .93%B .74%B 51.4% 82
---------------------------------------------------------------------------
1997E 15.16%G .86%B, H .98%B, H 55.7%H 55
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Small-Cap Value - Navigator Shares
---------------------------------------------------------------------------
1999F (20.56)%G .90%C, H .71%C, H 29.5%H $ 40
---------------------------------------------------------------------------
---------------------------------------------------------------------------
A For the period December 1, 1994 (commencement of sale of Navigator Shares)
to March 31, 1995.
B Net of fees waived by LMFA in excess of a voluntary expense limitation of
.95% of average daily net assets. If no fees had been waived by LMFA, the
annualized ratio of expenses to average daily net assets for the period
25
<PAGE>
October 4, 1996 to March 31, 1997, for the year ended March 31, 1998, and
for the period ended December 3, 1998, would have been 0.97%, 0.98% and
0.95%, respectively.
C Net of fees waived by LMFA in excess of a voluntary expense limitation of
1.00% of average daily net assets. If no fees had been waived by LMFA, the
annualized ratio of expenses to average daily net assets for the period June
19, 1998 to March 31, 1999, would have been 1.28%.
D American Leading Companies Navigator shares were redeemed on December 3,
1998, and information is for the period then ended.
E For the period October 4, 1996 (commencement of sale of Navigator Shares) to
March 31, 1997.
F For the period June 19, 1998 (commencement of sale of Navigator Shares) to
March 31, 1997.
G Not annualized.
H Annualized.
26
<PAGE>
L e g g M a s o n E q u i t y F u n d s
The following additional information about each fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated 100 Light Street,
P.O. Box 1476 Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC. (phone 1-800-SEC-0330).
Reports and other information about the funds are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-041 SEC file numbers 811-3380;
811-4308; 811-4451; 811-7692.
27
<PAGE>
<TABLE>
<CAPTION>
LEGG MASON EQUITY FUNDS
<S> <C>
LEGG MASON VALUE TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC. LEGG MASON AMERICAN LEADING COMPANIES TRUST
LEGG MASON SPECIAL INVESTMENT TRUST, INC. LEGG MASON BALANCED TRUST
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST
</TABLE>
PRIMARY SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus for Primary Shares or for Navigator
Shares of the funds (both dated July 31, 1999), as appropriate, which have been
filed with the Securities and Exchange Commission ("SEC"). The Funds' annual
report is incorporated by reference into this Statement of Additional
Information. A copy of either of the Prospectuses or the annual report may be
obtained without charge from the Funds' distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason"), at 1-800-822-5544.
Legg Mason Wood Walker,
Incorporated
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
TABLE OF CONTENTS
Page
DESCRIPTION OF THE FUNDS.......................................................3
FUND POLICIES..................................................................3
INVESTMENT STRATEGIES AND RISKS................................................5
ADDITIONAL TAX INFORMATION....................................................21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................25
VALUATION OF FUND SHARES......................................................26
PERFORMANCE INFORMATION.......................................................27
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES................................35
MANAGEMENT OF THE FUND........................................................37
THE FUNDS' INVESTMENT ADVISER/MANAGER.........................................39
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................42
THE FUNDS' DISTRIBUTOR........................................................44
CAPITAL STOCK INFORMATION.....................................................47
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT...............47
THE FUNDS' LEGAL COUNSEL......................................................48
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS...................................48
FINANCIAL STATEMENTS..........................................................48
Appendix A....................................................................49
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by any
fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
2
<PAGE>
DESCRIPTION OF THE FUNDS
Legg Mason Value Trust, Inc. ("Value Trust"), Legg Mason Total Return Trust,
Inc. ("Total Return Trust"), Legg Mason Special Investment Trust, Inc.
("Special Investment Trust") and Legg Mason Investors Trust, Inc. ("Investors
Trust") are each diversified open-end investment companies that were
established as Maryland corporations on January 20, 1982, May 22, 1985,
October 31, 1985, and May 5, 1993, respectively. Legg Mason American Leading
Companies Trust ("American Leading Companies"), Legg Mason Balanced Trust
("Balanced Trust"), and Legg Mason U.S. Small-Capitalization Value Trust
("Small-Cap Value") are separate series of Investors Trust.
FUND POLICIES
VALUE TRUST's investment objective is to seek long-term growth of capital.
TOTAL RETURN TRUST's investment objective is to seek capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. SPECIAL INVESTMENT's investment objective is to
seek capital appreciation. AMERICAN LEADING COMPANIES' investment objective is
to seek long-term capital appreciation and current income consistent with
prudent investment risk. BALANCED TRUST's investment objective is to seek
long-term capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk. SMALL-CAP
VALUE's investment objective is to seek long-term capital appreciation.
In addition to the investment objective of each Fund described in the
Prospectuses, each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of its shareholders. Value Trust, Total
Return Trust and Special Investment Trust each may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes, in an aggregate amount not to exceed 10% of
the value of the total assets of the respective Fund at the time of borrowing;
provided that borrowings, including reverse repurchase agreements, in excess of
5% of such value will be only from banks (although not a fundamental policy
subject to shareholder approval, each Fund will not purchase securities if
borrowings, including reverse purchase agreements, exceed 5% of its total
assets);
2. With respect to 75% of total assets, invest more than 5% of its total
assets (taken at market value) in securities of any one issuer, other than the
U.S. Government, or its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
3. Purchase securities on "margin", except for short-term credits
necessary for clearance of portfolio transactions and except that each Fund may
make margin deposits in connection with the use of futures contracts and options
on futures contracts;
4. Invest 25% or more of its total assets (taken at market value) in any
one industry;
5. Purchase or sell commodities and commodity contracts, but this
limitation shall not prevent each Fund from purchasing or selling options and
futures contracts;
6. Underwrite the securities of other issuers, except insofar as each
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and except to the
extent that the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;
8. Purchase or sell real estate, except that each Fund may invest in
securities collateralized by real estate or interests therein or in securities
3
<PAGE>
issued by companies that invest in real estate or interests therein (as a
non-fundamental policy changeable without a shareholder vote, each Fund will not
purchase or sell interests in real estate limited partnerships);
9. Make short sales of securities or maintain a short position, except
that each Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box;" or
10. Issue senior securities, except as permitted under the Investment
Company Act of 1940 ("1940 Act").
American Leading Companies, Balanced Trust and Small-Cap Value each may
not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed 5% of the
value of its total assets at the time of borrowings. (Although not a fundamental
policy subject to shareholder approval, the Fund will repay any money borrowed
before any portfolio securities are purchased);
2. Issue senior securities, except as permitted under the 1940 Act;
3. Engage in the business of underwriting the securities of other issuers
except insofar as the Fund may be deemed an underwriter under the Securities Act
of 1933, as amended, in disposing of a portfolio security;
4. Buy or hold any real estate; provided, however, that instruments
secured by real estate or interests therein are not subject to this limitation;
5. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
6. Purchase or sell any commodities or commodities contracts, except that
the Fund may purchase or sell currencies, interest rate and currency futures
contracts, options on currencies, securities, and securities indexes and options
on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities and repurchase agreements with respect thereto.
The foregoing limitations may be changed with respect to a Fund by "the
vote of a majority of the outstanding voting securities" of that Fund, a term
defined in the 1940 Act to mean the vote (a) of 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present, or (b) of more than 50%
of the outstanding voting securities of the Fund, whichever is less.
AMERICAN LEADING COMPANIES, BALANCED TRUST AND SMALL-CAP VALUE:
The following are some of the non-fundamental limitations which American
Leading Companies, Balanced Trust and Small-Cap Value currently observe. Each
Fund may not:
4
<PAGE>
1. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of permitted currency futures contracts and
options on currency futures contracts; or
2. Make short sales of securities or maintain a short position, except
that the Fund may sell short "against the box". This limit does not apply to
short sales and short positions in connection with its use of options, futures
contracts and options on futures contracts (No Fund intends to make short sales
in excess of 5% of its net assets during the coming year).
In addition, as a non-fundamental limitation, American Leading Companies
may not purchase or sell interest rate and currency futures contracts, options
on currencies, securities, and securities indexes and options on interest rate
and currency futures contracts, PROVIDED, however, that the Fund may sell
covered call options on securities and may purchase options to the extent
necessary to close out its position in one or more call options.
Except as otherwise stated, if a fundamental or non-fundamental percentage
limitation set forth above is complied with at the time an investment is made, a
later increase or decrease in percentage resulting from a change in value of
portfolio securities, in the net asset value of a Fund, or in the number of
securities an issuer has outstanding, will not be considered to be outside the
limitation.
Unless otherwise stated, the investment policies and limitations contained
in this Statement of Additional Information are not fundamental, and can be
changed without shareholder approval.
INVESTMENT STRATEGIES AND RISKS
This section supplements the information in the Prospectuses concerning
the investments the Funds may make and the techniques they may use. Each Fund,
unless otherwise stated, may employ several investment strategies, including but
not limited to:
Foreign Securities
- ------------------
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from fluctuations
in currency exchange rates, revaluation of currencies, future political and
economic developments and the possible imposition of currency exchange blockages
or other foreign governmental laws or restrictions, reduced availability of
public information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.
The costs associated with investment in foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, are higher than
those associated with investment in domestic issuers. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause a Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result in losses to a Fund due to subsequent declines in value of the portfolio
security or, if a Fund has entered into a contract to sell the security, could
result in liability to the purchaser.
5
<PAGE>
Since each Fund may invest in securities denominated in currencies other
than the U.S. dollar and since each Fund may hold foreign currencies, a Fund may
be affected favorably or unfavorably by exchange control regulations or changes
in the exchange rates between such currencies and the U.S. dollar. Changes in
the currency exchange rates may influence the value of each Fund's shares, and
also may affect the value of dividends and interest earned by that Fund and
gains and losses realized by that Fund. Exchange rates are determined by the
forces of supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments, other economic and financial
conditions, government intervention, speculation and other factors.
In addition to purchasing foreign securities, each Fund may invest in
ADRs. Generally, ADRs, in registered form, are denominated in U.S. dollars and
are designed for use in the domestic market. Usually issued by a U.S. bank or
trust company, ADRs are receipts that demonstrate ownership of the underlying
securities. For purposes of each Fund's investment policies and limitations,
ADRs are considered to have the same classification as the securities underlying
them. ADRs may be sponsored or unsponsored; issuers of securities underlying
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. Accordingly, there may be less information available
about such issuers than there is with respect to domestic companies and issuers
of securities underlying sponsored ADRs. Each Fund may also invest in GDRs,
which are receipts, often denominated in U.S. dollars, issued by either a U.S.
or non-U.S. bank evidencing its ownership of the underlying foreign securities.
Small-Cap Value does not currently intend to invest in foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate the Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies will each invest no more than
25% of its total assets in foreign securities. Bartlett currently anticipates
that Balanced Trust will not invest more than 10% of its total assets in foreign
securities, either directly or through ADRs or GDRs. Small-Cap Value does not
currently intend to invest in foreign securities.
Illiquid Securities
- -------------------
Value Trust and Total Return Trust each may invest up to 10% of its net
assets in illiquid securities. American Leading Companies, Balanced Trust,
Special Investment Trust and Small-Cap Value each may invest up to 15% of its
net assets in illiquid securities. For this purpose, "illiquid securities" are
those that cannot be disposed of within seven days for approximately the price
at which the Fund values the security. Illiquid securities include repurchase
agreements with terms of greater than seven days and restricted securities other
than those the adviser to a Fund has determined are liquid pursuant to
guidelines established by each Fund's Board of Directors. Due to the absence of
an active trading market, a Fund may have difficulty valuing or disposing of
illiquid securities promptly.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the Securities
Act of 1933, or pursuant to an exemption from registration. A Fund may be
required to pay part or all of the costs of such registration, and a
considerable period may elapse between the time a decision is made to sell a
restricted security and the time the registration statement becomes effective.
Judgment plays a greater role in valuing illiquid securities than those for
which a more active market exists.
SEC regulations permit the sale of certain restricted securities to
qualified institutional buyers. The investment adviser to each Fund, acting
pursuant to guidelines established by such Fund's Board of Directors, may
determine that certain restricted securities qualified for trading on this newly
developing market are liquid. If the market does not develop as anticipated,
restricted securities in each Fund's portfolio may adversely affect that Fund's
liquidity.
6
<PAGE>
Debt Securities
- ---------------
The prices of debt securities fluctuate in response to perceptions of the
issuer's creditworthiness and also tend to vary inversely with market interest
rates. The value of such securities is likely to decline in times of rising
interest rates. Conversely, when rates fall, the value of these investments is
likely to rise. The longer the time to maturity the greater are such variations.
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher current
yield than that provided by higher grade issues, but also involve higher risks.
Debt securities rated C by Moody's and S&P are bonds on which no interest is
being paid and which can be regarded as having extremely poor prospects of ever
attaining any real investment standing. However, debt securities, regardless of
their ratings, generally have a higher priority in the issuer's capital
structure than do equity securities.
Lower-rated debt securities are especially affected by adverse changes in
the industries in which the issuers are engaged and by changes in the financial
condition of the issuers. Highly leveraged issuers may also experience financial
stress during period of rising interest rates. Lower-rated debt securities are
also sometimes referred to as "junk bonds."
The market for lower-rated debt securities has expanded rapidly in recent
years. This growth has paralleled a long economic expansion. At certain times in
the past, the prices of many lower-rated debt securities declined, indicating
concerns that issuers of such securities might experience financial
difficulties. At those time, the yields on lower-rated debt securities rose
dramatically reflecting the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuer's financial
restructuring or default. There can be no assurance that such declines will not
recur.
The market for lower-rated debt securities is generally thinner and less
active than that for higher quality debt securities, which may limit a Fund's
ability to sell such securities at fair value. Judgment plays a greater role in
pricing such securities than is the case for securities having more active
markets. Adverse publicly and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market.
