<PAGE>
NAVIGATOR EQUITY FUNDS
Prospectus
July 31, 1995
Legg Mason Value Trust, Inc. Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Legg Mason American Leading
Trust, Inc. Companies, a series of Legg Mason
Investors Trust, Inc.
Shares of Navigator Value Trust, Navigator Total Return Trust,
Navigator Special Investment Trust and Navigator American Leading
Companies (collectively referred to as "Navigator Shares") represent
separate classes ("Navigator Classes") of common stock in Legg Mason Value
Trust, Inc. ("Value Trust"), Legg Mason Total Return Trust, Inc. ("Total
Return Trust"), Legg Mason Special Investment Trust, Inc. ("Special
Investment Trust") and Legg Mason American Leading Companies Trust
("American Leading Companies") (each separately referred to as a "Fund"
and collectively referred to as the "Funds"), respectively.
The Navigator Classes of Shares, described in this Prospectus,
are currently offered for sale only to institutional clients of the
Fairfield Group, Inc. ("Fairfield") for investment of their own funds and
funds for which they act in a fiduciary capacity, to clients of Legg Mason
Trust Company ("Trust Company") for which Trust Company exercises
discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and
accounts of the customers with such Clients ("Customers") are referred to
collectively as "Customer Accounts"), to qualified retirement plans
managed on a discretionary basis and having net assets of at least $200
million, and to The Legg Mason Profit Sharing Plan and Trust. Navigator
Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for
individuals.
Special Investment Trust may invest up to 35% of its net assets
in lower-rated debt securities (commonly known as "junk bonds"), and may
invest up to 20% of its total assets in the securities of companies
involved in actual or anticipated restructurings. Both types of
investments involve an increased risk of payment default and/or loss of
principal.
Shares of Special Investment Trust are not registered for sale to
investors in Missouri, and this Prospectus is not an offer to investors
residing in that State.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Mutual fund shares are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution.
Shares are not insured by the FDIC, the Federal Reserve Board, or any
other agency, and are subject to investment risk, including the possible
loss of the principal amount invested.
This Prospectus sets forth concisely the information about the
Funds that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the Funds dated July 31, 1995 has been filed
with the Securities and Exchange Commission ("SEC") and, as amended or
supplemented from time to time, is incorporated herein by this reference.
The Statement of Additional Information is available without charge upon
request from the distributor, Legg Mason Wood Walker, Incorporated ("Legg
Mason") (address and telephone numbers listed on the following page).
Navigator Shares are sold and redeemed without any purchase or
redemption charge imposed by the Funds, although Institutional Clients may
charge their Customer Accounts for services provided in connection with
the purchase or redemption of shares. See "How to Purchase and Redeem
Shares." Each Fund will pay management fees to Legg Mason Fund Adviser,
Inc., but Navigator Shares pay no distribution fees.
Value Trust is a diversified, open-end management investment
company seeking long-term growth of capital. Value Trust invests
principally in those equity securities which its investment adviser, Legg
Mason Fund Adviser, Inc. ("Adviser" or "Manager"), believes are
undervalued and therefore offer above-average potential for capital
appreciation.
Total Return Trust is a diversified, open-end management
investment company seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk. In attempting to achieve this objective, the Adviser
selects a diversified portfolio, composed of dividend-paying common stocks
and securities convertible into common stock which, in the opinion of the
Adviser, offer the potential for long-term growth; common stocks or
securities convertible into common stock which do not pay current
dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities. Total Return Trust
may write covered put and call options. Due to Total Return Trust's
investment objective, however, investors should not expect capital
appreciation comparable to funds devoted solely to growth, or income
comparable to funds devoted to maximum current income.
Special Investment Trust is a diversified, open-end management
investment company seeking capital appreciation. Special Investment Trust
invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of the
Adviser, have one or more of the following characteristics: they are not
closely followed by, or are out of favor with, investors generally, and
the Adviser believes they are undervalued in relation to their long-term
2
<PAGE>
earning power or asset values; unusual developments have occurred which
suggest the possibility that the market value of the securities will
increase; or they are involved in actual or anticipated reorganizations or
restructurings under the Bankruptcy Code. Special Investment Trust also
invests in the securities of companies with larger capitalizations which
have one or more of these characteristics. Special Investment Trust may
invest up to 35% of its assets in debt securities rated below investment
grade.
American Leading Companies is a professionally managed portfolio
seeking long-term capital appreciation and current income consistent with
prudent investment risk. American Leading Companies is a separate series
of Legg Mason Investors Trust, Inc. ("Trust"), a diversified open-end
management investment company. Under normal market conditions, American
Leading Companies will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. The
Fund s investment adviser, Legg Mason Capital Management, Inc. ("LMCM"),
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the Standard & Poor's
Composite Index of 500 Stocks ("S&P 500").
Legg Mason Wood Walker, Inc.
111 South Calvert Street, P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000 800-822-5544
3
<PAGE>
Expenses
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth in the tables are based on average net assets and annual Fund
operating expenses related to Navigator Shares for the period ended March
31, 1995.
Shareholder Transaction Expenses For Each Fund
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
Annual Fund Operating Expenses -- Navigator Shares
(as a percentage of average net assets)
Total Special American
Value Return Investment Leading
Trust Trust Trust Companies
Management fees 0.78% 0.75% 0.79% 0.58%A
12b-1 fees None None None None
Other expenses 0.04% 0.11% 0.11% 0.37%
Total operating
expenses 0.82% 0.86% 0.90% 0.95%A
A The management fee, other expenses and total operating expenses for
Navigator American Leading Companies would be 0.75%, 0.37% and 1.12%,
respectively, if the Fund's Manager had not agreed to reimburse
certain management fees and other expenses pursuant to a voluntary
expense limitation. The Manager has agreed, pursuant to the
reimbursement agreement, to reimburse management fees and/or assume
other expenses indefinitely to the extent the expenses of Navigator
American Leading Companies (exclusive of taxes, interest, brokerage
and extraordinary expenses) exceed during any month an annual rate of
0.95% of the Fund's average daily net assets for such month.
For further information concerning the Funds' expenses, please
see "The Funds' Management and Investment Adviser," page 25.
Example of Effect of Fund Expenses
The following examples illustrate the expenses that you would pay
on a $1,000 investment in Navigator Shares over various time periods
4
<PAGE>
assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period. As noted in the prior table, the Funds charge no
redemption fees of any kind.
Total Special American
Value Return Investment Leading
Trust Trust Trust Companies
1 Year $8 $9 $9 $10
3 Years $26 $27 $29 $30
5 Years $45 $48 $50 $53
10 Years $101 $106 $111 $117
This example assumes that all dividends and other distributions
are reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent
the projected or actual performance of, Navigator Shares of the Funds.
The above tables and examples should not be considered representations of
past or future expenses. Actual expenses may be greater or less than those
shown. The actual expenses attributable to Navigator Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which the Manager waives
its fees and reimburses all or a portion of each Fund's expenses and the
extent to which Navigator Shares incur variable expenses, such as transfer
agency costs.
5
<PAGE>
Financial Highlights
--------------------
Effective December 1, 1994, Value Trust, Total Return Trust and
Special Investment Trust commenced the sale of Navigator Shares.
Effective August 1, 1995, American Leading Companies will commence the
sale of Navigator Shares. Navigator Shares pay no 12b-1 distribution fees
and may pay lower transfer agency fees. The information for Primary
Shares (the other class of shares currently offered) reflects the 12b-1
fees paid by that Class.