The ratings of S&P and Moody's represent the opinions of those agencies.
Such ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as many buyers. A description of
the ratings assigned to corporate debt obligations by Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's ("S&P") is included in Appendix A.
In addition to ratings assigned to individual bond issues, each adviser
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which a Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial conditions of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of principal and interest.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by each Fund's adviser to determine, to
the extent possible, that the planned investment is sound.
If a security rated A or above at the time of purchase by American Leading
Companies is subsequently downgraded to a rating below A, LMFA will consider
that fact in determining whether to dispose of the security, but will dispose of
7
<PAGE>
it if necessary to insure that no more than 5% of net assets are invested in
debt securities rated below A. If one rating agency has rated a security A or
better and another agency has rated it below A, LMFA may rely on the higher
rating in determining to purchase or retain the security on behalf of American
Leading Companies. Bonds rated A may be given a "+" or "-" by the rating agency.
The Fund considers bonds denominated A, A+ or A- to be included in the rating A.
Preferred Stock
- ---------------
Each fund may purchase preferred stock as a substitute for debt securities
of the same issuer when, in the opinion of its adviser, the preferred stock is
more attractively priced in light of the risks involved. Preferred stock pays
dividends at a specified rate and generally has preference over common stock in
the payment of dividends and the liquidation of the issuer's assets but is
junior to the debt securities of the issuer in those same respects. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. Shareholders may
suffer a loss of value if dividends are not paid. The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes in the issuer's creditworthiness than are the prices of debt securities.
Convertible Securities
- ----------------------
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stream
of income with generally higher yields than those of common stocks of the same
or similar issuers, but lower than the yield of non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a corporation's
capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. The price of a convertible
security often reflects variations in the price of the underlying common stock
in a way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
convertible security's governing instrument, which may be less than the ultimate
conversion value.
Many convertible securities are rated below investment grade or, if
unrated, are considered of comparable quality. American Leading Companies does
not intend to purchase any convertible securities rated below BB by S&P or below
Ba by Moody's or, if unrated, deemed by LMFA to be of comparable quality.
Moody's describes securities rated Ba as having "speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class."
If an investment grade security purchased by Value Trust, Total Return
Trust or Special Investment Trust is subsequently given a rating below
investment grade, LMFA will consider that fact in determining whether to retain
that security in that Fund's portfolio, but is not required to dispose of it.
Corporate Debt Securities
- -------------------------
Corporate debt securities may pay fixed or variable rates of interest, or
interest at a rate contingent upon some other factor, such as the price of some
commodity. These securities may be convertible into preferred or common equity,
8
<PAGE>
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.
When-Issued Securities
- ----------------------
Each Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced and
have the best liquidity in the bond market. When a Fund purchases securities on
a when-issued basis, it assumes the risks of ownership at the time of the
purchase, not at the time of receipt. However, the Fund does not have to pay for
the obligations until they are delivered to it, and no interest accrues to the
Fund until they are delivered. This is normally seven to 15 days later, but
could be longer. Use of this practice would have a leveraging effect on the
Fund.
American Leading Companies does not currently expect that its commitment
to purchase when-issued securities will at any time exceed, in the aggregate, 5%
of its net assets.
To meet its payment obligation under a when-issued commitment, a Fund will
establish a segregated account with its custodian and maintain cash or
appropriate liquid securities, in an amount at least equal in value to that
Fund's commitments to purchase when-issued securities.
A Fund may sell the securities underlying a when-issued purchase, which
may result in capital gains or losses.
Covered Call Options
- --------------------
Each Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, a Fund might write covered call options on
securities generally when the adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by a Fund declines, the amount of such decline will be offset wholly or in part
by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. A Fund would give up the ability to sell the portfolio securities
used to cover the call option while the call option was outstanding. In
addition, a Fund could lose the ability to participate in an increase in the
value of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of closing
out the call option.
If a Fund desires to close out its obligation under a call option it has
sold, it will have to purchase an offsetting option. The value of an option
position will reflect, among other things, the current market price of the
underlying security, futures contract or currency, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, and general market
conditions. Accordingly, when the price of the security rises toward the strike
price of the option, the cost of offsetting the option will negate to some
extent the benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy depends
upon the adviser's ability to forecast the direction of price fluctuations in
the underlying market or market sector.
Each Fund may write exchange-traded options. The ability to establish and
close out positions on the exchange is subject to the maintenance of a liquid
secondary market. Although a Fund intends to write only those exchange-traded
9
<PAGE>
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any specific time. With respect to options written by a Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, because the Fund must maintain a covered position with respect to any
call option it writes on a security, the Fund may not sell the underlying
security during the period it is obligated under such option. This requirement
may impair the Fund's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
A Fund will not enter into an options position that exposes it to an
obligation to another party unless it owns an offsetting ("covering") position
in securities or other options. A Fund will comply with guidelines established
by the SEC with respect to coverage of these strategies by mutual funds, and, if
the guidelines so require, will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian in the amount prescribed,
as marked-to-market daily. Securities positions used for cover and securities
held in a segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
As a non-fundamental policy, ALC will not sell a covered call option if,
as a result, the value of the portfolio securities underlying all outstanding
covered call options would exceed 25% of the value of the equity securities held
by the Fund.
Indexed Securities
- ------------------
Indexed securities are securities whose prices are indexed to the prices
of securities indexes, currencies or other financial statistics. Indexed
securities typically are debt securities or deposits whose value at maturity
and/or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities fluctuates (either directly or
inversely, depending upon the instrument) with the performance of the index,
security, currency or other instrument to which they are indexed and may also be
influenced by interest rate changes in the U.S. and abroad. At the same time,
indexed securities are subject to the credit risks associated with the issuer of
the security, and their value may substantially decline if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations and certain U.S. government agencies. The U.S.
Treasury recently began issuing securities whose principal value is indexed to
the Consumer Price Index (also known as "Treasury Inflation-Protection
Securities"). The funds will only purchase indexed securities of issuers which
its adviser determines present minimal credit risks and will monitor the
issuer's creditworthiness during the time the indexed security is held. The
adviser will use its judgment in determining whether indexed securities should
be treated as short-term instruments, bonds, stock or as a separate asset class
for purposes of each fund's investment allocations, depending on the individual
characteristics of the securities. Each fund currently does not intend to invest
more than 5% of its net assets in indexed securities. Indexed securities may
fluctuate according to a multiple of changes in the underlying instrument and,
in that respect, have a leverage-like effect on a Fund.
Stripped Securities
- -------------------
Stripped securities are created by separating bonds into their principal
and interest components and selling each piece separately (commonly referred to
as IOs and POs). Stripped securities are more volatile than other fixed income
securities in their response to changes in market interest rates. The value of
some stripped securities moves in the same direction as interest rates, further
increasing their volatility.
Zero Coupon Bonds
- -----------------
Zero coupon bonds do not provide for cash interest payments but instead
are issued at a significant discount from face value. Each year, a holder of
such bonds must accrue a portion of the discount as income. Because each Fund is
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<PAGE>
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.
THE FOLLOWING INFORMATION APPLIES TO SPECIAL INVESTMENT TRUST AND SMALL-CAP
VALUE:
Small and Mid-Sized Company Stocks
- ----------------------------------
The advisers for Special Investment Trust and Small-Cap Value believe that
the comparative lack of attention by investment analysts and institutional
investors to small and mid-sized companies may result in opportunities to
purchase the securities of such companies at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity or
long-term prospects. Each Fund's policy of investing primarily in the securities
of smaller companies differs from the investment approach of many other mutual
funds, and investment in such securities involves special risks. Among other
things, the prices of securities of small and mid-sized companies generally are
more volatile than those of larger companies; the securities of smaller
companies generally are less liquid; and smaller companies generally are more
likely to be adversely affected by poor economic or market conditions.
It is anticipated that some of the portfolio securities of either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a Fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a Fund to dispose of such
securities at prevailing market prices in order to meet redemptions. However, as
a non-fundamental policy, Special Investment Trust and Small-Cap Value will not
invest more than 15% of their respective net assets in illiquid securities.
Investments in securities of companies with small market capitalizations
are generally considered to offer greater opportunity for appreciation but also
may involve greater risks than customarily are associated with more established
companies. The securities of small companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks, I.E., small company stocks may decline
in price as the prices of large company stocks rise or vice versa.
THE FOLLOWING INFORMATION APPLIES TO BALANCED TRUST:
Mortgage-Related Securities
- ---------------------------
Mortgage-related securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest, and in most instances, principal to the investor. The
mortgagor's monthly payments to his/her lending institution are "passed-through"
to investors such as the Fund. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are backed by various forms of credit,
insurance and collateral. They may not extend to the full amount of the pool.
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<PAGE>
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The majority of mortgage-related securities currently available are issued
by governmental or government-related organizations formed to increase the
availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is the Government National Mortgage Association.
GNMA certificates ("GNMAs") are interests in pools of loans insured by the
Federal Housing Administration or by the Farmer's Home Administration ("FHA"),
or guaranteed by the Veterans Administration ("VA"). Fannie Mae and Freddie Mac
each issue pass-through securities which are guaranteed as to principal and
interest by Fannie Mae and Freddie Mac, respectively.
The average life of mortgage-related securities varies with the maturities
and the nature of the underlying mortgage instruments, as well as with market
interest rates. For example, GNMAs tend to have a longer average life than
Freddie Mac participation certificates ("PCs") because there is a tendency for
the conventional and privately-insured mortgages underlying Freddie Mac PCs to
repay at faster rates than the FHA and VA loans underlying GNMAs. In addition,
the term of a security may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The occurrence of mortgage
pre-payments is affected by various factors, including the level of interest
rates, general economic conditions, the location and age of the mortgaged
property and other social and demographic conditions. An increase in mortgage
prepayments could cause the Fund to incur a loss on a mortgage-related security
that was purchased at a premium. On the other hand, a decrease in the rate of
prepayments, resulting from an increase in market interest rates, among other
causes, may extend the effective maturities of mortgage-related securities,
increasing their sensitivity to changes in market interest rates.
In determining the dollar-weighted average maturity of the fixed income
portion of the portfolio, Bartlett, investment adviser to Balanced Trust, will
follow industry practice in assigning an average life to the mortgage-related
securities of the Fund unless the interest rate on the mortgages underlying such
securities is such that Bartlett believes a different prepayment rate is likely.
For example, where a GNMA has a high interest rate relative to the market, that
GNMA is likely to have a shorter overall maturity than a GNMA with a market rate
coupon. Moreover, Bartlett may deem it appropriate to change the projected
average life for a Fund's mortgage-related security as a result of fluctuations
in market interest rates and other factors.
Quoted yields on mortgage-related securities are typically based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
average life yield. Reinvestment of the prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Fund. The compounding effect from the reinvestments of monthly payments received
by the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
Like other debt securities, the value of mortgage-related securities will
tend to rise when interest rates fall, and fall when rates rise. The value of
mortgage-related securities may also change because of changes in the market's
perception of the creditworthiness of the organization that issued or guaranteed
them. In addition, the mortgage securities market in general may be adversely
affected by changes in governmental regulation or tax policies.
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<PAGE>
Privately Issued Mortgage-Related Securities
- --------------------------------------------
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential mortgage
loans; mortgage-backed bonds which are considered to be obligations of the
institution issuing the bonds and are collateralized by mortgage loans; and
bonds and collateralized mortgage obligations ("CMOs") which are collateralized
by mortgage-related securities issued by Freddie Mac, Fannie Mae, or GNMA or by
pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each class of
obligations is scheduled to receive periodic interest payments according to the
coupon rate on the obligations. However, all monthly principal payments and any
prepayments from the collateral pool are paid first to the "Class 1"
bondholders. The principal payments are such that the Class 1 obligations are
scheduled to be completely repaid no later than, for example, five years after
the offering date. Thereafter, all payments of principal are allocated to the
next most senior class of bonds until that class of bonds has been fully repaid.
Although full payoff of each class of bonds is contractually required by a
certain date, any or all classes of obligations may be paid off sooner than
expected because of an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers generally
offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payments in the former securities, resulting in higher risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
Municipal Obligations
- ---------------------
The municipal obligations in which the Fund may invest include municipal
leases and participation interests therein. These obligations, which may take
the form of a lease, an installment purchase or a conditional sales contract,
are issued by state and local governments and authorities to acquire land and a
wide variety of equipment and facilities, such as fire and sanitation vehicles,
telecommunications equipment and other capital assets. Rather than holding such
obligations directly, the Fund may purchase a participation interest in a
municipal lease obligation from a bank or other third party. A participation
interest gives the Fund a specified, undivided pro-rata interest in the total
amount of the obligation.
Municipal lease obligations have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "non-appropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
In determining the liquidity of a municipal lease obligation, Bartlett
will distinguish between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond or other investment structure using a municipal lease-purchase
agreement as its base. While the former may present special liquidity issues,
the latter are based on a well established method of securing payment of a
municipal obligation. The Fund's investment in municipal lease obligations and
13
<PAGE>
participation interests therein will be treated as illiquid unless Bartlett
determines, pursuant to guidelines established by the Board of Directors, that
the security could be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the security.
An issuer's obligations under its municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Code, and laws that may be enacted
by Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of issuers to meet their obligations for
the payment of interest and principal on their municipal obligations may be
materially and adversely affected.
The following information applies to VALUE TRUST, TOTAL RETURN TRUST, SPECIAL
INVESTMENT TRUST, BALANCED TRUST AND SMALL-CAP VALUE: (SMALL-CAP VALUE DOES NOT
CURRENTLY INTEND TO INVEST IN FUTURES AND OPTIONS.)
Value Trust, Total Return Trust, Special Investment Trust and Balanced Trust
- ----------------------------------------------------------------------------
Each of these Funds can invest in futures and options transactions,
including puts and calls. Because such investments "derive" their value from the
value of the underlying security, index, or interest rate on which they are
based, they are sometimes referred to as "derivative" securities. Such
investments involve risks that are different from those presented by investing
directly in the securities themselves. While utilization of options, futures
contracts and similar instruments may be advantageous to a fund, if its adviser
is not successful in employing such instruments in managing the Fund's
investments, the Fund's performance will be worse than if the Fund did not make
such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated with
ownership of the securities in which each invests. For example, a Fund may sell
a stock index futures contract in anticipation of a general market or market
sector decline that could adversely affect the market value of the Fund's
portfolio. To the extent that a Fund's portfolio correlates with a given stock
index, the sale of futures contracts on that index would reduce the risks
associated with a market decline and thus provide an alternative to the
liquidation of securities positions. A fund may sell an interest rate futures
contract to offset price changes of debt securities it already owns. This
strategy is intended to minimize any price changes in the debt securities a Fund
owns (whether increases or decreases) caused by interest rate changes, because
the value of the futures contact would be expected to move in the opposite
direction from the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts to
hedge against a market advance in debt securities that the Fund plans to advance
in debt securities that the Fund plans to acquire at a future date. The purchase
of such options is analogous to the purchase of call options on an individual
debt security that can be used as a temporary substitute for a position in the
security itself. The Funds may purchase put options on stock index futures
contracts. This is analogous to the purchase of protective put options on
individual stocks were a level of protection is sought below which no additional
economic loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of the
overall position. For example, the Funds may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the value of
the put option would be expected to rise and off-set all or a portion of the
Fund's resulting losses in its stock holdings. However, option premiums tend to
decrease over time as the expiration date nears. Therefore, because of the costs
of the option (in the form of premium and transaction costs), a Fund would
expect to suffer a loss in the put option if prices do not decline sufficiently
to offset the deterioration in the value of the option premium.
14
<PAGE>
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a written
put option, although its gain would be limited to the amount of the premium it
received. If stock prices remain the same over time, it is likely that the Fund
will also profit, because it should be able to close out the option at a lower
price. If stock prices fall, the Fund would expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to those
obtainable from purchasing a futures contract, but with risk limited to the cost
of the option if stock prices fell. At the same time, a Fund can expect to
suffer a loss if stock prices do not rise sufficiently to offset the cost of the
option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a Fund would seek to mitigate the effects
of a price decline. At the same time, when writing call options the Fund would
give up some ability to participate in security price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and also
require different skills from the advisers in managing the Funds' portfolios.
While utilization of options, futures contracts and similar instruments may be
advantageous to the Funds, if the adviser is not successful in employing such
instruments in managing a Fund's investments or in predicting interest rate
changes, the Fund's performance will be worse than if the Fund did not make such
investments. It is possible that there will be imperfect correlation, or even no
correlation, between price movements of the investments being hedged and the
options or futures used. It is also possible that a Fund may be unable to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or that a Fund may need to sell a portfolio security
at a disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a Fund
may be unable to close out or liquidate its hedge position. In addition, the
Funds will pay commissions and other costs in connection with such investments,
which may increase each Fund's expenses and reduce its yield. A more complete
discussion of the possible risks involved in transactions in options and futures
contracts is contained in the Statement of Additional Information. Each Fund's
current policy is to limit options and futures transactions to those described
above. The Funds may purchase and write both over-the-counter and
exchange-traded options.
A Fund will not enter into any futures contracts or related options if the
sum of the initial margin deposits on futures contracts and related options and
premiums paid for elated options the Fund has purchased would exceed 5% of the
Fund's total assets. A Fund will not purchase futures contracts or related
options if, as a result, more than 20% of the Fund's total assets would be so
invested. Small-Cap Value does not currently intend to invest in futures and
options.
Futures Contracts
- -----------------
Each Fund may from time to time purchase or sell futures contracts. In the
purchase of a futures contract, the purchaser agrees to buy a specified
underlying instrument at a specified future date. In the sale of a futures
contract, the seller agrees to sell the underlying instrument at a specified
future date. The price at which the purchase or sale will take place is fixed at
the time the contract is entered into. Some currently available contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on indexes of securities such as S&P 500. Futures contracts can be held
until their delivery dates, or can be closed out before then, if a liquid
secondary market is available. A futures contract is closed out by entering into
an opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery date as
a contract the party had sold) at the current price as determined on the futures
exchange.
15
<PAGE>
As the purchaser or seller of a futures contract, a Fund would not be
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, the Fund would be required to deposit
with its custodian, in the name of the futures broker (known as a futures
commission merchant, or "FCM"), a percentage of the contract's value. This
amount, which is known as initial margin, generally equals 10% or less of the
value of the futures contract. Unlike margin in securities transactions, initial
margin on futures contracts does not involve borrowing to finance the futures
transactions. Rather, initial margin is in the nature of a good faith deposit or
performance bond, and would be returned to that Fund when the futures position
is terminated, after all contractual obligations have been satisfied. Initial
margin may be maintained either in cash or appropriate liquid securities.
The value of a futures contract tends to increase and decrease with the
value of the underlying instrument. The purchase of a futures contract will tend
to increase exposure to positive and negative price fluctuations in the
underlying instrument in the same manner as if the underlying instrument had
been purchased directly. By contrast, the sale of a futures contract will tend
to offset both positive and negative market price changes.
As the contract's value fluctuates, payments known as variation margin or
maintenance margin are made to or received from the FCM. If the contract's value
moves against the Fund, (i.e., the Fund's futures position declines in value),
the Fund may be required to make payments to the FCM, and, conversely, the Fund
may be entitled to receive payments from the FCM if the value of the Fund's
futures position increases. This process is known as "marking-to-market" and
takes place on a daily basis. Variation margin does not involve borrowing to
finance the futures transactions, but rather represents a daily settlement of
the Fund's obligations to or from a clearing organization.
Options on Securities, Indexed Securities and Futures Contracts
- ---------------------------------------------------------------
PURCHASING PUT OR CALL OPTIONS By purchasing a put (or call) option, a
Fund obtains the right (but not the obligation) to sell (or buy) the underlying
instrument at a fixed strike price. The option's underlying instrument may be a
specific security, an indexed security or a futures contract. The option may
give the Fund the right to sell (or buy) only on the option's expiration date,
or may be exercisable at any time up to and including that date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium).
A Fund may terminate its position in an option it has purchased by
allowing the option to expire, closing it out in the secondary market at its
current price, if a liquid secondary market exists, or by exercising it. If the
option is allowed to expire, the Fund will lose the entire premium paid.
WRITING PUT OR CALL OPTIONS By writing a put (or call) option, a Fund
takes the opposite side of the transaction from the option's purchaser (or
seller). In return for receipt of the premium, the Fund assumes the obligation
to pay the strike price for the option's underlying instrument (or to sell or
deliver the option's underlying instrument) if the other party to the option
chooses to exercise it. When writing an option on a futures contract, a Fund
will be required to make margin payments to an FCM as described above for
futures contracts.
Before exercise, a Fund may seek to terminate its position in an option it
has written by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
Over-The-Counter and Exchange-Traded Options
- --------------------------------------------
Each Fund may purchase and write both over-the-counter ("OTC") and
exchange-traded options. Exchange-traded options in the United States are issued
16
<PAGE>
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between a Fund and its
contra-party with no clearing organization guarantee. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make/take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC market.
Exchange markets for options on debt securities exist, but the ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market.
Value Trust and Total Return Trust each may invest up to 10% and Special
Investment Trust, Balanced Trust and Small-Cap Value may invest up to 15% of its
assets in illiquid securities. The term "illiquid securities" includes purchased
OTC options. Assets used as cover for OTC options written by the Fund also will
be deemed illiquid securities, unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC options it writes for a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option.
Cover for Options and Futures Strategies
- ----------------------------------------
No Fund will use leverage in its hedging strategies involving options and
futures contracts. Each Fund will hold securities, options or futures positions
whose values are expected to offset ("cover") its obligations under the
transactions. No Fund will enter into hedging strategies involving options and
futures contracts that expose the Fund to an obligation to another party unless
it owns either (i) an offsetting ("covered") position in securities, options or
futures contracts or (ii) has cash, receivables and liquid debt securities with
a value sufficient at all times to cover its potential obligations. Each Fund
will comply with guidelines established by the SEC with respect to coverage of
these strategies by mutual funds and, if the guidelines so require, will set
aside cash and/or appropriate liquid securities in a segregated account with its
custodian in the amount prescribed. Securities, options or futures contracts
used for cover and securities held in a segregated account cannot be sold or
closed out while the strategy is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that the use of cover or
segregation involving a large percentage of a Fund's assets could impede the
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Risks of Futures and Related Options Trading
- --------------------------------------------
Successful use of futures contracts and related options depends upon the
ability of the adviser to assess movements in the direction of overall
securities and interest rates, which requires different skills and techniques
than assessing the value of individual securities. Moreover, futures contracts
relate not to the current price level of the underlying instrument, but to the
anticipated price level at some point in the future; trading of stock index
futures may not reflect the trading of the securities that are used to formulate
the index or even actual fluctuations in the index itself. There is, in
addition, the risk that movements in the price of the futures contract will not
correlate with the movements in the prices of the securities being hedged. Price
distortions in the marketplace, such as result from increased participation by
speculators in the futures market, may also impair the correlation between
movements in the prices of futures contracts and movements in the prices of the
hedged securities. If the price of the futures contract moves less than the
price of securities that are subject to the hedge, the hedge will not be fully
effective; however, if the price of the securities being hedged has moved in an
unfavorable direction, a Fund normally would be in a better position than if it
had not hedged at all. If the price of securities being hedged has moved in a
favorable direction, this advantage may be partially offset by losses on the
futures position.
Options have a limited life and thus can be disposed of only within a
specific time period. Positions in futures contracts may be closed out only on
an exchange or board of trade that provides a secondary market for such futures
17
<PAGE>
contracts. Although each Fund intends to purchase and sell futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market, there is no assurance that such a market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures position and, in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase which, in the event of adverse price movements, could be lost.
Sellers of options on futures contracts must post initial margin and are subject
to additional margin calls that could be substantial in the event of adverse
price movements. In addition, a Fund's activities in the futures markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price of a
futures contract or related option is permitted to change in a single day. If
the price of a contract moves to the limit for several consecutive days, a Fund
may be unable during that time to close its position in that contract and may
have to continue making payments of variation margin. A Fund may also be unable
to dispose of securities or other instruments being used as "cover" during such
a period.
Risks of Options Trading
- ------------------------
The success of each Fund's option strategies depends on many factors, the
most significant of which is the adviser's ability to assess movements in the
overall securities and interest rate markets.
The exercise price of the options may be below, equal to or above the
current market value of the underlying securities or indexes. Purchased options
that expire unexercised have no value. Unless an option purchased by a Fund is
exercised or unless a closing transaction is effected with respect to that
position, the Fund will realize a loss in the amount of the premium paid and any
transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although each
Fund intends to purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any specific
time. Closing transactions with respect to OTC options may be effected only by
negotiating directly with the other party to the option contract. Although each
Fund will enter into OTC options with dealers capable of entering into closing
transactions with the Fund, there can be no assurance that a Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
In the event of insolvency of the contra-party, a Fund may be unable to
liquidate or exercise an OTC option, and could suffer a loss of its premium.
Also, the contra-party, although solvent, may refuse to enter into closing
transactions with respect to certain options, with the result that a Fund would
have to exercise those options which it has purchased in order to realize any
profit. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to that Fund. For example,
because each Fund must maintain a covered position with respect to any call
option it writes on a security or index, a Fund may not sell the underlying
security or currency (or invest any cash, government securities or short-term
debt securities used to cover an index option) during the period it is obligated
under the option. This requirement may impair a Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Options on indexes are settled exclusively in cash. If a Fund writes a
call option on an index, the Fund will not know in advance the difference, if
any, between the closing value of the index on the exercise date and the
exercise price of the call option itself, and thus will not know the amount of
cash payable upon settlement. In addition, a holder of an index option who
exercises it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change.
18
<PAGE>
Each Fund's activities in the options markets may result in higher
portfolio turnover rates and additional brokerage costs.
Additional Limitations on Futures and Options
- ---------------------------------------------
As a non-fundamental policy, each Fund will write a put or call on a
security only if (a) the security underlying the put or call is permitted by the
investment policies of that Fund, and (b) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined as of the
date the options are sold does not exceed 25% of that Fund's net assets.
Under regulations adopted by the Commodity Futures Trading Commission
("CFTC"), futures contracts and related options may be used by each Fund (a) for
hedging purposes, without quantitative limits, and (b) for other purposes to the
extent that the amount of margin deposit on all such non-hedging futures
contacts owned by the Fund, together with the amount of premiums paid by that
Fund on all such non-hedging options held on futures contracts, does not exceed
5% of the market value of that Fund's net assets.
The foregoing limitations, as well as those set forth in the prospectus
regarding each Fund's use of futures and related options transactions, do not
apply to options attached to, or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options, such as rights, certain debt securities and indexed
securities.
The above limitations on each Fund's investments in futures contracts and
options may be changed as regulatory agencies permit. However, each Fund will
not modify the above limitations to increase its permissible futures and options
activities without supplying additional information, as appropriate, in a
current Prospectus or Statement of Additional Information.