The financial highlights tables that follow have been derived
from each Fund's financial statements which have been audited for Value
Trust, Total Return Trust and Special Investment Trust by Coopers &
Lybrand L.L.P., independent accountants and for American Leading Companies
by Ernst & Young LLP, independent auditors. Each Fund's financial
statements for the year ended March 31, 1995 and the report of Coopers &
Lybrand L.L.P. or Ernst & Young LLP thereon are included in that Fund's
annual report and are incorporated by reference in the Statement of
Additional Information. The annual report for each Fund is available to
shareholders without charge by calling your Legg Mason or affiliated
investment executive or Legg Mason's Funds Marketing Department at
800-822-5544.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE TRUST
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995B 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $18.76 $18.50 $17.81 $15.69 $13.38
Net investment income .12 .10 .08 .18 .25
Net realized and
unrealized gain (loss)
on investments 1.40 1.70 .92 2.12 2.34
Total from investment
operations 1.52 1.80 1.00 2.30 2.59
Distributions to
shareholders from:
Net investment income (.01) (.05) (.11) (.18) (.28)
Net realized gain on
investments -- (.04) (.20) -- --
Net asset value, end of
period $20.27 $20.21 $18.50 $17.81 $15.69
Total return 8.11%C 9.77% 5.65% 14.76% 19.53%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.82%D 1.81%E 1.82%E 1.86%E 1.90%E
Net investment income 1.8%D 0.5% 0.5% 1.1% 1.7%
Portfolio turnover rate 20.1% 20.1% 25.5% 21.8% 39.4%
Net assets, end of year
(in thousands) $36,519 $986,325 $912,418 $878,394 $745,833
7
<PAGE>
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $14.19 $14.16 $12.14 $15.07 $15.34 $11.55
Net investment income .32 .33 .21 .21 .21 .25
Net realized and
unrealized gain (loss) on (.74) .77 1.99 (1.54) 1.11 4.15
investments
Total from investment
operations (.42) 1.10 2.20 (1.33) 1.32 4.40
Distributions to
shareholders from:
Net investment income (.36) (.33) (.18) (.20) (.20) (.18)
Net realized gain on
investments (.03) (.74) -- (1.40) (1.39) (.43)
Net asset value, end of
period $13.38 $14.19 $14.16 $12.14 $15.07 $15.34
Total return (2.88)% 7.74% 18.33% (8.42)% 9.89% 39.75%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 1.90%E 1.86%E 1.96%E 1.97%E 2.00%E 2.07%E
Net investment income 2.5% 2.2% 1.6% 1.5% 1.5% 2.0%
Portfolio turnover rate 38.8% 30.7% 29.7% 47.8% 42.5% 32.6%
Net assets, end of year
(in thousands) $690,053 $808,780 $720,961 $665,689 $819,348 $599,004
</TABLE>
A All share and per share figures reflect the 2-for-1 stock split
effective July 29, 1991.
B For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
C Not annualized. The annualized total return for the period would have
been 24.46%.
D Annualized.
E Includes distribution fee of 1.0% through May 11, 1987 and 0.95%
thereafter.
8
<PAGE>
TOTAL RETURN TRUST
<TABLE>
<CAPTION>
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995B 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $12.66 $13.54 $13.61 $11.64 $ 9.64
Net investment income .15 .33 .36 .39C .34
Net realized and
unrealized gain (loss) .25 (.19) .24 1.89 1.91
on investments
Total from investment
operations .40 .14 .60 2.28 2.25
Distributions to
shareholders from:
Net investment income (.06) (.29) (.33) (.31) (.25)
Net realized gain on
investments (.17) (.60) (.34) -- --
Net asset value, end of
period $12.83 $12.79 $13.54 $13.61 $11.64
Total return 2.28%F 1.09% 4.57% 19.88% 23.59%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.86%G 1.93%H 1.94%H 1.95%CH 2.34% H
Net investment
income 3.6% G 2.5% 2.7% 3.1%C 3.1%
Portfolio turnover rate 61.9% 61.9% 46.6% 40.5% 38.4%
Net assets, end of
period (in thousands) $4,823 $194,767 $184,284 $139,034 $52,360
9
<PAGE>
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986A
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $10.03 $10.06 $ 8.86 $11.63 $10.78 $10.00
Net investment income .28 .21 .15 .18 .18 .13D
Net realized and
unrealized gain (loss) (.31) .15 1.18 (1.35) .90 .65
on investments
Total from investment
operations (.03) .36 1.33 (1.17) 1.08 .78
Distributions to
shareholders from:
Net investment (.29) (.21) (.13) (.21) (.19) --
income
Net realized gain on
investments (.07) (.18) -- (1.39) (.04) --
Net asset value, end
of period $ 9.64 $10.03 $10.06 $ 8.86 $11.63 $10.78
Total return (0.05)% 3.48% 15.16% (10.17)% 10.24% 7.80%E
Ratios/Supplemental
Data:
Ratios to average net
assets:
Expenses 2.50% H 2.39%H 2.40%H 2.30%H 2.40%H 2.20%GH
Net investment
income 3.1% 2.0% 1.6% 1.9% 1.7% 3.8% G
Portfolio turnover 62.1% 39.2% 25.7% 50.1% 82.7% 40.0%G
rate
Net assets, end of
period (in thousands) $22,822 $26,815 $30,102 $35,394 $47,028 $44,357
</TABLE>
10
<PAGE>
A For the period November 21, 1985 (commencement of operations) to March
31, 1986.
B For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
C Net of fees waived by the Adviser in excess of an indefinite voluntary
expense limitation of 1.95% beginning November 1, 1992.
D Excludes investment advisory fees and other expenses in excess of a
1.2% Adviser-imposed expense limitation.
E Not annualized. The annualized total return for the period would have
been 21.73%.
F Not annualized. The annualized total return for the period would have
been 6.88%.
G Annualized.
H Includes distribution fee of 1.0%.
11
<PAGE>
SPECIAL INVESTMENT TRUST
<TABLE>
<CAPTION>
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995B 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $19.11 $21.56 $17.91 $17.00 $14.59
Net investment income .07 (.06) (.11) .03 .12
Net realized and
unrealized gain .85 (1.31) 3.93 1.66 2.83
(loss) on investments
Total from investment
operations .92 (1.37) 3.82 1.69 2.95
Distributions to
shareholders from:
Net investment -- -- (.03) -- (.14)
income
Net realized gain
on investments -- (.23) (.14) (.78) (.40)
Net asset value, end
of period $20.03 $19.96 $21.56 $17.91 $17.00
Total return 4.81%E (6.37%) 21.35% 10.50% 20.46%
Ratios/Supplemental
Data:
Ratios to average net
assets:
Expenses 0.90%F 1.93%G 1.94%G 2.00%G 2.10%G
Net investment
income 1.0%F (0.2)% (0.6)% 0.2% 0.8%
Portfolio turnover rate 27.5% 27.5% 16.7% 32.5% 56.9%
Net assets, end of
period (in thousands) $26,123 $612,093 $565,486 $322,572 $201,772
12
<PAGE>
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986A
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of $13.58 $11.84 $10.14 $12.80 $11.53 $10.00
period
Net investment .18 .12 .06C .13C --C .04C
income
Net realized and
unrealized gain 2.42 1.70 1.65 (1.825) 1.51 1.49
(loss) on
investments
Total from
investment 2.60 1.82 1.71 (1.695) 1.51 1.53
operations
Distributions to
shareholders from:
Net investment (.27) (.08) (.01) (.075) (.02) --
income
Net realized
gain on (1.32) -- -- (.89) (.22) --
investments
Net asset value,
end of period $14.59 $13.58 $11.84 $10.14 $12.80 $11.53
Total return 21.46% 15.37% 16.99% (14.18)% 13.39% 15.30%D
Ratios/Supplemental
Data:
Ratios to average
net assets:
Expenses 2.30%G 2.30%G 2.50%G 2.50%G) 2.50%G 2.50%FG
Net investment
income 1.4% 1.0% 0.7% 1.0% -- 1.2% F
Portfolio turnover 75.6% 115.9% 122.4% 158.9% 77.0% 41.0% F
rate
Net assets, end of
period (in thousands) $106,770 $68,240 $44,450 $43,611 $55,822 $34,337
</TABLE>
13
<PAGE>
A For the period December 30, 1985 (commencement of operations) to March
31, 1986.
B For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
C Excludes investment advisory fees and other expenses in excess of a
2.5% Adviser-imposed expense limitation.
D Not annualized. The annualized total return for the period would have
been 60.70%.
E Not annualized. The annualized total return for the period would have
been 14.51%.
F Annualized.
G Includes distribution fee of 1.0%.
14
<PAGE>
AMERICAN LEADING COMPANIES
--------------------------
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended March 31, 1995 1994A
<S> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of $ 9.69 $10.00
period
Net investment incomeB 0.12 0.059
Net realized and unrealized gain
(loss) on investments 0.48 (0.344)
Total from investment 0.60 (0.285)
operations
Distributions to shareholders
from:
Net investment income (0.11) (0.025)
Net asset value, end of period $10.18 $ 9.69
Total return 6.24% (2.86)%C
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses 1.95%B 1.95%BD
Net investment income 1.21%B 1.14%BD
Portfolio turnover rate 30.5% 21.0%D
Net assets, end of period
(in thousands) $59,985 $55,022
</TABLE>
A For the period September 1, 1993 (commencement of operations) to March
31, 1994.
B Net of fees waived pursuant to a voluntary expense limitation of 1.95%
of average daily net assets. If no fees had been waived by the
Manager, the ratio of expenses to average daily net assets for the
period September 1, 1993 to March 31, 1994 and the year ended March 31,
1995 would have been 2.28% and 2.12%, respectively.
C Not annualized. The annualized total return for the period would have
been (4.92)%.
D Annualized.
15
<PAGE>
Performance Information
From time to time the Funds may quote the total return of each
class of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
Cumulative total return shows the fund's performance over a specific
period of time. Average annual total return is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, Value Trust's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and Standard & Poor's 500 Stock Composite Index
("S&P Stock Index"), two unmanaged indexes of widely held common stocks.
No adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in
each Fund will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Returns of each Fund would
have been lower if the Adviser and/or Legg Mason had not waived certain
fees for the fiscal years ended March 31, as follows: 1989 through 1995
for Value Trust; 1986 through 1995 for Total Return and Special
Investment; and 1994 through 1995 for American Leading Companies.
Performance figures reflect past performance only and are not
intended to and do not indicate future performance. Further information
about each Fund's performance is contained in its Annual Report to
Shareholders, which may be obtained without charge by calling your Legg
Mason or affiliated investment executive or Legg Mason's Funds Marketing
Department at 800-822-5544.
Total returns as of March 31, 1995 are shown on the following page.
16
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Special
Total Invest- American Value S&P
Value Return ment Leading Line Stock
Trust Trust Trust Companies Index Index
<S> <S> <S> <S> <S> <S>
Primary Class:
One Year +9.77% +1.09% -6.37% +6.24% +5.12% +15.54%
Five Years +54.50 +56.57 +83.68 N/A +38.57 +71.50
Ten Years +177.23 N/A N/A N/A +102.99 +284.58
Life of
Class +584.27A +99.17B +178.15C +3.20D +244.66A +586.40A
Navigator
Class:
Life of
ClassE +8.11 +2.28 +4.81 N/A +6.37 +11.37
Average Annual Total Return
Ameri-
Special can
Total Invest- Leading Value S&P
Value Return ment Com- Line Stock
Trust Trust Trust panies Index Index
Primary
Class:
One Year +9.77% +1.09% -6.37% +6.24% +5.12% +15.54%
Five Years +9.09 +9.38 +12.93 N/A +6.74 +11.39
Ten Years +10.73 N/A N/A N/A +7.34 +14.42
Life of
Class +16.00A +7.64B +11.69C +2.02D +10.02A +16.03A
</TABLE>
17
<PAGE>
A Inception of Value Trust - April 16, 1982.
B Inception of Total Return Trust - November 21, 1985.
C Inception of Special Investment Trust - December 30, 1985.
D Inception of American Leading Companies - September 1, 1993.
E For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
The S&P Stock Index and Value Line Index figures assume
reinvestment of dividends paid by their component stocks. Tax
consequences are not included in the illustration, nor are brokerage or
other fees calculated in the S&P Stock Index and Value Line Index figures.
18
<PAGE>
Investment Objectives and Policies
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
Value Trust's objective is long-term growth of capital. The
Adviser believes that the Fund's objective can best be met through the
purchase of securities that appear to be undervalued in relation to the
long-term earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be
temporarily out of favor differs from the investment approach followed by
many other mutual funds with similar investment objectives. Such mutual
funds typically do not invest in securities that have declined sharply in
price, are not widely followed, or are issued by companies that have
reported poor earnings or that have suffered a cyclical downturn in
business. The Adviser believes, however, that purchasing securities
depressed by temporary factors will provide investment returns superior to
those obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings
and dividends, reasonable return on equity, and sound finances. The Fund
may from time to time invest in securities that pay no dividends or
interest. Current dividend income is not a prerequisite in the selection
of equity securities.
The Fund may invest in debt securities, including government,
corporate and money market securities, for temporary defensive purposes
and, consistent with its investment objective, during periods when or
under circumstances where the Adviser believes the return on certain debt
securities may equal or exceed the return on equity securities. The Fund
may invest in debt securities of both foreign and domestic issuers of any
maturity without regard to rating, and may invest its assets in such
securities without regard to a percentage limit. Although not a
fundamental policy subject to shareholder vote, the Adviser currently
anticipates that under normal market conditions, the Fund will invest no
more than 25% of its total assets in long-term debt securities. Up to 10%
19
<PAGE>
of its total assets may be invested in debt securities rated below
investment grade, i.e., rated lower than BBB by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, deemed by the Adviser to be of comparable quality.
Total Return Trust's objective is to obtain capital appreciation
and current income in order to achieve an attractive total investment
return consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets in debt securities rated below investment grade, i.e.,
rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed by
the Adviser to be of comparable quality.
Special Investment Trust's objective is capital appreciation.
Current income is not a consideration. The Fund invests principally in
equity securities of companies with market capitalizations of less than
$2.5 billion which the Adviser believes have one or more of the following
characteristics:
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the
company's business;
20
<PAGE>
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. Equity securities of companies involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code.
No more than 20% of the Fund's total assets may be invested in such
securities.
The Fund also invests in debt securities of companies having one
or more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of possible loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the
Fund may not be widely traded, and that the Fund's position in such
securities may be substantial in relation to the market for such
securities. Accordingly, it may be difficult for the Fund to dispose of
such securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities
of companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
21
<PAGE>
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active
monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
assets may be invested in debt securities rated below BBB by S&P, or below
Baa by Moody's, and unrated securities deemed by the Adviser to be of
comparable quality.
When conditions warrant, for temporary defensive purposes, the
Fund also may invest without limit in short-term debt instruments,
including government, corporate and money market securities. Such short-
term investments will be rated in one of the four highest rating
categories by S&P or Moody's or, if unrated by S&P or Moody's, deemed by
the Adviser to be of comparable quality.
American Leading Companies investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMCM
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMCM s goal is to purchase companies having what LMCM believes is a
reasonable price/earnings ratio, and it will favor those companies with
well established histories of dividends and dividend growth rates. The
Fund may also invest in companies having capitalizations above or below $2
billion which LMCM believes show strong potential for future market
leadership, and in companies which LMCM believes, because of corporate
restructuring or other changes, are undervalued based on their potential
for future growth. There is always a risk that LMCM will not properly
assess the potential for an issuer's future growth, or that an issuer will
not realize that potential.
While the Fund may invest in foreign securities, the Fund under
normal market conditions intends to invest at least 65% of its total
assets in domestic Leading Companies. "Domestic" company, for this
purpose, means a company that has its principal corporate offices in the
22
<PAGE>
U.S. or that derives at least 50% of its revenues from operations in the
U.S.
The Fund's objective and polices require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. The Fund's portfolio turnover rate is not
expected to exceed 100%. Under normal circumstances, the Fund expects to
own a minimum of 35 different securities. The Fund may also invest in
common stocks and securities convertible into common stocks which do not
pay current dividends but which offer prospects for capital appreciation
and future income. The Fund may invest in when-issued securities, which
may involve additional risks.