Forward Currency Contracts
- --------------------------
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. No Fund will speculate with
forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect to
specific transactions. For example, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. A Fund will thereby be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between the
date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
Each Fund also may use forward currency contracts in connection with
portfolio positions to lock-in the U.S. dollar value of those positions or to
shift the Fund's exposure to foreign currency fluctuations from one country to
19
<PAGE>
another. For example, when the adviser believes that the currency of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another currency, it may enter into a forward currency contract to
sell the amount of the former foreign currency approximating the value of some
or all of a Fund's securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
At or before the maturity date of a forward currency contract requiring a
Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward currency contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Fund would
realize a gain or loss as a result of entering into such an offsetting forward
currency contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and the offsetting contract.
The precise matching of the forward contract amount and the value of the
securities involved will not generally be possible because the future value of
such securities in a foreign currency will change as a consequence of market
movements in the value of those securities between the date the forward currency
contract is entered into and the date it matures. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot (i.e.,
cash) market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver under the forward contract and the decision is made to sell the security
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of foreign
currency a Fund is obligated to deliver under the forward contract. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward currency contracts involve the risk that anticipated currency movements
will not be accurately predicted, causing a Fund to sustain losses on these
contracts and transaction costs. Each Fund may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or (2) the Fund maintains cash, U.S. government
securities or other appropriate liquid securities in a segregated account in an
amount not less than the value of the Fund's total assets committed to the
consummation of the contract.
The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
Each Fund will deal only with banks, broker/dealers or other financial
institutions which the adviser deems to be of high quality and to present
minimum credit risk. The use of forward currency contracts does not eliminate
fluctuations in the prices of the underlying securities each Fund owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
FOR EACH FUND:
Portfolio Lending
- -----------------
Each Fund may lend portfolio securities to brokers or dealers in corporate
or government securities, banks or other recognized institutional borrowers of
securities, provided that cash or equivalent collateral, equal to at least 100%
of the market value of the securities loaned, is continuously maintained by the
borrower with the Fund. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividends or interest
20
<PAGE>
paid on such securities, and the Fund may invest the cash collateral and earn
income, or it may receive an agreed upon amount of interest income from the
borrower who has delivered equivalent collateral. These loans are subject to
termination at the option of the Fund or the borrower. Each Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. Each Fund does not have the right
to vote securities on loan, but would terminate the loan and regain the right to
vote if that were considered important with respect to the investment. The risks
of securities lending are similar to those of repurchase agreements. Each Fund
presently does not intend to lend more than 5% of its portfolio securities at
any given time.
Repurchase Agreements
- ---------------------
When cash is temporarily available, or for temporary defensive purposes,
each Fund may invest without limit in repurchase agreement and money market
instruments, including high-quality short-term debt securities. A repurchase
agreement is an agreement under which either U.S. government obligations or
high-quality liquid debt securities are acquired from a securities dealer or
bank subject to resale at an agreed-upon price and date. The securities are held
for each Fund by a custodian bank as collateral until resold and will be
supplemented by additional collateral if necessary to maintain a total value
equal to or in excess of the value of the repurchase agreement. Each Fund bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the fund is delayed or prevented from exercising
its rights to dispose of the collateral securities, which may decline in value
in the interim. The Funds will enter into repurchase agreements only with
financial institutions determined by each Fund's adviser to present minimal risk
of default during the term of the agreement based on guidelines established by
the Funds' Board of Directors.
Repurchase agreements are usually for periods of one week or less, but may
be for longer periods. The Funds will not enter into repurchase agreements of
more than seven days' duration if more than 15% of net assets (with respect to
American Leading Companies, Balanced Trust, Special Investment Trust and
Small-Cap Value) or more than 10% of net assets (with respect to Value Trust and
Total Return Trust) would be invested in such agreements and other illiquid
investments. To the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, a Fund might
suffer a loss. If bankruptcy proceedings are commenced with respect to the
seller of the security, realization upon the collateral by a Fund could be
delayed or limited. However, each Fund has adopted standards for the parties
with whom it may enter into repurchase agreements, including monitoring by each
Fund's adviser of the creditworthiness of such parties which the Fund's Board of
Directors believes are reasonably designed to assure that each party presents no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase agreement.
When a Fund enters into a repurchase agreement, it will obtain as
collateral from the other party securities equal in value to 102% of the amount
of the repurchase agreement (or 100%, if the securities obtained are U.S.
Treasury bills, notes or bonds). Such securities will be held by a custodian
bank or an approved securities depository or book-entry system.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax considerations
affecting each Fund and its shareholders. Investors are urged to consult their
own tax advisers for more detailed information and for information regarding any
federal, state or local taxes that might apply to them.
General
- -------
For federal tax purposes, each Fund is treated as a separate corporation.
To continue to qualify for treatment as a regulated investment company ("RIC")
21
<PAGE>
under the Internal Revenue Code of 1986, as amended ("Code"), each Fund must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally, net investment income plus any net short-term capital
gain and any net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each Fund, these requirements include the following: (1) the fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward currency contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If any fund failed to qualify for treatment as a RIC for any taxable
year, (i) it would be taxed at corporate rates on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (ii) the shareholders would treat all those distributions,
including distributions of net capital gain (I.E., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Dividends and interest received by each Fund, and gains realized thereby,
may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the total return on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.
Dividends and Other Distributions
- ---------------------------------
Dividends and other distributions declared by a Fund in December of any
year and payable to its shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if the distributions are paid by the Fund during the following
January. Accordingly, those distributions will be taxed to shareholders for the
year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
for any Fund may not exceed the aggregate dividends received by that Fund for
the taxable year from domestic corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the federal alternative minimum tax.
Distributions of net capital gain made by any Fund do not qualify for the
dividends-received deduction.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term,
capital loss to the extent of any capital gain distributions received on
those shares.
22
<PAGE>
Passive Foreign Investment Companies
- ------------------------------------
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (i.e., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which a Fund is a U.S. shareholder -- that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if the QEF did not
distribute those earnings and gain to the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Each Fund may elect to "mark-to-mark" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income by the
Fund for prior taxable years under the election (and under regulations proposed
in 1992 that provided a similar election with respect to the stock of certain
PFICs). A Fund's adjusted basis in each PFIC's stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.
Options, Futures, Forward Currency Contracts and Foreign Currencies
- -------------------------------------------------------------------
The use of hedging instruments, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses each Fund realizes
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains that may be excluded by future regulations) -- and gains
from options derived by American Leading Companies, or from options, futures and
forward currency contracts derived by each other Fund, with respect to its
business of investing in securities or foreign currencies -- will qualify as
permissible income under the Income Requirement.
Certain futures and foreign currency contracts in which a Fund may invest
will be subject to section 1256 of the Code ("section 1256 contracts"). Any
section 1256 contracts a Fund holds at the end of each taxable year other than
contracts with respect to which the Fund has made a "mixed straddle election,
must be "marked-to-market" (that is, treated as having been sold at that time
for their fair market value), with the result that unrealized gains or losses
will be treated as though they were realized. Sixty percent of any net gain or
loss recognized on these deemed sales, and sixty percent of any net realized
gain or loss on section 1256 contracts actually sold by the Fund during the year
will be treated as long-term capital gain or loss, and the balance will be
treated as short-term capital gain or loss. Section 1256 contracts also may be
marked-to market for purposes of the Excise Tax. These rules may operate to
increase the amount that a fund must distribute to satisfy the Distribution
Requirement (I.E., with respect to the portion treated as short-term capital
gain), which
23
<PAGE>
will be taxable to the shareholders as ordinary income, and to increase the net
capital gain a fund recognizes, without in either case increasing the cash
available to the fund. A fund may elect to exclude certain transactions from the
operation of section 1256, although doing so may have the effect of increasing
the relative proportion of net short-term capital gain (taxable as ordinary
income) and thus increasing the amount of dividends that must be distributed.
When a covered call option written (sold) by a Fund expires, the Fund
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a Fund terminates its obligations under
such an option by entering into a closing transaction, the Fund realizes a
short-term capital gain (or loss), depending on whether the cost of the closing
transaction is less than (or exceeds) the premium received when the option was
written. When a covered call option written by a Fund is exercised, the Fund is
treated as having sold the underlying security, producing long-term or
short-term capital gain or loss, depending on the holding period of the
underlying security and whether the sum of the option price received on the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the underlying security.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a Fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
purposes, options and futures contracts are personal property. Under section
1092, any loss from the disposition of a position in a straddle generally may be
deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle; in addition, these rules may apply to
postpone the recognition of loss that otherwise would be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a position
is sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses
from the affected straddle positions would be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of straddle transactions are not entirely clear.
If a Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or a futures or forward
currency contract entered into by a Fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction of
a fund during any taxable year that otherwise would be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the fund holds the appreciated financial position unhedged for 60 days after
that closing (I.E., at no time during that 60-day period is the fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
To the extent a fund recognizes income from a "conversion transaction," as
defined in section 1258 of the Code, all or part of the gain from the
disposition or other termination of a position held as part of the conversion
transaction may be recharacterized as ordinary income. A conversion transaction
generally consists of two or more positions taken with regard to the same or
similar property, where (1) substantially all of the taxpayer's return is
attributable to the time value of its net investment in the transaction and (2)
the transaction satisfies any of the following criteria: (a) the transaction
consists of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
24
<PAGE>
in the future; (b) the transaction is a straddle, within the meaning of section
1092 of the Code (see above); (c) the transaction is one that was marketed or
sold to the taxpayer on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as capital
gain; or (d) the transaction is described as a conversion transaction in future
regulations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason, certain of its
affiliates and unaffiliated entities having an agreement with Legg Mason.
Navigator Shares are currently offered for sale only to Institutional Clients,
to qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million, and to any qualified retirement plan of Legg
Mason, Inc. or of any of its affiliates. Navigator Shares may not be purchased
by individuals directly, but Institutional Clients may purchase shares for
Customer Accounts maintained for individuals. Primary Shares are available to
all other investors.
FUTURE FIRST SYSTEMATIC INVESTMENT PLAN AND TRANSFER OF FUNDS FROM FINANCIAL
- ----------------------------------------------------------------------------
INSTITUTIONS
- ------------
If you invest in Primary Shares, the Prospectus for those shares explains
that you may buy Primary Shares through the Future First Systematic Investment
Plan. Under this plan you may arrange for automatic monthly investments in
Primary Shares of $50 or more by authorizing Boston Financial Data Services
("BFDS"), each Fund's transfer agent, to transfer funds each month from your
Legg Mason account or from your checking account to be used to buy Primary
Shares at the per share net asset value determined on the day the funds are sent
from your bank. You will receive a quarterly account statement. You may
terminate the Future First Systematic Investment Plan at any time without charge
or penalty. Forms to enroll in the Future First Systematic Investment Plan are
available from any Legg Mason or affiliated office.
Investors in Primary Shares may also buy Primary Shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of a Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn on, the
investor may be subject to extra charges in order to cover collection costs.
These charges may be deducted from the investor's shareholder account.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
If you own Primary Shares with a net asset value of $5,000 or more, you
may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan for
Employees ("SIMPLE") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value per share
determined as of the close of regular trading of the New York Stock Exchange
("Exchange") (normally 4:00 p.m., eastern time) ("close of the Exchange") on the
first day of each month. If the Exchange is not open for business on that day,
the shares will be redeemed at the per share net asset value determined as of
25
<PAGE>
the close of regular trading of the Exchange on the preceding business day. The
check for the withdrawal payment will usually be mailed to you on the next
business day following redemption. If you elect to participate in the Systematic
Withdrawal Plan, dividends and other distributions on all Primary Shares in your
account must be automatically reinvested in Primary Shares. You may terminate
the Systematic Withdrawal Plan at any time without charge or penalty. Each Fund,
its transfer agent, and Legg Mason also reserve the right to modify or terminate
the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund in which
you have an account if you maintain a Systematic Withdrawal Plan, because you
may incur tax liabilities in connection with such purchases and withdrawals. No
Fund will knowingly accept purchase orders from you for additional shares if you
maintain a Systematic Withdrawal Plan unless your purchase is equal to at least
one year's scheduled withdrawals. In addition, if you maintain a Systematic
Withdrawal Plan you may not make periodic investments under the Future First
Systematic Investment Plan.
Other Information Regarding Redemption
- --------------------------------------
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, by a Fund or its
distributor except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in markets
the Fund normally utilizes is restricted, or an emergency, as defined by rules
and regulations of the SEC, exists, making disposal of the Fund's investments or
determination of its net asset value not reasonably practicable, or (iii) for
such other periods as the SEC by regulation or order may permit for protection
of each Fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
Each Fund reserves the right, under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part in securities valued in
the same way as they would be valued for purposes of computing the Fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
will be subject to fluctuation in the market price of those securities until
they are sold. Each Fund does not redeem "in kind" under normal circumstances,
but would do so where the adviser determines that it would be in the best
interests of the Fund's shareholders as a whole.
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily for each Class as of
the close of the Exchange, on every day the Exchange is open, by dividing the
value of the total assets attributable to that Class, less liabilities
attributable to that Class, by the number of shares of that Class outstanding.
Pricing will not be done on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Presidents' Day,
Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. As described in the Prospectuses, securities
for which market quotations are readily available are valued at current market
value. Securities traded on an exchange or the NASDAQ Stock Market securities
are normally valued at last sale prices. Other over-the-counter securities, and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), are valued at the mean of latest closing bid and
asked prices. Securities with remaining maturities of 60 days or less are valued
at amortized cost. Securities and other assets quoted in foreign currencies will
26
<PAGE>
be valued in U.S. dollars based on the currency exchange rates prevailing at the
time of the valuation. All other securities are valued at fair value as
determined by or under the direction of the appropriate Fund's Board of
Directors. Premiums received on the sale of call options are included in the net
asset value of each Class, and the current market value of options sold by a
Fund will be subtracted from net assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year, of
a hypothetical investment of $10,000 made in each Fund at commencement of
operations of each class of Fund shares. The tables assume that all dividends
and other distributions are reinvested in each respective Fund. They include the
effect of all charges and fees applicable to the respective class of shares the
Fund has paid. (There are no fees for investing or reinvesting in the Funds
imposed by the Funds, and there are no redemption fees.) They do not include the
effect of any income tax that an investor would have to pay on distributions.