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, during periods when LMCM
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. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMCM to be of comparable quality. The 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 longer the
time to maturity the greater are such variations.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities rated below Ba by Moody's or BB by S&P or, if unrated, deemed
by the Adviser to be of comparable quality.
For each Fund:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements and (with respect to American Leading
Companies) 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 State Street Bank and Trust Company
("State Street"), the Funds' custodian, as collateral until resold and
will be supplemented by additional collateral if necessary to maintain a
total value equal to or in excess of the value of the repurchase
agreement. Each Fund bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the Fund
is delayed or prevented from exercising its rights to dispose of the
collateral securities, which may decline in value in the interim. The
Funds will enter into repurchase agreements only with financial
institutions determined by the Adviser to present minimal risk of default
during the term of the agreement based on guidelines established by the
Funds' Boards of Directors. A Fund will not enter into repurchase
23
<PAGE>
agreements of more than seven days' duration if more than 10% (for Value
Trust, Total Return Trust and Special Investment Trust) or 15% (for
American Leading Companies) of its net assets would be invested in such
agreements and other illiquid investments.
The Funds may engage in securities lending. However, no Fund
currently intends to loan securities with a value exceeding 5% of its
total assets. For further information concerning securities lending, see
the Statement of Additional Information.
Foreign Securities
The Funds may also invest in American depositary receipts
("ADRs"), which are securities issued by domestic banks evidencing their
ownership of specific foreign securities. ADRs may be sponsored or
unsponsored; issuers of securities underlying unsponsored ADRs are not
contractually obligated to disclose material information in the U.S.
Accordingly, there may be less information available about such issuers
than there is with respect to domestic companies and issuers of securities
underlying sponsored ADRs. Although ADRs are denominated in U.S. dollars,
the underlying security often is not; thus, the value of the ADR may be
subject to exchange controls and variations in the exchange rate.
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic
issuers. In addition, with respect to certain foreign countries, there is
the possibility of expropriation, confiscatory taxation, withholding taxes
and limitations on the use or removal of funds or other assets. Although
not a fundamental policy subject to shareholder vote, the Adviser
currently anticipates that Value Trust, Total Return Trust and Special
Investment Trust will each invest no more than 25% of its total assets in
foreign securities. American Leading Companies may not invest more than
25% of its total assets in foreign securities, either directly or through
ADRs.
Futures and Options Transactions
Value Trust, Total Return Trust and Special Investment Trust:
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
24
<PAGE>
contracts on that index could reduce the risks associated with a market
decline and thus provide an alternative to the liquidation of securities
positions. A Fund may sell an interest rate futures contract to offset
price changes of debt securities it already owns. This strategy is
intended to minimize any price changes in the debt securities a Fund owns
(whether increases or decreases) caused by interest rate changes, because
the value of the futures contract would be expected to move in the
opposite direction from the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures
contracts to hedge against a market advance in debt securities that the
Fund plans to acquire at a future date. The purchase of such options is
analogous to the purchase of call options on an individual debt security
that can be used as a temporary substitute for a position in the security
itself. The Funds may purchase put options on stock index futures
contracts. This is analogous to the purchase of protective put options on
individual stocks where a level of protection is sought below which no
additional economic loss would be incurred by the Funds. The Funds may
purchase and write options in combination with each other to adjust the
risk and return of the overall position. For example, the Funds may
purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities,
in a manner similar to selling futures contracts. If stock prices fall,
the value of the put option would be expected to rise and offset all or a
portion of the Fund s resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing
actual securities. If stock prices rise, a Fund would expect to profit
from a written put option, although its gain would be 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 index, with results similar
to those obtainable from purchasing a futures contract, but with risk
limited to the cost of the option if stock prices fell. At the same time,
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, the Fund would
25
<PAGE>
give up some ability to participate in security price increases when
writing call options.
The purchase and sale of options and futures contracts involve
risks different from those involved with direct investments in securities,
and also require different skills from the Adviser in managing the Funds
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the Adviser is not
successful in employing such instruments in managing 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 hedged positions. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related
options if the sum of the initial margin deposits on futures contracts and
related options and premiums paid for related options the Fund has
purchased would exceed 5% of the Fund's total assets. A Fund will not
purchase futures contracts or related options if, as a result, more than
20% of the Fund's total assets would be so invested.
The Funds may also enter into forward foreign currency contracts.
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. By entering into
a foreign currency contract, a Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. A Fund may enter into these contracts for the
purpose of hedging against risk arising from its investment in securities
denominated in foreign currencies or when it anticipates investing in such
securities. Forward currency contracts involve certain costs and risks,
including the risk that anticipated currency movements will not be
accurately predicted, causing a Fund to sustain losses on these contracts.
American Leading Companies:
The Fund may sell covered call options on any security in which
it is permitted to invest for the purpose of enhancing income. A call
option gives the purchaser the right to purchase the underlying security
from the Fund at a specified price (the "strike price") during a specified
period. A call option is "covered" if, at all times the option is
26
<PAGE>
outstanding, the Fund holds the underlying security or a right to obtain
that security at no additional cost. The Fund may purchase a call option
for the purpose of closing out a short position in an option.
The use of options involves certain risks. These risks include:
(1) the fact that use of these instruments can reduce the opportunity for
gain; (2) dependence on LMCM s ability to predict movements in the prices
of individual securities, fluctuations in the general securities markets
or in market sectors; (3) imperfect correlation between movements in the
price of options and movements in the price of the underlying securities;
(4) the possible lack of a liquid secondary market for a particular option
at any particular time; (5) the possibility that the use of cover
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other
short-term obligations; and (6) the possible need to defer closing out
positions in these instruments in order to avoid adverse tax consequences.
There can be no assurance that the use of options by the Fund will be
successful. As a non-fundamental policy, the Fund will not sell a covered
call option if, as a result, the value of the portfolio securities
underlying all outstanding covered call options would exceed 25% of the
value of the equity securities held by the Fund. See the Statement of
Additional Information for a more detailed discussion of options
strategies.
Risks of Lower Rated Debt Securities
Value Trust, Total Return Trust and Special Investment Trust:
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 D by S&P are in default. However,
debt securities, regardless of their ratings, generally have a higher
priority in the issuer s capital structure than do equity securities.
Lower rated debt securities are especially affected by adverse
changes in the industries in which the issuers are engaged and by changes
in the financial condition of the issuers. Highly leveraged issuers may
also experience financial stress during periods of rising interest rates.
The market for lower rated debt securities has expanded rapidly
in recent years, which growth paralleled a long economic expansion. At
certain times in the past, the prices of many lower rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on lower
rated debt securities rose dramatically, reflecting the risk that holders
of such securities could lose a substantial portion of their value as a
result of the issuers financial restructuring or default. There can be
no assurance that such declines will not recur.
The market for lower rated debt securities is generally thinner
and less active than that for higher quality debt securities, which may
limit a Fund s ability to sell such securities at fair value. Judgment
plays a greater rile in pricing such securities than is the case for
securities having more active markets. Adverse publicity and investor
27
<PAGE>
perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower rated debt securities,
especially in a thinly traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Adviser to determine, to
the extent possible, that the planned investment is sound. Each Fund does
not intend to invest in securities that are in default, or where, in the
Adviser's opinion, default appears likely.
Investment Limitations
Each Fund has adopted certain fundamental investment limitations
that, like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Other Fund policies, unless described as fundamental, can be
changed by action of the Board of Directors.
The fundamental restrictions applicable to American Leading
Companies include a prohibition on investing 25% or more of its total
assets in the securities of issuers having their principal business
activities in the same industry (with the exception of securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements with respect thereto).
How to Purchase and Redeem Shares
Institutional Clients of Fairfield may purchase Navigator Shares
from Fairfield, the principal offices of which are located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Other investors eligible to
purchase Navigator Shares may purchase them through a brokerage account
with Legg Mason. (Legg Mason and Fairfield are wholly owned subsidiaries
of Legg Mason, Inc., a financial services holding company.)