Performance data is only historical, and is not intended to indicate any Fund's
future performance.
VALUE TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1983* $16,160 $ 241 $16,401
1984 18,870 555 19,425
1985 23,583 1,100 24,683
1986 32,556 1,954 34,510
1987 35,503 2,421 37,924
1988 32,268 2,461 34,729
1989 37,650 3,459 41,109
1990 39,891 4,399 44,290
1991 37,701 5,313 43,014
1992 44,210 7,204 51,414
1993 50,184 8,819 59,003
1994 52,789 9,548 62,337
1995 57,817 10,610 68,427
1996 82,356 14,870 97,226
1997 110,379 19,502 129,881
1998 172,493 29,268 201,761
27
<PAGE>
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1999 259,794 42,708 302,502
* April 16, 1982 (commencement of operations) to March 31, 1983.
NAVIGATOR SHARES
- ----------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,805 $ 6 $10,811
1996 15,249 268 15,517
1997 20,323 619 20,942
1998 31,713 1,146 32,859
1999 48,038 1,688 49,726
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $146,180, and the investor would
have received a total of $29,223 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1999 would have
been $39,707, and the investor would have received a total of $4,062 in
distributions. If the adviser had not waived certain fees in the 1983-1999
fiscal years, returns would have been lower.
28
<PAGE>
TOTAL RETURN TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1986* $10,780 - $10,780
1987 11,673 $ 211 11,884
1988 10,295 380 10,675
1989 11,690 603 12,293
1990 11,875 846 12,721
1991 11,499 1,216 12,715
1992 13,885 1,830 15,715
1993 16,234 2,605 18,839
1994 16,637 3,064 19,701
1995 16,593 3,482 20,075
1996 21,342 5,194 26,536
1997 26,102 6,890 32,992
1998 37,430 9,565 46,995
1999 34,742 8,903 43,175
* November 21, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
- ----------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,203 $160 $10,363
1996 13,106 668 13,774
1997 15,989 1,321 17,310
1998 22,606 2,311 24,917
1999 20,509 2,619 23,128
* December 1, 1994 (commencement of operations) to March 31, 1995.
29
<PAGE>
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $21,690, and the investor would
have received a total of $10,332 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1999 would have
been $16,643, and the investor would have received a total of $5,056 in
distributions. If the adviser had not waived certain fees in the 1986-1995
fiscal years, returns would have been lower.
SPECIAL INVESTMENT TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1986* $11,530 - $11,530
1987 13,051 $ 23 13,074
1988 11,107 113 11,220
1989 12,982 144 13,126
1990 14,890 253 15,143
1991 17,777 615 18,392
1992 21,249 905 22,154
1993 23,528 953 24,481
1994 28,511 1,197 29,708
1995 26,707 1,108 27,815
1996 34,291 1,442 35,733
1997 38,345 1,526 39,871
1998 54,898 2,070 56,968
1999 64,288 2,230 66,518
* December 30, 1985 (commencement of operations) to March 31, 1986.
30
<PAGE>
NAVIGATOR SHARES
- ----------------
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,481 - $10,481
1996 13,489 $121 13,610
1997 15,224 129 15,353
1998 21,996 177 22,173
1999 25,948 193 26,141
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $38,820, and the investor would
have received a total of $10,646 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1999 would have
been $21,313, and the investor would have received a total of $3,249 in
distributions. If the adviser had not waived certain fees in the 1986-1998
fiscal years, returns would have been lower.
AMERICAN LEADING COMPANIES:
PRIMARY SHARES
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1994* $9,690 $ 24 $9,714
1995 10,180 140 10,320
1996 12,230 283 12,513
1997 15,242 366 15,608
1998 20,658 442 21,100
1999 24,713 506 25,219
* September 1, 1993 (commencement of operations) to March 31, 1994.
31
<PAGE>
NAVIGATOR SHARES
- ----------------
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1997* $11,428 $88 $11,516
1998 15,602 110 15,742
1999** 15,923 109 16,032
* October 4, 1996 (commencement of operations) to March 31, 1997.
** All outstanding Navigator Shares were redeemed December 3, 1998; this
amount reflects values up to that date. There were no Navigator Shares
outstanding at March 31, 1999.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $20,380, and the investor would
have received a total of $3,295 in distributions.
BALANCED TRUST:
PRIMARY SHARES
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1997* $10,160 $42 $10,202
1998 12,749 289 13,038
1999 12,241 473 12,687
* October 1, 1996 (commencement of operations) to March 31, 1997.
If the investor had not reinvested dividends and other distributions, the
total value of the hypothetical investment as of March 31, 1999 would have been
$11,980, and the investor would have received a total of $630 in distributions.
If the adviser had not waived certain fees in the fiscal years ended March 31,
1997, 1998 and 1999, returns would have been lower.
The table above is based only on Primary Shares of Balanced Trust. As of
the date of this Statement of Additional Information, Navigator Shares of
Balanced Trust have no performance history of their own.
32
<PAGE>
SMALL-CAP VALUE TRUST:
PRIMARY SHARES
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1999* $7,810 ----- $7,810
* June 15, 1998 (commencement of operations) to March 31, 1999.
If the investor had not reinvested dividends and other distributions, the total
value of the hypothetical investment as of March 31, 1999 would have been
$7,810, and the investor would have received a total of $0.00 in distributions.
NAVIGATOR SHARES
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1999* $7,944 ----- $7,944
* June 19, 1998 (commencement of operations) to March 31, 1999.
If the investor had not reinvested dividends and other distributions, the total
value of the hypothetical investment as of March 31, 1999 would have been
$7,944, and the investor would have received a total of $0.00 in distributions.
Total Return Calculations
- -------------------------
Average annual total return quotes used in each Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
separately for each Class according to the following formula:
n (SUPERSCRIPT)
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
33
<PAGE>
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by a Fund are assumed to have been reinvested
at net asset value on the reinvestment dates during the period.
From time to time each Fund may compare the performance of a Class of
Shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all dividends. It takes no account of the costs of investing or the tax
consequences of distributions. The Funds invest in many securities that are not
included in the S&P 500.
Each Fund may also cite rankings and ratings, and compare the return of a
Class with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. Each Fund may also refer in
such materials to mutual fund performance rankings, ratings, comparisons with
funds having similar investment objectives, and other mutual funds reported in
independent periodicals, including, but not limited to, FINANCIAL WORLD, MONEY
Magazine, FORBES, BUSINESS WEEK, BARRON'S, FORTUNE, THE KIPLINGER LETTERS, THE
WALL STREET JOURNAL, and THE NEW YORK TIMES.
Each Fund may compare the investment return of a Class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on many certificates
of deposit, which remains at a specified rate for a specified period of time,
the return of each Class of Shares will vary.
Fund advertisements may reference the history of the distributor and its
affiliates, the education and experience of the portfolio manager, and the fact
that the portfolio manager engages in value investing. With value investing, the
adviser invests in those securities it believes to be undervalued in relation to
the long-term earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor economic
conditions, tax-loss selling, or actual or anticipated unfavorable developments
affecting the issuer of the security. The adviser believes that the securities
of sound, well-managed companies that may be temporarily out of favor due to
earnings declines or other adverse developments are likely to provide a greater
total return than securities with prices that appear to reflect anticipated
favorable developments and that are therefore subject to correction should any
unfavorable developments occur.
In advertising, each Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Fund may use other recognized
sources as they become available.
Each Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
34
<PAGE>
Each Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
Each Fund may also include in advertising biographical information on key
investment and managerial personnel.
Each Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through periods of low price levels.
Each Fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors meet their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisers for private accounts and mutual
funds with assets of approximately $89 billion as of March 31, 1999.
In advertising, each Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
Lipper Analytical Services, Inc., an independent rating service which
measures the performance of most U.S. mutual funds, reported that Value Trust's
total return of Primary Shares ranked 55 among 3,512 general equity funds it
measured during the one year ended April 30, 1999. For the five years ended
April 30, 1999, Value Trust's total return ranked 2 among 1,309 general equity
funds and for the ten years ended April 30, 1999, Value Trust's total return
ranked 9 among 548 general equity funds. Of course, there can be no assurance
that results similar to those achieved by Value Trust in the past will be
realized in future periods. Rankings may have been different if the adviser had
not waived certain fees during the periods in question.
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of those plans until the
income is distributed to them. Primary Share investors who are considering
establishing an IRA, SEP, SIMPLE or other qualified retirement plan should
consult their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in those plans with respect to Primary Shares
through regular payroll deductions may be arranged with a Legg Mason or
affiliated financial advisor and your employer. Additional information with
respect to these plans is available upon request from any Financial Advisor or
Service Provider.
TRADITIONAL IRA. Certain Primary Share investors may obtain tax advantages
by establishing IRAs. Specifically, except as noted below, if neither you nor
your spouse is an active participant in a qualified employer or government
retirement plan, or if either you or your spouse is an active participant and
your adjusted gross income does not exceed a certain level, then each of you may
deduct cash contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. A married investor
who is not an active participant in such a plan and files a joint income tax
return with his or her spouse (and their combined adjusted gross income does not
exceed $150,000) is not affected by the spouse's active participant status. In
addition, if your spouse is not employed and you file a joint return, you may
35
<PAGE>
establish a separate IRA for your spouse and contribute up to a total of $4,000
to the two IRAs, provided that the contribution to either does not exceed
$2,000. If your employer's plan qualifies as a SEP, permits voluntary
contributions and meets certain other requirements, you may make voluntary
contributions to that plan that are treated as deductible IRA contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your Fund shares are then not immediately taxable to
you or the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability, where the distribution is rolled over
into another qualified plan or certain other situations.
ROTH IRA. A shareholder whose adjusted gross income (or combined adjusted
gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
EDUCATION IRA. Although not technically for retirement savings, an
Education IRA provides a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than the maximum amount allowable under
current law (currently $500) may be contributed for any year to Education IRAs
for the same beneficiary. Contributions are not deductible and may not be made
after the beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or transferred to an Education IRA of a qualified
family member).
Simplified Employee Pension Plan -- SEP
- ---------------------------------------
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
Savings Incentive Match Plan for Employees - SIMPLE
- ---------------------------------------------------
An employer with no more than 100 employees that does not maintain another
retirement plan may establish a SIMPLE either as separate IRAs or as part of a
Code section 401(k) plan. A SIMPLE, which is not subject to the complicated
nondiscrimination rules that generally apply to qualified retirement plans, will
allow certain employees to make elective contributions of up to $6,000 per year
and will require the employer to make either matching contributions up to 3% of
each such employee's salary or a 2% nonelective contribution.
Withholding at the rate of 20% is required for federal income tax purposes
on certain distributions (excluding, for example, certain periodic payments)
from the foregoing retirement plans (except IRAs and SEPs), unless the recipient
transfers the distribution directly to an "eligible retirement plan" (including
IRAs and other qualified plans) that accepts those distributions. Other
36
<PAGE>
distributions generally are subject to regular wage withholding at the rate of
10% (depending on the type and amount of the distribution), unless the recipient
elects not to have any withholding apply. Primary Share investors should consult
their plan administrator or tax advisor for further information.
MANAGEMENT OF THE FUND
Each Fund's officers are responsible for the operation of the Fund under
the direction of the Board of Directors. The officers and directors of the Funds
and their principal occupations during the past five years are set forth below.
An asterisk (*) indicates officers and/or directors who are "interested persons"
of the Funds as defined by the 1940 Act. The business address of each officer
and director is 100 Light Street, Baltimore, Maryland 21202, unless otherwise
indicated.
RAYMOND A. MASON* [9/28/36], CHAIRMAN OF THE BOARD AND DIRECTOR OF VALUE
TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST; Chairman of the Board
and President of Legg Mason, Inc. (financial services holding company); Director
of Environmental Elements Corporation (manufacturer of pollution control
equipment); Officer and/or Director of various other affiliates of Legg Mason.
JOHN F. CURLEY, JR.* [7/24/39], PRESIDENT AND DIRECTOR OF VALUE TRUST,
TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST; CHAIRMAN OF THE BOARD AND
DIRECTOR OF INVESTORS TRUST; Retired Vice Chairman and Director of Legg Mason,
Inc. and Legg Mason Wood Walker, Incorporated; Chairman of the Board and
Director of three Legg Mason funds; Chairman of the Board, President and Trustee
of one Legg Mason fund; Chairman of the Board and Trustee of one Legg Mason
fund. Formerly: Director of Legg Mason Fund adviser, Inc. ("LMFA") and Western
Asset Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], DIRECTOR OF EACH FUND; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in the manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia Electric
Company); Director/Trustee of five other Legg Mason funds. Formerly: Senior Vice
President and Chief Financial Officer of Philadelphia Electric Company (now PECO
Energy Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company; and Director of
Finance, City of Philadelphia.
ARNOLD L. LEHMAN [7/18/44], DIRECTOR OF EACH FUND; . Director of the
Brooklyn Museum of Art; Director/Trustee of five other Legg Mason funds.
Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], DIRECTOR OF EACH FUND; 400 Seventh Street NW,
Washington, DC. Chief Executive Officer of the Marrow Foundation.
Director/Trustee of five other Legg Mason funds. Formerly: Executive Director of
the Baltimore International Festival (January 1991 - March 1993); and Senior
Assistant to the President of The Johns Hopkins University (1986-1991).
T. A. RODGERS [10/22/34], DIRECTOR OF EACH FUND; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director/Trustee of five other Legg Mason funds. Formerly: Director
and Vice President of Corporate Development, Polk Audio, Inc. (manufacturer of
audio components).