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares and $100 for each subsequent investment. Each Fund
reserves the right to change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
28
<PAGE>
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after
the close of the Exchange or on days the Exchange is closed will be
executed at the net asset value determined as of the close of the Exchange
on the next day the Exchange is open. See "How Net Asset Value is
Determined" on page 22. Each Fund reserves the right to reject any order
for its shares or to suspend the offering of shares for a period of time.
In addition to Institutional Clients purchasing shares directly
from Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with
the purchase of Navigator Shares. Depending upon the terms of a
particular Customer Account, however, Institutional Clients may charge
their Customers fees for automatic investment and other cash management
services provided in connection with investments in the Funds.
Information concerning these services and any applicable charges will be
provided by the Institutional Clients. This Prospectus should be read by
Customers in connection with any such information received from the
Institutional Clients. Any such fees, charges or other requirements
imposed by an Institutional Client upon its Customers will be in addition
to the fees and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone,
in accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by
calling Fairfield at 1-800-441-3885. Legg Mason clients should call their
investment executives or Legg Mason Funds Processing at 1-800-822-5544.
Callers should have available the number of shares (or dollar amount) to
be redeemed and their account number.
Orders for redemption received by Legg Mason or Fairfield before
the close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
29
<PAGE>
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by
a direct wire to a domestic commercial bank account previously designated
by the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the Fund. Such payments will
normally be transmitted on the next business day following receipt of a
valid request for redemption. However, each Fund reserves the right to
take up to seven days to make payment upon redemption if, in the judgment
of the Adviser, that Fund could be adversely affected by immediate
payment. (The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) The proceeds of redemption or repurchase may be
more or less than the original cost. If the shares to be redeemed or
repurchased were paid for by check (including certified or cashier's
checks) within 15 business days of the redemption or repurchase request,
the proceeds may not be disbursed unless the Fund can be reasonably
assured that the check has been collected.
Each Fund will not be responsible for the authenticity of
redemption instructions received by telephone, provided it follows
reasonable procedures to identify the caller. Each Fund may request
identifying information from callers or employ identification numbers.
Each Fund may be liable for losses due to unauthorized or fraudulent
instructions if it does not follow reasonable procedures. Telephone
redemption privileges are available automatically to all shareholders
unless certificates have been issued. Shareholders who do not wish to have
telephone redemption privileges should call their investment executive for
further instructions.
Because of the relatively high cost of maintaining small
accounts, a Fund may elect to close any account with a current value of
less than $500 by redeeming all of the shares in the account and mailing
the proceeds to the investor. However, the Funds will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value
per share. If a Fund elects to redeem the shares in an account, the
investor will be notified that the account is below $500 and will be
allowed 60 days in which to make an additional investment in order to
avoid having the account closed.
How Shareholder Accounts are Maintained
A shareholder account is established automatically for each
investor. Any shares the investor purchases or receives as a dividend or
other distribution will be credited directly to the account at the time of
purchase or receipt. No certificates are issued unless the shareholder
specifically requests them in writing. Shareholders who elect to receive
certificates can redeem their shares only by mail. Certificates will be
issued in full shares only. No certificates will be issued for shares of
any Fund prior to 15 business days after purchase of such shares by check
unless the Fund can be reasonably assured during that period that payment
for the purchase of such shares has been collected. Shares may not be
30
<PAGE>
held in, or transferred to, an account with any brokerage firm other than
Fairfield, Legg Mason or their affiliates.
Every shareholder of record will receive a confirmation of each
new share transaction with a Fund, which will also show the total number
of shares being held in safekeeping by the Funds transfer agent for the
account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a
fiduciary, advisory, custodial or other similar capacity on behalf of
persons maintaining Customer Accounts at Institutional Clients will
normally be held of record by the Institutional Clients. Therefore, in
the context of Institutional Clients, references in this Prospectus to
shareholders mean the Institutional Clients rather than their Customers.
Institutional Clients purchasing or holding Navigator Shares on behalf of
their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to a Fund on a timely basis.
How Net Asset Value Is Determined
Net asset value per Navigator Share of each Fund is determined
daily as of the close of the Exchange, on every day that the Exchange is
open, by subtracting the liabilities attributable to Navigator Shares from
the total assets attributable to such shares and dividing the result by
the number of Navigator Shares outstanding. Securities owned by each Fund
for which market quotations are readily available are valued at current
market value. In the absence of readily available market quotations,
securities are valued at fair value as determined by each Fund's Board of
Directors. Where a security is traded on more than one market, which may
include foreign markets, the securities are generally valued on the market
considered by the Adviser/LMCM to be the primary market. Securities with
remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
Dividends and Other Distributions
Each Fund declares dividends to holders of Navigator Shares out
of its investment company taxable income (which consists of net investment
income, any net short-term capital gain and any net gains from certain
foreign currency transactions) attributable to those shares. Value Trust,
Total Return Trust, and American Leading Companies declare and pay
dividends from net investment income quarterly; they pay dividends from
any net short-term capital gains and net gains from foreign currency
transactions annually. Special Investment Trust declares and pays
dividends from its investment company taxable income following the end of
each taxable year. Each Fund also distributes substantially all of its net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) after the end of the taxable year in which the gain is
realized. A second distribution of net capital gain may be necessary in
some years to avoid imposition of the excise tax described under the
heading "Additional Tax Information" in the Statement of Additional
Information. Shareholders may elect to:
31
<PAGE>
1. Receive both dividends and other distributions in Navigator
Shares of the distributing Fund;
2. Receive dividends in cash and other distributions in
Navigator Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing
Fund and other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Navigator fund. A shareholder should
contact its investment executive for additional information about this
option. Qualified retirement plans that obtained Navigator Shares through
exchange generally receive dividends and other distributions in additional
shares.
If no election is made, both dividends and other distributions
will be credited to the Institutional Client's account in Navigator Shares
at the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also will be credited to your
account at that net asset value. If an investor elects to receive
dividends or other distributions in cash, a check will be sent. Investors
purchasing through Fairfield may elect at any time to change the
distribution option by notifying the applicable Fund in writing at:
[insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
Tax Treatment of Dividends and Other Distributions
Each Fund intends to continue to qualify for treatment as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Code"), so that it will be relieved of federal income tax on
that part of its investment company taxable income (generally consisting
of net investment income, any net short-term capital gain and any net
gains from certain foreign currency transactions) and net capital gain
that is distributed to its shareholders.
Dividends from each Fund's investment company taxable income
(whether paid in cash or reinvested in Fund shares) are taxable to their
shareholders (other than tax-exempt investors) as ordinary income to the
extent of each Fund's earnings and profits. Distributions of each Fund's
net capital gain (whether paid in cash or reinvested in Fund shares), when
32
<PAGE>
designated as such, are taxable to those shareholders as long-term capital
gain, regardless of how long they have held their Fund shares.
Each Fund sends each shareholder a notice following the end of
each calendar year specifying, among other things, the amounts of all
ordinary income dividends and other distributions paid (or deemed paid)
during that year.
A redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of any other Navigator fund
generally will have similar tax consequences. See "Shareholder Services--
Exchange Privilege," page 24. If Fund shares are purchased within 30 days
before or after redeeming other Fund shares at a loss, all or part of that
loss will not be deductible and instead will increase the basis of the
newly purchased shares.
A dividend or other distribution paid shortly after shares have
been purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal
tax considerations generally affecting each Fund and its shareholders; see
the Statement of Additional Information for a further discussion. In
addition to federal income tax, an investor may also be subject to state,
local or foreign taxes on distributions from the Funds, depending on the
laws of its home state and locality. A portion of the dividends paid by
the Funds attributable to direct U.S. government obligations is not
subject to state and local income taxes in most jurisdictions. Each
Fund's annual notice to shareholders regarding the amount of dividends
identifies this portion. Prospective shareholders are urged to consult
their tax advisers with respect to the effects of this investment on their
own tax situations.
Shareholder Services
Confirmations and Reports
Shareholders will receive from Legg Mason a confirmation after
each transaction involving Navigator Shares (except a reinvestment of
dividends and capital gain distributions). An account statement will be
sent to each shareholder monthly unless there has been no activity in the
account, in which case an account statement will be sent quarterly.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by its respective
independent accountants/auditors.
Confirmations for purchases and redemptions of Navigator Shares
made by Institutional Clients acting in a fiduciary, advisory, custodial,
33
<PAGE>
or other similar capacity on behalf of persons maintaining Customer
Accounts at Institutional Clients will be sent to the Institutional
Client. Beneficial ownership of shares by Customer Accounts will be
recorded by the Institutional Client and reflected in the regular account
statements provided by them to their customers.
Shareholder inquiries should be addressed to "[insert complete
Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore,
Maryland 21203-1476," or "Fairfield Group, Inc., 200 Gibraltar Road,
Horsham, Pennsylvania 19044."
Exchange Privilege
Holders of Navigator Shares are entitled to exchange them for
Navigator Shares of the following funds, provided the shares to be
acquired are eligible for sale under applicable state securities laws:
Navigator Money Market Fund, Inc. -- Prime Obligations Portfolio
A money market fund seeking to provide as high a level of current
interest income as is consistent with liquidity and relative stability of
principal.
Navigator Tax-Free Money Market Fund, Inc.
A money market fund seeking to provide its shareholders with as
high a level of current interest income that is exempt from federal income
taxes as is consistent with liquidity and relative stability of principal.
Navigator Value Trust
A mutual fund seeking long-term growth of capital.
Navigator Total Return Trust
A mutual fund seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk.
Navigator Special Investment Trust
A mutual fund seeking capital appreciation by investing
principally in issuers with market capitalizations of less than $2.5
billion.
Navigator American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Navigator U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
34
<PAGE>
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Navigator Maryland Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Navigator Pennsylvania Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Navigator Tax-Free Intermediate-Term Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current
income consistent with stability of principal.
Investments by exchange into other Navigator funds are made at
the per share net asset value next determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your investment
executive. To effect an exchange by telephone, please call your investment
executive with the information described in the section "How to Purchase
and Redeem Shares," page 19. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders. There is no
assurance the money market funds will be able to maintain a $1.00 share
price. None of the funds is insured or guaranteed by the U.S. Government.
The Funds' Management and Investment Adviser
Board of Directors
The business and affairs of each Fund are managed under the
direction of its Board of Directors.
Adviser
Pursuant to separate advisory agreements with Value Trust, Total
Return Trust and Special Investment Trust (each an "Advisory Agreement"),
which were approved by each respective Fund s Board of Directors, the
35
<PAGE>
Adviser, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to each of those Funds. The Adviser administers and
acts as the portfolio manager for each Fund and has responsibility for the
actual investment management of the Funds, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security. The Adviser acts as adviser, manager or consultant to sixteen
investment company portfolios which had aggregate assets under management
of approximately $4.6 billion as of June 30, 1995. The Adviser's address
is 111 South Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed Value Trust from its inception
in 1982 to November 1990, when he assumed primary responsibility for the
day-to-day management. Mr. Miller has been responsible for the day-to-day
management of the Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of the Total Return Trust on January 1,
1992. Mr. Miller has also been primarily responsible for the day-to-day
management of the Special Investment Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser.
Mr. Miller has been employed by the Adviser since 1982. Mrs. Dennin is a
Vice President of the Adviser and has been employed by the Adviser since
1985. From 1985 through 1991, Mrs. Dennin analyzed various industries for
the Adviser including financial services, retail, apparel and insurance.
The Adviser receives for its services a management fee from each
Fund attributable to the net assets of Navigator Shares, calculated daily
and payable monthly. The Adviser receives a fee at an annual rate of 1.0%
of the Value Trust's average daily net assets for the first $100 million
of average net assets; 0.75% of average daily net assets between $100
million and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets and 0.75% of average daily net
assets exceeding $100 million. The management fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For the Total Return Trust, the Adviser has agreed to waive indefinitely
its fees in any month to the extent the Total Return Trust's expenses
related to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 0.95% of
the Fund's average daily net assets. During the fiscal year ended March
31, 1995, Value Trust paid a management fee of 0.78% of its average daily
net assets, Total Return Trust paid a management fee of 0.75% of its
average daily net assets, and Special Investment Trust paid a management
fee of 0.79% of its average daily net assets.
Manager
Pursuant to a management agreement with American Leading
Companies ("Management Agreement"), which was approved by the Trust's
Board of Directors, Legg Mason Fund Adviser, Inc. ("Manager"), a wholly
owned subsidiary of Legg Mason, Inc., serves as the Fund's manager. The
Fund pays the Manager, pursuant to the Management Agreement, a management
fee equal to an annual rate of 0.75% of the Fund's average daily net
36
<PAGE>
assets attributable to Navigator Shares. The management fee paid by the
Fund is higher than fees paid by most other equity funds. The Fund pays
all its other expenses which are not assumed by the Manager. The Manager
has agreed to waive its fees and to reimburse the Fund for its expenses
related to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of 0.95% of the Fund's average net
assets indefinitely. This agreement is voluntary and may be terminated by
the Manager at any time.
LMCM
LMCM, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to American Leading Companies pursuant to the terms of
an Investment Advisory Agreement with the Manager, which was approved by
the Trust's Board of Directors. LMCM manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays LMCM a fee, computed daily and
payable monthly, at an annual rate equal to 40% of the fee received by the
Manager, or 0.30% of the Fund's average daily net assets attributable to
Navigator Shares.
LMCM has not previously advised a registered investment company.
However, LMCM manages private accounts with a value as of April 30, 1995
of approximately $700 million. The address of LMCM is 111 South Calvert
Street, Baltimore, MD 21202.
J. Eric Leo serves as portfolio manager for the Fund and is
primarily responsible for the selection of investments. Mr. Leo has been
Executive Vice President and Chief Investment Officer of LMCM since
December 1991. From October 1986 to December 1991, he served as Managing
Director of Equitable Capital Management, where he managed, among other
assets, the Equitable Account #1 - Growth & Income Commingled Fund. Prior
to joining Equitable, Mr. Leo was President and Chief Investment Officer
for Sperry Capital Management Corp., where he was responsible for $1.1
billion in pension assets.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
The Funds' Distributor
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
37
<PAGE>
ended March 31, 1995, Legg Mason received from BFDS $222,259, $52,972,
$178,389 and $19,487 for performing such services in connection with Value
Trust, Total Return Trust, Special Investment Trust and American Leading
Companies, respectively.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason,
Inc., is a registered broker-dealer with principal offices located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield may sell
Navigator Shares pursuant to a Dealer Agreement with the Funds'
Distributor, Legg Mason. Neither Fairfield nor Legg Mason receives
compensation from the Funds for selling Navigator Shares.
The Chairman, President and Treasurer of each Fund are employed
by Legg Mason.
Description of each Corporation/Trust and its Shares
Value Trust, Total Return Trust, Special Investment Trust and
Legg Mason Investors Trust, Inc. were established as Maryland corporations
on January 20, 1982, May 22, 1985, October 31, 1985 and May 5, 1993,
respectively. Value Trust has authorized capital of 200 million shares of
common stock, par value $0.001 per share. Total Return Trust and Special
Investment Trust each has authorized capital of 100 million shares of
common stock, par value $0.001 per share. The Articles of Incorporation
of American Leading Companies authorize the Trust to issue one billion
shares of par value $.001 per share. 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. Salespersons and others
entitled to receive compensation for selling or servicing Fund shares may
receive more with respect to one Class than another.
The initial and subsequent investment minimums for Primary Shares
are $1,000 and $100, respectively. Investments in Primary Shares may be
made through a Legg Mason or affiliated investment executive, through the
Future First Systematic Investment Plan or through automatic investment
arrangements.