EDWARD A. TABER, III* [8/25/43], DIRECTOR OF EACH FUND; PRESIDENT OF THE
TRUST; Senior Executive Vice President of Legg Mason, Inc. and Legg Mason Wood
Walker, Inc.; Vice Chairman and Director of LMFA; President and/or
Director/Trustee of four Legg Mason funds.
The executive officers of the Funds, other than those who also serve as
directors, are:
37
<PAGE>
MARIE K. KARPINSKI* [1/1/49], VICE PRESIDENT AND TREASURER OF EACH Fund;
Treasurer of the adviser; Vice President and Treasurer of six other Legg Mason
funds; Vice President of Legg Mason.
SUSAN L. SILVA* [3/29/67], ASSISTANT SECRETARY OF EACH FUND; Assistant
Secretary of one other Legg Mason fund; employee of Legg Mason since January
1994.
The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of a Fund who are "interested persons" of the Fund
receive no salary or fees from the Fund. Each Director of a Fund who is not an
interested person of the Fund ("Independent Directors") receives an annual
retainer and a per meeting fee based on the average net assets of each Fund at
December 31, of the previous year.
On July 1, 1999, the directors and officers of each Fund beneficially
owned in the aggregate less than 1% of that Fund's outstanding shares.
On July 1, 1999, the Legg Mason Profit Sharing Plan and Trust, 7 East
Redwood Street, Baltimore, MD 21202 owned of record and beneficially the
following percentages of the outstanding shares of the Navigator Classes:
Navigator Class of Value Trust 19.66%
Navigator Class of Total Return Trust 95.66%
Navigator Class of Special Investment Trust 95.87%
On July 1, 1999, Fidelity Investments, 100 Magellan Way, Covington, KY
41015 and PEBSCO, P.O. Box 182029, Columbus, OH 43218, owned of record and
beneficially 34.21% and 8.81%, respectively, of the outstanding shares of the
Navigator Class of Value Trust. As of the same date, State Street Bank & Trust
Company, Trustee for the NCR Savings Plan, One Enterprise Drive, North Quincy,
MA, owned of record and beneficially 6.44% of the outstanding shares of the
Navigator Class of Value Trust.
As of the same date, Old Second National Bank, 37 S. River Street, Aurora,
IL 60106, owned of record and beneficially 100% of the outstanding shares of the
Navigator Class of U.S. Small-Cap Value Trust.
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31, 1999.
None of the Legg Mason funds has any retirement plan for its directors.
38
<PAGE>
COMPENSATION TABLE
- ------------------
<TABLE>
<CAPTION>
===================================================================================================
AGGREGATE AGGREGATE
AGGREGATE AGGREGATE COMPENSATION COMPENSATION TOTAL COMPENSATION
NAME OF COMPENSATION COMPENSATION FROM SPECIAL FROM FROM EACH FUND
PERSON AND FROM VALUE FROM TOTAL INVESTMENT INVESTORS AND FUND COMPLEX
POSITION TRUST* RETURN TRUST* TRUST* TRUST* PAID TO DIRECTORS**
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Raymond A.
Mason -
Chairman of
the Board
and Director None None None None None
- ---------------------------------------------------------------------------------------------------
John F.
Curley, Jr. -
President
and Director None None None None None
- ---------------------------------------------------------------------------------------------------
Edward A.
Taber, III -
Director None None None None None
- ---------------------------------------------------------------------------------------------------
Richard G. $3,340 $2,283 $3,340 $2,285 $35,100
Gilmore -
Director
- ---------------------------------------------------------------------------------------------------
Charles F. $3,340 $2,283 $3,340 $2,285 $25,800
Haugh -
Director (A)
- ---------------------------------------------------------------------------------------------------
Arnold L. $3,340 $2,283 $3,340 $2,285 $30,600
Lehman -
Director
- ---------------------------------------------------------------------------------------------------
Jill E. $3,340 $2,283 $3,340 $2,285 $35,100
McGovern -
Director
- ---------------------------------------------------------------------------------------------------
T. A. $3,340 $2,283 $3,340 $2,285 $35,100
Rodgers-
Director
===================================================================================================
(A) Mr. Haugh retired as a director in September 1998.
* Represents fees paid to each director during the fiscal year ended March 31, 1999.
** Represents aggregate compensation paid to each director during the calendar year
ended December 31, 1998. There are eleven open-end investment companies in the Legg Mason
Complex (with a total of twenty funds).
</TABLE>
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA, a Maryland Corporation, is located at 100 Light Street, Baltimore,
Maryland 21202. LMFA is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of Legg Mason, Bartlett and Legg Mason Capital Management, Inc.
("LMCM"). LMFA serves as manager and investment adviser to Value Trust, Total
Return Trust, Special Investment Trust and American Leading Companies and as
39
<PAGE>
manager to Balanced Trust and Small-Cap Value under separate Management
Agreements with each Fund ("Management Agreement"). The Management Agreement for
Value Trust originally became effective as of April 19, 1982 and was last
approved by the shareholders of Value Trust on July 20, 1984. The Management
Agreement for Total Return Trust originally became effective as of August 5,
1985 and was last approved by the shareholders of Total Return Trust on July 17,
1986. The Management Agreement for Special Investment Trust originally became
effective as of December 10, 1985 and was last approved by the shareholders of
Special Investment Trust on July 17, 1986. The Management Agreement for American
Leading Companies originally became effective as of August 2, 1993. The
Management Agreement for Balanced Trust became effective on July 31, 1996. The
Management Agreement for Small-Cap Value became effective on May 1, 1998.
The Management Agreements for each Fund were most recently approved by
each Fund's Board of Directors, including a majority of the directors who are
not "interested persons" of the Fund or LMFA, on November 13, 1998.
Each Management Agreement provides that, subject to overall direction by
the Fund's Board of Directors, LMFA manages or oversees the investment and other
affairs of each Fund. LMFA is responsible for managing each Fund consistent with
the Fund's investment objective and policies described in its Prospectuses and
this Statement of Additional Information. LMFA also is obligated to (a) furnish
the Fund with office space and executive and other personnel necessary for the
operation of each Fund; (b) supervise all aspects of each Fund's operations; (c)
bear the expense of certain informational and purchase and redemption services
to each Fund's shareholders; (d) arrange, but not pay for, the periodic updating
of prospectuses, proxy material, tax returns and reports to shareholders and
state and federal regulatory agencies; and (e) report regularly to each Fund's
officers and directors. In addition, LMFA paid Value Trust's, Total Return
Trust's and Special Investment Trust's organizational expenses and has agreed to
reimburse Value Trust and Special Investment Trust for auditing fees and
compensation of those Funds' independent directors. LMFA and its affiliates pay
all compensation of directors and officers of each Fund who are officers,
directors or employees of LMFA. Each Fund pays all of its expenses which are not
expressly assumed by LMFA. These expenses include, among others, interest
expense, taxes, brokerage fees and commissions, expenses of preparing and
printing prospectuses, proxy statements and reports to shareholders and of
distributing them to existing shareholders, custodian charges, transfer agency
fees, distribution fees to Legg Mason, each Fund's distributor, compensation of
the independent directors, legal and audit expenses, insurance expense,
shareholder meetings, proxy solicitations, expenses of registering and
qualifying Fund shares for sale under federal and state law, governmental fees
and expenses incurred in connection with membership in investment company
organizations. Each Fund also is liable for such nonrecurring expenses as may
arise, including litigation to which the Fund may be a party. Each Fund may also
have an obligation to indemnify its directors and officers with respect to
litigation.
LMFA receives for its services to each Fund a management fee, calculated
daily and payable monthly. LMFA receives from Value Trust and Special Investment
Trust a management fee at an annual rate of 1% of the average daily net assets
of that Fund for the first $100 million of average daily net assets, 0.75% of
average daily net assets between $100 million and $1 billion, and 0.65% of
average daily net assets exceeding $1 billion. LMFA receives from Total Return
Trust a management fee at an annual rate of 0.75% of the average daily net
assets of that Fund. LMFA receives from American Leading Companies a management
fee at an annual rate of 0.75% of the average daily net assets of that Fund.
LMFA receives from Balanced Trust a management fee at an annual rate of 0.75% of
the average daily net assets of that Fund. LMFA receives from Small-Cap Value a
management fee at an annual rate of 0.85% of the average daily net assets of
that Fund. LMFA has agreed to waive its fees for Total Return Trust, American
Leading Companies, Balanced Trust and Small-Cap Value for expenses related to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) in excess of the following amounts: for Total Return Trust and
American Leading Companies, 1.95% of average net assets attributable to Primary
40
<PAGE>
Shares indefinitely; for Balanced Trust, 1.85% of average net assets
attributable to Primary Shares until July 31, 2000; and for Small-Cap Value,
2.00% of average net assets attributable to Primary Shares until July 31, 2000.
LMFA has agreed to waive its fees for Total Return Trust, American Leading
Companies, Balanced Trust and Small-Cap Value for expenses related to Navigator
Shares (exclusive of taxes, interest, brokerage and extraordinary expenses) in
excess of the following amounts: for Total Return Trust and American Leading
Companies, 0.95% of average net assets attributable to Navigator Shares
indefinitely; for Balanced Trust, 1.10% of average net assets attributable to
Navigator Shares until July 31, 2000; and for Small-Cap Value, 1.00% of average
net assets attributable to Navigator Shares until July 31, 2000.
For the fiscal years ended March 31, 1999, 1998 and 1997, management fees
of $45,014,441, $24,282,523, and $13,199,924, respectively were received from
Value Trust; $4,952,596, $4,031,818, and $2,404,297, respectively, were received
from Total Return Trust; and $11,608,871, $9,875,632, and $7,272,943,
respectively, were received from Special Investment Trust.
For the fiscal years ended March 31, 1999, 1998 and 1997, LMFA received
management fees of $1,655,396, $1,190,729 (prior to fees waived of $69,496), and
$643,329 (prior to fees waived of $94,059), respectively, from American Leading
Companies.
For the fiscal years ended March 31, 1999, and 1998 LMFA received
management fees of $419,683 (prior to fees waived of $25,964) and $215,415
(prior to fees waived of $83,278) respectively for Balanced Trust. For the
period October 1, 1996 (commencement of operations) to March 31, 1997, all
management fees were waived by LMFA for Balanced Trust.
For the period June 15, 1998 (commencement of operations) to March 31,
1999, LMFA received management fees of $182,493 (prior to fees waived of
$__________) from Small-Cap Value.
Under each Advisory Agreement or (with respect to Balanced Trust and
Small-Cap Value) Management Agreement, each Fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated, or until the right
is withdrawn in writing by LMFA.
LMCM, 100 Light Street, Baltimore, MD 21202, an affiliate of Legg Mason,
also serves as an investment adviser to American Leading Companies pursuant to
an Investment Advisory Agreement dated August 2, 1993, between LMCM and LMFA
("Advisory Agreement"). The Advisory Agreement was most recently approved by the
Board of Directors, including a majority of the directors who are not
"interested persons" (as that term is defined in the 1940 Act) of Investors
Trust, LMFA or LMCM, on November 13, 1998. The Advisory Agreement was approved
by LMFA, Inc., as the Fund's sole shareholder, on August 2, 1993.
Under the Advisory Agreement, LMCM may provide the Fund with research and
investment advisory services for which LMFA (not the Fund) may pay a fee.
Currently, LMCM is not providing any services to the Fund. For the fiscal years
ended March 31, 1999, 1998 and 1997, LMFA paid $0.00, $610,704, and $219,733,
respectively, to LMCM on behalf of the Fund for such services.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, an affiliate of
Legg Mason, serves as investment adviser to Balanced Trust pursuant to an
Investment Advisory Agreement dated July 31, 1996, between Bartlett and LMFA
("Advisory Agreement"). The Advisory Agreement was most recently approved by the
Board of Directors, including a majority of the directors who are not
"interested persons" (as that term is defined in the 1940 Act) of the Trust,
Bartlett or the Manager, on November 13, 1998. The Advisory Agreement was
approved by LMFA, as the Fund's sole shareholder, on July 31, 1996.
Under the Advisory Agreement, Bartlett is responsible, subject to the
general supervision of the Manager and the Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
41
<PAGE>
Bartlett's services to the Fund, the Manager (not the Fund) pays Bartlett a fee,
computed daily and payable monthly, at an annual rate equal to 662/3% of the fee
received by the Manager from the Fund, net of any waivers by the Manager.
For the fiscal year ended March 31, 1999 and 1998, Bartlett received
$262,479 and $88,092 respectively in advisory fees on behalf of Balanced Trust.
For the period October 1, 1996 (commencement of operations) to March 31, 1997,
Bartlett waived its advisory fees.
Brandywine Asset Management, Inc. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware, an affiliate of Legg Mason, serves as investment adviser
to Small-Cap Value pursuant to an Investment Advisory Agreement dated May 1,
1998, between Brandywine and LMFA ("Advisory Agreement"). The Advisory Agreement
was approved by LMFA as the Fund's sole shareholder, on May 28, 1998.
Under the Advisory Agreement, Brandywine is responsible, subject to the
general supervision of LMFA and Investors Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
Brandywine's services to the Fund, LMFA (not the Fund) pays Brandywine a fee,
computed daily and payable monthly, at an annual rate equal to 0.50% of the
Fund's average daily net assets or 58.8% of the fee received by LMFA from the
Fund, net of any waivers by LMFA.
For the fiscal year ended March 31, 1999, Brandywine received $379 in
advisory fees on behalf of U.S. Small-Cap Value Trust.
Under each Advisory Agreement and (with respect to Balanced Trust and
Small-Cap Value) Management Agreement, LMFA/LMCM/Bartlett/Brandywine will not be
liable for any error of judgment or mistake of law or for any loss by a Fund in
connection with the performance of the Advisory Agreement or Management
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations or duties under the
respective Agreement.
Each Advisory Agreement and (with respect to Balanced Trust and Small-Cap
Value) Management Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the respective Fund's Board of
Directors, by vote of a majority of the Fund's outstanding voting securities, or
by LMFA/LMCM/Bartlett/Brandywine, on not less than 60 days' notice to the other
party to the Agreement, and may be terminated immediately upon the mutual
written consent of all parties to the Agreement.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, each Corporation and LMFA have adopted policies that
restrict securities trading in the personal accounts of portfolio managers and
others who normally come into advance possession of information on portfolio
transactions. These policies comply, in all material respects, with the
recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the fiscal years ended March 31, 1999 and 1998, the
portfolio turnover rates for Value Trust were 19.3% and 12.9%, respectively; the
portfolio turnover rates for Total Return Trust were 44.2% and 20.6%,
respectively; the portfolio turnover rates for Special Investment Trust were
47.8% and 29.8%, respectively; and the portfolio turnover rates for American
Leading Companies were 47.6% and 51.4%, respectively. And, the portfolio
turnover rates for Balanced Trust were 50.0% and 34.5%, respectively. For the
42
<PAGE>
period June 15, 1998 to March 31, 1999, the portfolio turnover rate for
Small-Cap Value Trust was 29.5% (annualized).
Under the Advisory Agreement with each Fund, each Fund's adviser is
responsible for the execution of the Fund's portfolio transactions and must seek
the most favorable price and execution for such transactions, subject to the
possible payment, as described below, of higher brokerage commissions to brokers
who provide research and analysis. Each Fund may not always pay the lowest
commission or spread available. Rather, in placing orders for a Fund each Fund's
adviser also takes into account such factors as size of the order, difficulty of
execution, efficiency of the executing broker's facilities (including the
services described below), and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, each
Fund's adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to each Fund's adviser for its use, may
place orders with brokers who provide supplemental investment and market
research and securities and economic analysis and may pay to these brokers a
higher brokerage commission than may be charged by other brokers. Such services
include, without limitation, advice as to the value of securities; the
advisability of investing in, purchasing, or selling securities; advice as to
the availability of securities or of purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Such research and analysis may be useful to each Fund's adviser in connection
with services to clients other than the Fund whose brokerage generated the
service. LMFA's/Bartlett's/Brandywine's fee is not reduced by reason of its
receiving such brokerage and research services.
From time to time each Fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. Commissions
paid to Legg Mason will not exceed "usual and customary brokerage commissions."
Rule 17e-1 under the 1940 Act defines "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the over-the-counter
market, each Fund generally deals with responsible primary market-makers unless
a more favorable execution can otherwise be obtained.
For the fiscal years ended March 31, 1999, 1998 and 1997, Legg Mason
received $59,620, $3,120, and $0 from Value Trust, $0, $1,134, and $0 from Total
Return Trust, and $0, $0, and $0, respectively, from Special Investment Trust.
Value Trust paid total brokerage commissions of $5,503,410 $1,360,133, and
$693,443, respectively; Total Return Trust paid total brokerage commissions of
$1,024,770, $477,779, and $386,786, respectively; and Special Investment Trust
paid total brokerage commissions of $2,824,033, $1,333,903, and $1,066,917,
respectively, during the fiscal years ended March 31, 1999, 1998 and 1997.
For the fiscal years ended March 31, 1999, 1998 and 1997, American Leading
Companies paid total brokerage commissions of $329,996, $203,625, and $120,631,
respectively. Legg Mason received no brokerage commissions from American Leading
Companies for the same periods.
For the fiscal year ended March 31, 1999, and 1998 Balanced Trust paid
total brokerage commissions of $64,034 and $34,738 respectively. For the period
October 1, 1996 (commencement of operations) to March 31, 1997, Balanced Trust
paid total brokerage commissions of $23,144. Legg Mason received no brokerage
commissions from Balanced Trust for the same periods.
For the period June 15, 1998 (commencement of operations) to March 31,
1999, Small-Cap Value paid total brokerage commissions of $295,140. Legg Mason
received no brokerage commissions from Small-Cap Value for that same period.
43
<PAGE>
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. Each Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. These procedures, among other things, limit
each Fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so that: a Fund together with all other registered investment
companies having the same adviser, may not purchase more than 25% of the
principal amount of the offering of such class . In addition, a Fund may not
purchase securities during the existence of an underwriting if Legg Mason is the
sole underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg Mason
from executing transactions on an exchange for its affiliates, such as the
Funds, unless the affiliate expressly consents by written contract. Each Fund's
Advisory Agreement expressly provides such consent.
Among the broker-dealers regularly used by each respective Fund during the
fiscal year ended March 31, 1999, Value Trust at that date owned shares of the
following parent companies: 3,150,000 shares of The Bear Stearns Companies, Inc.
at a market value of $140,765,625; Total Return Trust at that date owned shares
of the following parent companies: 395,576 shares of The Bear Stearns Companies,
Inc. at a market value of $7,677,300. American Leading Companies, Balanced Trust
and Small-Cap Value held no shares of their regular broker-dealers. Investment
decisions for each Fund are made independently from those of other funds and
accounts advised by LMFA, Bartlett or Brandywine. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this procedure may adversely affect the price or quantity of the security
available to a particular account. In other cases, however, an account's ability
to participate in large-volume transactions may produce better executions and
prices.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to a separate
Underwriting Agreement with each Fund. The Underwriting Agreement obligates Legg
Mason to promote the sale of Fund shares and to pay certain expenses in
connection with its distribution efforts, including expenses for the printing
and distribution of prospectuses and periodic reports used in connection with
the offering to prospective investors (after the prospectuses and reports have
been prepared, set in type and mailed to existing shareholders at the Fund's
expense), and for supplementary sales literature and advertising costs.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits the Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. Under the Plans, the aggregate
fees may not exceed an annual rate of each Fund's average daily net assets
attributable to Primary Shares as follows: 1.00% for Total Return Trust, Special
Investment Trust, American Leading Companies and Small-Cap Value; 0.75% for
Balanced Trust and 0.95% for Value Trust. Distribution activities for which such
payments may be made include, but are not limited to, compensation to persons
who engage in or support distribution and redemption of Shares, printing of
prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses, all with respect to Primary Shares only.
The Plans were most recently approved by the shareholders of Value Trust
on July 20, 1984 and on July 17, 1986 for both the Total Return Trust and
Special Investment Trust. The Plans were approved by LMFA, as sole shareholder
of: American Leading Companies, on August 2, 1993 and Balanced Trust, on October
7, 1996 and Small-Cap Value on June 1, 1998. The Plans of Value Trust, Total
Return Trust and Special Investment Trust were amended, effective July 1, 1993,
44
<PAGE>
to make clear that, of the aggregate 1.00% fees with respect to Total Return
Trust and Special Investment Trust, 0.75% is paid for distribution services and
0.25% is paid for ongoing services to shareholders; and with respect to Value
Trust, 0.70% is paid for distribution services and 0.25% is paid for ongoing
services to shareholders. The amendments also specify that each Fund may not pay
more in cumulative distribution fees than 6.25% of total new gross assets
attributable to Primary Shares, plus interest, as specified in the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD"). Legg
Mason may pay all or a portion of the fee to its financial advisors.
Continuation of the Plans was most recently approved on November 13, 1998 by the
Board of Directors of each respective Fund including a majority of the directors
who are not "interested persons" of each Fund as that term is defined in the
1940 Act and who have no direct or indirect financial interest in the operation
of the Plan or the Underwriting Agreement ("12b-1 Directors").
With respect to Primary Shares, Legg Mason has also agreed to waive its
fees for Total Return Trust, American Leading Companies, Balanced Trust and
Small-Cap Value as described under "The Funds' Investment Adviser/Manager."
In approving the establishment or continuation of each Plan, in accordance
with the requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that each Plan would benefit the respective Fund and its
Primary Class shareholders. The directors considered, among other things, the
extent to which the potential benefits of the Plan to the Fund's Primary Class
shareholders could offset the costs of the Plan; the likelihood that the Plan
would succeed in producing such potential benefits; the merits of certain
possible alternatives to the Plan; and the extent to which the retention of
assets and additional sales of each Fund's Primary Shares would be likely to
maintain or increase the amount of compensation paid by that Fund to the
adviser/LMFA.
In considering the costs of the Plans, the directors gave particular
attention to the fact that any payments made by a Fund to Legg Mason under the
Plan would increase the Fund's level of expenses in the amount of such payments.
Further, the directors recognized that the adviser/LMFA would earn greater
management fees if a Fund's assets were increased, because such fees are
calculated as a percentage of a Fund's assets and thus would increase if net
assets increase. The directors further recognized that there can be no assurance
that any of the potential benefits described below would be achieved if the
Plans were implemented.
Among the potential benefits of the Plans, the directors noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
each Fund's Primary Shares and to maintain and enhance the level of services
they provide to each Fund's Primary Class shareholders. These efforts, in turn,
could lead to increased sales and reduced redemptions, eventually enabling each
Fund to achieve economies of scale and lower per share operating expenses. Any
reduction in such expenses would serve to offset, at least in part, the
additional expenses incurred by each Fund in connection with its Plan.
Furthermore, the investment management of each Fund could be enhanced, as net
inflows of cash from new sales might enable its portfolio manager to take
advantage of attractive investment opportunities, and reduced redemptions could
eliminate the potential need to liquidate attractive securities positions in
order to raise the funds necessary to meet the redemption requests.
Each Plan will continue in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. Each Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting Primary Shares. Any change in a Plan that would materially increase the
distribution cost to a Fund requires shareholder approval; otherwise the Plan
may be amended by the directors, including a majority of the 12b-1 Directors, as
previously described.
45
<PAGE>
In accordance with Rule 12b-1, each Plan provides that Legg Mason will
submit to the Fund's Board of Directors, and the directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
For the fiscal years ended March 31, 1999, 1998 and 1997, Value Trust paid
Legg Mason $60,265,880, $32,477,903, and $16,863,796, respectively in
distribution and service fees under the Plan, from assets attributable to
Primary Shares. For the same fiscal years, Total Return Trust paid Legg Mason
$6,436,510, $5,232,873, and $3,120,818, respectively; Special Investment Trust
paid Legg Mason $15,329,259, $12,733,789, and $8,965,838, respectively; and
American Leading Companies paid Legg Mason $2,206,663, $1,587,015, and $857,522,
respectively, in fees under the Plan. For the fiscal year ended March 31, 1999
and 1998, Balanced Trust paid Legg Mason $419,683, and $215,415 in fees under
the Plan and for the period October 1, 1996 (commencement of operations) to
March 31, 1997, Balanced Trust paid distribution and service fees of $45,587
(prior to fees waived of $26,398). For the period June 15, 1998 (commencement of
operations) to March 31, 1999, Small-Cap Value paid distribution and service
fees of $387,871.
46
<PAGE>
During the year ended March 31, 1999, Legg Mason incurred the following
expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
Total Special American Small
Value Return Investment Leading Balanced Cap Value
Trust Trust Trust Companies Trust Trust*
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Compensation to
sales personnel $35,389,000 $3,987,000 $9,354,000 $1,268,000 $241,000 $144,000
Advertising $431,000 $149,000 $142,000 $92,000 $122,000 $108,000
Printing and
mailing of
prospectuses to
prospective $586,000 $207,000 $219,000 $119,000 $171,000 $99,000
shareholders
Other $12,467,000 $2,231,000 $4,492,000 $1,192,000 $855,000 $606,000
---------------------------------------------------------------------------------
Total expenses $48,873,000 $6,574,000 $14,207,000 $2,671,000 $1,389,000 $957,000
=================================================================================
</TABLE>
* June 15, 1998 (commencement of operations) to March 31, 1999.
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
Shares.
CAPITAL STOCK INFORMATION
Value Trust has authorized capital of 500 million shares of common stock,
par value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special Investment
Trust has authorized capital of 150 million shares of common stock, par value
$0.001 per share. The Articles of Incorporation of Investors Trust authorize
issuance of 500 million shares of par value $.001 per share of American Leading
Companies, 250 million shares of par value $.001 per share of Balanced Trust and
100 million shares of par value $.001 per share of Small-Cap Value. Each
corporation may issue additional series of shares. Each Fund currently offers
two Classes of Shares - Class A (known as "Primary Shares") and Class Y (known
as "Navigator Shares"). The two Classes represent interests in the same pool of
assets. A separate vote is taken by a Class of Shares of a Fund if a matter
affects just that Class of Shares. Each Class of Shares may bear certain
differing Class-specific expenses and sales charges, which may affect
performance.
Investors may obtain more information concerning the Navigator Class from
their financial advisor or any person making available to them shares of the
Primary Class, or by calling 1-800-822-5544.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts
02105, serves as custodian of each Fund's assets. Boston Financial Data
Services, P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent, and administrator of various shareholder services.
Legg Mason assists BFDS with certain of its duties as transfer agent and
receives compensation from BFDS for its services. Shareholders who request an
historical transcript of their account will be charged a fee based upon the
number of years researched. Each Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative costs.
47
<PAGE>
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036-1800, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, MD 21201, has
been selected by the Directors to serve as independent accountants for Value
Trust, Total Return Trust and Special Investment Trust. Ernst & Young LLP, 2001
Market Street, Philadelphia, PA 19103, has been selected by the Directors to
serve as independent auditors for Investors Trust.
FINANCIAL STATEMENTS
The Statement of Net Assets as of March 31, 1999; the Statements of
Operations for the year ended March 31, 1999; the Statements of Changes in Net
Assets for the years ended March 31, 1999 and 1998; the Financial Highlights for
the five years ended March 31, 1999; the Notes to Financial Statements and the
Report of the Independent Accountants, each with respect to Value Trust, Total
Return Trust and Special Investment Trust, are included in the combined annual
report for the year ended March 31, 1999, and are hereby incorporated by
reference in this Statement of Additional Information.