Holders of Primary Shares bear distribution and service fees
under Rule 12b-1 at the rate of 1.0% of the net assets attributable to
Primary Shares of Special Investment Trust, Total Return Trust and
American Leading Companies and 0.95% of the net assets attributable to
Primary Shares of Value Trust. Investors in Primary Shares may elect to
receive dividends and/or capital gain distributions in cash through the
receipt of a check or a credit to their Legg Mason account. The per share
net asset value of the Navigator Shares, and dividends and distributions
(if any) paid to Navigator shareholders, are generally expected to be
higher than those of Primary Shares of the Fund, because of the lower
expenses attributable to Navigator Shares. The per share net asset value
of the Classes of Shares will tend to converge, however, immediately after
the payment of ordinary income dividends. Primary Shares of the Funds may
38
<PAGE>
be exchanged for the corresponding Class of Shares of other Legg Mason
funds. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
sales charge, determined on the same business day as redemption of the
Fund shares the investors in Primary Shares wish to redeem.
The Boards of Directors of the Funds do not anticipate that there
will be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of each Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of each Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the
Investment Company Act of 1940 requires a shareholder vote on certain
matters (including the election of directors, approval of an advisory
contract, and approval of a plan of distribution pursuant to Rule 12b-1).
Each Fund will call a special meeting of the shareholders at the request
of 10% or more of the shares entitled to vote; shareholders wishing to
call such a meeting should submit a written request to the Fund at 111
South Calvert Street, Baltimore, Maryland 21202, stating the purpose of
the proposed meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be
deemed liable for misstatements or omission regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
39
<PAGE>
Table of Contents
Expenses 3
Financial Highlights 5
Performance Information 10
Investment Objectives and Policies 12
How To Purchase and Redeem Shares 19
How Your Shareholder Account is Maintained 21
How Net Asset Value Is Determined 22
Dividends And Other Distributions 22
Tax Treatment Of Dividends And Other Distributions 23
Shareholder Services 24
The Funds' Management and Investment Adviser 25
The Funds' Distributor 27
Description of each Corporation/Trust and its Shares 28
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
Independent Accountants/Auditors:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
40
<PAGE>
Ernst & Young LLP
One North Charles Street, Baltimore, Maryland 21202
No person has been authorized to give any information or to make
any representations not contained in this Prospectus or the
Statement of Additional Information in connection with the
offering made by the Prospectus and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus
does not constitute an offering by the Fund or by the principal
underwriter in any jurisdiction in which such offering may not
lawfully be made.
41
<PAGE>
LEGG MASON VALUE TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON INVESTORS TRUST, INC.
PRIMARY SHARES
NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
Mutual fund shares are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution.
Shares are not insured by the FDIC, the Federal Reserve Board, or any
other agency, and are subject to investment risk, including the possible
loss of the principal amount invested.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for Primary Shares or
Navigator Shares (both dated July 31, 1995), as appropriate, which have
been filed with the Securities and Exchange Commission ("SEC"). Copies of
the Prospectuses are available without charge from the Funds at (410) 539-
0000.
The Legg Mason Value Trust, Inc. ("Value Trust") is a mutual fund
seeking long-term growth of capital. Value Trust invests principally in
those equity securities which its investment adviser, Legg Mason Fund
Adviser, Inc. ("Adviser" or "Manager"), believes are undervalued and
therefore offer above-average potential for capital appreciation. Other
investors who seek capital appreciation may also invest in Value Trust
shares.
The Legg Mason Total Return Trust, Inc. ("Total Return Trust") is
a mutual fund seeking capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable
risk. In attempting to achieve this objective, the Adviser selects a
diversified portfolio, composed of dividend-paying common stocks and
securities convertible into common stock which, in the opinion of the
Adviser, offer the potential for long-term growth; common stocks or
securities convertible into common stock which do not pay current
dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities. Total Return Trust
may write covered put and call options.
The Legg Mason Special Investment Trust, Inc. ("Special
Investment Trust") is a mutual fund seeking capital appreciation. Special
Investment Trust invests principally in equity securities of companies
with market capitalizations of less than $2.5 billion which, in the
opinion of the Adviser, have one or more of the following characteristics:
they are not closely followed by, or are out of favor with, investors
generally, and the Adviser believes they are undervalued in relation to
their long-term earning power or asset values; unusual developments have
occurred which suggest the possibility that the market value of the
securities will increase; or they are involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. Special
<PAGE>
Investment Trust may also invest in the securities of companies with
larger capitalizations which have one or more of these characteristics.
Legg Mason American Leading Companies Trust ("American Leading
Companies"), a diversified, professionally managed portfolio, is a
separate series of Legg Mason Investors Trust, Inc., an open-end
investment company ("Trust"). American Leading Companies seeks long-term
capital appreciation and current income consistent with prudent investment
risk. American Leading Companies normally will seek to achieve its
investment objective by investing not less than 75% of its total assets in
the dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. American Leading Companies's
investment adviser, Legg Mason Capital Management, Inc. ("LMCM"), defines
a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future.
Such companies typically are well known as leaders in their respective
industries; most are found in the top half of the Standard & Poor's
Composite Index of 500 Stocks ("S&P 500").
Shares of Navigator Value Trust, Navigator Total Return Trust,
Navigator Special Investment Trust and Navigator American Leading
Companies (collectively referred to as "Navigator Shares") represent
interests in Value Trust, Total Return Trust, Special Investment Trust and
American Leading Companies, respectively, that are currently offered for
sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they
act in a fiduciary capacity, to clients of Legg Mason Trust Company
("Trust Company") for which Trust Company exercises discretionary
investment management responsibility (such institutional investors are
referred to collectively as "Institutional Clients" and accounts of the
customers with such Clients ("Customers") are referred to collectively as
"Customer Accounts"), to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to
The Legg Mason Profit Sharing Plan and Trust. The Navigator Class of
Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for
individuals.
The Primary Class of shares of Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies (collectively
referred to as "Primary Shares") is offered for sale to all other
investors and may be purchased directly by individuals.
Navigator and Primary Shares of Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies (each separately
referred to as a "Fund" and collectively referred to as the "Funds") are
sold and redeemed without any purchase or redemption charge, although
Institutions may charge their Customer Accounts for services provided in
connection with the purchase or redemption of Navigator Shares. Each Fund
pays management fees to the Adviser/Manager. Primary Shares pay a 12b-1
distribution fee, but Navigator Shares pay no distribution fees. See "The
Funds' Distributor."
<PAGE>
LEGG MASON WOOD WALKER,
Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
Dated: July 31, 1995
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Fund described in
the Prospectus, 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 may not:
1. Borrow money, except from banks or through reverse
repurchase agreements for temporary purposes, in an aggregate amount not
to exceed 10% of the value of the total assets of the respective Fund at
the time of borrowing; provided that borrowings, including reverse
repurchase agreements, in excess of 5% of such value will be only from
banks (although not a fundamental policy subject to shareholder approval,
each Fund will not purchase securities if borrowings, including reverse
purchase agreements, exceed 5% of its total assets);
2. With respect to 75% of total assets, invest more than 5%
of its total assets (taken at market value) in securities of any one
issuer, other than the U.S. Government, or its agencies and
instrumentalities, or purchase more than 10% of the voting securities of
any one issuer;
3. Purchase securities on "margin", except for short-term
credits necessary for clearance of portfolio transactions and except that
each Fund may make margin deposits in connection with the use of futures
contracts and options on futures contracts;
4. Invest more than 25% of its total assets (taken at market
value) in any one industry;
5. Purchase or sell commodities and commodity contracts, but
this limitation shall not prevent each Fund from purchasing or selling
options and futures contracts;
6. Underwrite the securities of other issuers, except
insofar as each Fund may be deemed an underwriter under the Securities Act
of 1933, as amended, in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and
except to the extent that the purchase of a portion of an issue of
publicly distributed notes, bonds or other evidences of indebtedness or
deposits with banks and other financial institutions may be considered
loans;
8. Purchase or sell real estate, except that each Fund may
invest in securities collateralized by real estate or interests therein or
in securities issued by companies that invest in real estate or interests
therein (as a non-fundamental policy changeable without a shareholder
vote, each Fund will not purchase or sell interests in real estate limited
partnerships); or
2
<PAGE>
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."