The Statements of Net Assets as of March 31, 1999; the Statements of
Operations for the year ended March 31, 1999; the Statements of Changes in Net
Assets for the years ended March 31, 1999 and 1998; the Financial Highlights for
all periods; the Notes to Financial Statements and the Report of Independent
Auditors, each with respect to American Leading Companies Trust, Balanced Trust
and U.S. Small-Cap Value Trust, are included in the combined annual reports for
the year ended March 31, 1999, for Primary Shares and Navigator Shares,
respectively, and are hereby incorporated by reference in this Statement of
Additional Information.
48
<PAGE>
Appendix A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
- -------------------------------------------------------------------------
RATINGS:
- --------
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
- ---------------------------------------------------------------
AAA-This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
49
<PAGE>
AA -Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
D-Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
50
<PAGE>
Legg Mason Total Return Trust, Inc.
Part C. OTHER INFORMATION
-----------------
Item 23. EXHIBITS
--------
(a) (i) Articles of Incorporation (2)
(ii) Articles of Amendment (dated November 8, 1985) (2)
(iii) Articles of Amendment (dated April 24, 1992) (2)
(iv) Articles Supplementary (dated August 1, 1994) (2)
(b) (i) By-Laws as Amended and Restated (2)
(ii) Amendment to By-Laws (effective February 19, 1992) (2)
(iii) Amendment to By-Laws (effective May 9, 1997) (2)
(c) Specimen Security -- not applicable
(d) Investment Advisory and Management Agreement (2)
(e) (i) Amended Underwriting Agreement (1)
(ii) Dealer Agreement with respect to Navigator Shares (1)
(f) Bonus, profit sharing or pension plans - none
(g) (i) Custodian Agreement (2)
(ii) Addendum dated February 9, 1988 (2)
(iii) Addendum dated February 25, 1988 (2)
(h) (i) Transfer Agency and Service Agreement (2)
(ii) Credit Agreement (3)
(i) Opinion and Consent of Counsel - filed herewith
(j) Accountant's consent-filed herewith
(k) Financial statements omitted from Item 22 - none
(l) Agreements for providing initial capital (2)
(m) Plan pursuant to Rule 12b-1 (1)
(n) Financial Data Schedule - not applicable
(o) Form of Plan Pursuant to Rule 18f-3 - filed herewith
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 17 to the Registration Statement, SEC File No.
2-97908.
(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 20 to the Registration Statement, SEC File No.
2-97908, filed July 31, 1997.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 26 to Legg Mason Value Trust, Inc.'s Registration Statement, SEC
File No. 2-75766, filed May 28, 1999.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
None.
Item 25. INDEMNIFICATION
---------------
This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 20, SEC File No. 2-97908, filed May 29,
1998.
Item 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER AND INVESTMENT ADVISER
----------------------------------------------------------------
I. Legg Mason Fund Adviser, Inc. ("Adviser"), the Registrant's investment
adviser, is a registered investment adviser incorporated on January 20, 1982.
<PAGE>
The Adviser is engaged primarily in the investment advisory business. The
Adviser serves as investment adviser or manager to seventeen open-end investment
companies or portfolios. Information as to the officers and directors of the
Adviser is included in its Form ADV filed on June 24, 1998 with the Securities
and Exchange Commission (registration number 801-16958) and is incorporated
herein by reference.
Item 27. PRINCIPAL UNDERWRITERS
----------------------
(a) Legg Mason Cash Reserve Trust
Legg Mason Value Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Legg Mason Focus Trust, Inc.
Legg Mason Light Street Trust, Inc.
Western Asset Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
(b)The following table sets forth information concerning each director and
officer of the Registrant's principal underwriter, Legg Mason Wood Walker,
Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
BUSINESS ADDRESS* UNDERWRITER - LMWW REGISTRANT
- ------------------ ------------------ -------------
Raymond A. Mason Chairman of the Chairman of the
Board and Director Board and Director
James W. Brinkley President, Director None
and Chief Operating
Officer
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice Director
President and
Director
<PAGE>
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President and
Director
Thomas M. Daly, Jr. Senior Vice None
President
Robert G. Donovan Executive Vice None
President and
Director
Jeffrey W. Durkee Senior Vice President None
and Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
<PAGE>
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
Joseph Sullivan Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
Theodore S. Kaplan Senior Vice None
President and
Senior Counsel
Seth J. Lehr Senior Vice None
1735 Market St President and
Philadelphia, PA 19103 Director
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
<PAGE>
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Robert F. Price Senior Vice President None
and General Counsel
Timothy C. Scheve Executive Vice None
President, Treasuer
and Director
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
Andrew J. Bowden Vice President None
and Deputy General
Counsel
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Charles J. Daley, Jr. Vice President and None
Controller
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Norman C. Frost, Jr. Vice President None
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
James E. Furletti Vice President None
Robert E. Patterson Vice President and None
Deputy General Counsel
John A. Moag, Jr. Vice President None
Edward P. Meehan Vice President None
Edward W. Lister, Jr. Vice President None
Gregory B. McShea Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
<PAGE>
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
Thomas E. Robinson Vice President None
James A. Rowan Vice President None
Douglas M. Schmidt Vice President None
B. Andrew Schmuker Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
William A. Verch Vice President None
Sheila M. Vidmar Vice President and None
Deputy General Counsel
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 29. MANAGEMENT SERVICES
-------------------
None.
Item 30. UNDERTAKINGS
------------
None.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Total Return Trust,
Inc., certifies that it meets all the requirements for effectiveness of this
Post-Effective Amendment No. 22 to its Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore and State of Maryland, on the 30th day of
July, 1999.
LEGG MASON TOTAL RETURN TRUST, INC.
by: /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 22 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- -----
/s/ Raymond A. Mason* Chairman of the Board July 30, 1999
- --------------------- and Director
Raymond A. Mason
/s/ John F. Curley, Jr.* President and Director July 30, 1999
- ------------------------
John F. Curley, Jr.
/s/ Edward A. Taber, III* Director July 30, 1999
- -------------------------
Edward A. Taber, III
/s/ Richard G. Gilmore* Director July 30, 1999
- -----------------------
Richard G. Gilmore
/s/ Arnold L. Lehman* Director July 30, 1999
- ---------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Director July 30, 1999
- ---------------------
Jill E. McGovern
/s/ T. A. Rodgers* Director July 30, 1999
- ------------------
T.A. Rodgers
/s/ Marie K. Karpinski Vice President July 30, 1999
- ---------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 8, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of the following investment companies:
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, KATHI D. BAIR, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and
lawful attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, any Registration
Statements on Form N-1A, all Pre-Effective Amendments to any Registration
Statements of the Funds, any and all subsequent Post-Effective Amendments to
said Registration Statements, any supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933 and the Investment Company Act of 1940, all
related requirements of the Securities and Exchange Commission and all
requirements of appropriate states and territories. I hereby ratify and confirm
all that said attorney-in-fact or their substitutes may do or cause to be done
by virtue hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
- --------- ----
/s/ Richard G. Gilmore May 8, 1998
- -------------------------
Richard G. Gilmore
/s/ T.A. Rodgers May 8, 1998
- -------------------------
T. A. Rodgers
/s/ Charles F. Haugh May 8, 1998
- -------------------------
Charles F. Haugh
/s/ Arnold L. Lehman May 8, 1998
- -------------------------
Arnold L. Lehman
/s/ Jill E. Mcgovern May 8, 1998
- -------------------------
Jill E. McGovern
/s/ Edward A. Taber, III May 8, 1998
- -------------------------
Edward A. Taber, III
/s/ Edmund J. Cashman, Jr. May 8, 1998
- -------------------------
Edmund J. Cashman, Jr.
/s/ John F. Curley, Jr. May 8, 1998
- -------------------------
John F. Curley, Jr.
/s/ Raymond A. Mason May 8, 1998
- -------------------------
Raymond A. Mason
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone (202) 778-9000
Facsimile (202) 778-9100
www.kl.com
ARTHUR C. DELIBERT
(202) 778-9042
[email protected]
July 28, 1999
Legg Mason Total Return Trust, Inc.
100 Light Street
Baltimore, MD 21202
Dear Sir or Madam:
Legg Mason Total Return Trust, Inc. (the "Corporation") is a
corporation organized under the laws of the State of Maryland by Articles of
Incorporation dated May 22, 1985. You have requested our opinion as to certain
matters regarding the issuance of certain Shares of the Corporation. As used in
this letter, the term "Shares" means the Primary Class and Navigator Class
shares of common stock of the Corporation. This opinion is valid with respect to
each of Primary and Navigator Class only during the time that Post-Effective
Amendment No. 22 to the Corporation's Registration Statement is effective and
has not been superseded by another post-effective amendment applicable to that
Class, that has become effective.
We have, as counsel, participated in various corporate and other
matters relating to the Corporation. We have examined certified copies of the
Articles of Incorporation and By-Laws, the minutes of meetings of the directors
and other documents relating to the organization and operation of the
Corporation, and we are generally familiar with its business affairs. Based upon
the foregoing, it is our opinion that, when sold in accordance with the
Corporation's Articles of Incorporation, By-Laws and the terms contemplated by
Post-Effective Amendment No. 22 to the Corporation's Registration Statement, the
Shares will have been legally issued, fully paid and nonassessable by the
Corporation.
<PAGE>
Legg Mason Total Return Trust, Inc.
July 28, 1999
Page 2
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 22 to the Corporation's Registration Statement on
Form N-1A (File No. 2-97908) being filed with the Securities and Exchange
Commission. We also consent to the reference to our firm in the Statement of
Additional Information filed as part of the Registration Statement.
Sincerely,
KIRKPATRICK & LOCKHART LLP
/s/ KIRKPATRICK & LOCKHART LLP
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By: Arthur C. Delibert
CONSENT OF INDEPENDENT ACCOUNTANTS
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We consent to the incorporation by reference in this Post-Effective Amendment
No. 22 (File No. 33-1271) under the Securities Act of 1933 and Post-Effective
Amendment No. 23 (File No. 811-4451) under the Investment Company Act of 1940 to
the Registration Statement on Form N-1A of Legg Mason Total Return Trust, Inc.
of our report dated April 30, 1999 on our audit of the Primary and Navigator
Class financial statements and financial highlights as of March 31, 1999 and for
the respective periods then ended, which report is included in the Annual Report
to Shareholders.
We also consent to the reference to our firm under the captions "Financial
Highlights" in each Prospectus and "The Corporation's Independent Accountants"
in the Statement of Additional Information.
/s/ Pricewaterhousecoopers LLP
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PricewaterhouseCoopers LLP
Baltimore, Maryland
July 28, 1999
LEGG MASON TOTAL RETURN TRUST, INC.
FORM OF
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
Legg Mason Total Return Trust, Inc. (the "Fund") hereby adopts this
Multiple Class Plan pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
1. PRIMARY CLASS SHARES. Primary Class shares of the Fund are offered and
sold without imposition of an initial sales charge or a contingent deferred
sales charge.
Primary Class shares of the Fund are available to all investors except
those qualified to purchase Navigator Class shares.
Primary Class shares of the Fund are subject to an annual distribution fee
of up to 0.75% of the average daily net assets of the Primary Class shares of
the Fund and an annual service fee of 0.25% of the average daily net assets of
the Primary Class shares of the Fund under a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
2. NAVIGATOR CLASS SHARES. Navigator Class shares are offered and sold
without imposition of an initial sales charge or a contingent deferred sales
charge and are not subject to any service or distribution fees.
Navigator Class shares of each Fund are available for purchase only: (i)
by institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own funds and funds for which they act in a fiduciary
capacity; (ii) by clients of Legg Mason Trust Company ("Trust Company") for
which Trust Company exercises discretionary investment management
responsibility; (iii) by qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million; (iv) by the Legg Mason
Profit Sharing Plan and Trust; and (v) by ERISA clients of Bartlett & Co. that
were shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund
on December 19, 1996. Navigator Class shares are also available for purchase by
exchange, as described below.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
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Certain expenses may be attributable to a particular Class of shares of
the Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the transfer agency fees identified as
being attributable to a specific Class. All other expenses are allocated between
the classes on the basis of their relative net assets.
C. EXCHANGE PRIVILEGES:
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Legg Mason Total Return Trust, Inc.
Multiple Class Plan
Page 3
Primary Class and Navigator Class shares of the Fund may be exchanged for
shares of the corresponding Class of other Legg Mason funds, or may be acquired
through an exchange of shares of the corresponding Class of other Legg Mason
funds.
Legg Mason U.S. Government Money Market Portfolio, Legg Mason Cash Reserve
Trust and Legg Mason Tax Exempt Trust (collectively referred to as "Legg Mason
Money Market Funds") currently offer only one class of shares. So long as a Legg
Mason Money Market Fund offers only a single class of shares, Primary Class and
Navigator Class shares of the Fund may be exchanged for shares of that Legg
Mason Money Market Fund, or may be acquired through an exchange of shares of
that Money Market Fund.
These exchange privileges may be modified or terminated by the Fund in
certain instances, and exchanges may be made only into funds that are legally
available for sale in the investor's state of residence.
D. CLASS DESIGNATION:
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Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its Classes of shares.
E. ADDITIONAL INFORMATION:
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This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable Classes; provided, however, that none
of the terms set forth in any such prospectus shall be inconsistent with the
terms of the Classes contained in this Plan. The prospectus for the Fund
contains additional information about the Classes and the Fund's multiple class
structure.
F. DATE OF EFFECTIVENESS:
This Multiple Class Plan is effective on .
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Date Marie K. Karpinski