American Leading Companies 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
Investment Company Act of 1940 ("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
3
<PAGE>
Fund, a term defined in the Investment Company Act of 1940 to mean the
vote (a) of 67% or more of the voting securities present at a meeting, if
the holders of more than 50% of the outstanding voting securities of the
Fund are present, or (b) of more than 50% of the outstanding voting
securities of the Fund, whichever is less.
Value Trust, Total Return Trust and Special Investment Trust:
As non-fundamental policies, changeable without shareholder vote,
each Fund will not: (i) not invest more than 5% of its total assets (taken
at market value) in securities of companies that, including their
predecessors, have been in operation less than three years; (ii) purchase
or sell interests in oil and gas or other mineral exploration or
development programs or purchase or sell oil, gas or mineral leases; (iii)
invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer commission or profit, other than
a customary brokerage commission, is involved and only if immediately
thereafter not more than 10% of that Fund's total assets (taken at market
value) would be invested in such securities.
American Leading Companies:
The following are some of the non-fundamental limitations which
American Leading Companies currently observes. The Fund may not:
1. Purchase or sell any oil, gas or mineral exploration or
development programs;
2. 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;
3. 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
(The Fund does not intend to make short sales in excess of 5% of its net
assets during the coming year);
4. Purchase or retain the securities of an issuer if, to the
knowledge of the Fund's management, those officers and directors of the
Fund, of Legg Mason Fund Adviser, Inc. and of Legg Mason Capital
Management, Inc. who individually own beneficially more than 0.5% of the
outstanding securities of that issuer own in the aggregate more than 5% of
the securities of that issuer;
5. Purchase any security if, as a result, more than 5% of
the Fund's total assets would be invested in securities of companies that
4
<PAGE>
together with any predecessors have been in continuous operation for less
than three years;
6. Purchase a security restricted as to resale if, as a
result thereof, more than 10% of the Fund's total assets would be invested
in restricted securities. For purposes of this limitation, securities
that can be sold freely in the principal market in which they are traded
are not considered restricted, even it they cannot be sold in the United
States.
7. Make investments in warrants if such investments, valued
at the lower of cost or market, exceed 5% of the value of its net assets,
which amount may include warrants that are not listed on the New York or
American Stock Exchanges, provided that such unlisted warrants, valued at
the lower of cost or market, do not exceed 2% of the Fund's net assets,
and further provided that this restriction does not apply to warrants
attached to, or sold as a unit with, other securities. For purposes of
this restriction, the term "warrants" does not include options on
securities, stock or bond indices, foreign currencies or futures
contracts.
8. Acquire securities of other open-end investment
companies, except in connection with a merger, consolidation,
reorganization or acquisition.
9. Hold more than 10% of the outstanding voting securities
of any one issuer.
10. 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.
American Leading Companies interprets fundamental investment
limitation (4) to prohibit investment in real estate limited partnerships.
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 a
violation of any 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.
The following information applies to each Fund unless otherwise stated:
5
<PAGE>
Foreign Securities
The costs associated with investment in foreign issuers,
including withholding taxes, brokerage commissions and custodial fees, are
higher than those associated with investment in domestic issuers. In
addition, foreign securities transactions may be subject to difficulties
associated with the settlement of such transactions. Delays in settlement
could result in temporary periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended
security purchases due to settlement problems could cause a Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result in losses to a Fund due
to subsequent declines in value of the portfolio security or, if a Fund
has entered into a contract to sell the security, could result in
liability to the purchaser.
Since each Fund may invest in securities denominated in
currencies other than the U.S. dollar and since each Fund may hold foreign
currencies, a Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rates between such
currencies and the U.S. dollar. Changes in the currency exchange rates
may influence the value of each Fund's shares, and also may affect the
value of dividends and interest earned by that Fund and gains and losses
realized by that Fund. Exchange rates are determined by the forces of
supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other
factors.
In addition to purchasing foreign securities, each Fund may
invest in American Depositary Receipts ("ADRs"). Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use
in the domestic market. Usually issued by a U.S. bank or trust company,
ADRs are receipts that demonstrate ownership of the underlying securities.
For purposes of each Fund's investment policies and limitations, ADRs are
considered to have the same classification as the securities underlying
them.
Illiquid Securities
Value Trust, Total Return Trust and Special Investment Trust each
may invest up to 10% of its net assets in illiquid securities. American
Leading Companies 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/LMCM has determined are liquid pursuant to
guidelines established by each Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the
6
<PAGE>
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 Adviser/LMCM, acting pursuant to
guidelines established by each 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.
American Leading Companies:
Debt Securities
The ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P") 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. Regardless of rating levels, all debt securities considered
for purchase (whether rated or unrated) are analyzed by LMCM to determine,
to the extent possible, that the planned investment is sound. If a
security rated A or above at the time of purchase is subsequently
downgraded to a rating below A, LMCM will consider that fact in
determining whether to dispose of the security, but will dispose of it if
necessary to insure that no more than 5% of net assets are invested in
debt securities rated below A. If one rating agency has rated a security
A or better and another agency has rated it below A, LMCM may rely on the
higher rating in determining to purchase or retain the security. 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.
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.
7
<PAGE>
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. The Fund 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 LMCM 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."
Value Trust, Total Return Trust and Special Investment Trust:
If an investment grade security purchased by Value Trust, Total
Return Trust or Special Investment Trust is subsequently given a rating
below investment grade, the Adviser will consider that fact in determining
whether to retain that security in that Fund's portfolio, but is not
required to dispose of it.
American Leading Companies:
When-Issued Securities
The Fund may enter into commitments to purchase securities on a
when-issued basis. When the Fund purchases securities on a when-issued
basis, it assumes the risks of ownership at the time of the purchase, not
at the time of receipt. However, the Fund does not have to pay for the
obligations until they are delivered to it. This is normally seven to 15
days later, but could be longer. Use of this practice would have a
leveraging effect on the Fund. The Fund 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,
the Fund will establish a segregated account with its custodian and
maintain cash or liquid high-quality debt obligations, in an amount at
least equal in value to the Fund's commitments to purchase when-issued
securities.
The Fund may sell the securities underlying a when-issued
purchase, which may result in capital gains or losses.
8
<PAGE>
Covered Call Options
The 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, the Fund might write covered
call options on securities generally when its 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 the
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. The 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, the 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 (or could
be negated if the buyer chose to exercise the call option at an exercise
price below the securities' current market value).
If the 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.
The 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 the Fund intends to
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. With
respect to options written by the 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
9
<PAGE>
security or make an investment at a time when such a sale or investment
might be advantageous.
The 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. The Fund will
comply with guidelines established by the SEC with respect to coverage of
these strategies by mutual funds, and, if the guidelines so require, will
set aside cash and/or liquid, high-grade debt securities in a segregated
account with its custodian in the amount prescribed, 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.
The following information applies to Value Trust, Total Return Trust and
Special Investment Trust:
Futures Contracts
Each Fund may from time to time purchase or sell futures
contracts. In the purchase of a futures contract, the purchaser agrees to
buy a specified underlying instrument at a specified future date. In the
sale of a futures contract, the seller agrees to sell the underlying
instrument at a specified future date. The price at which the purchase or
sale will take place is fixed at the time the contract is entered into.
Some currently available contracts are based on specific securities, such
as U.S. Treasury bonds or notes, and some are based on indexes of
securities such as S&P 500. Futures contracts can be held until their
delivery dates, or can be closed out before then, if a liquid secondary
market is available. A futures contract is closed out by entering into an
opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery
date as a contract the party had sold) at the current price as determined
on the futures exchange.
As the purchaser or seller of a futures contract, a Fund would
not be required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, the Fund would be
required to deposit with its custodian, in the name of the futures broker
(known as a futures commission merchant, or "FCM"), a percentage of the
contract's value. This amount, which is known as initial margin,
generally equals 10% or less of the value of the futures contract. Unlike
margin in securities transactions, initial margin on futures contracts
does not involve borrowing to finance the futures transactions. Rather,
initial margin is in the nature of a good faith deposit or performance
bond, and would be returned to that Fund when the futures position is
terminated, after all contractual obligations have been satisfied.
10
<PAGE>
Initial margin may be maintained either in cash or in liquid high-quality
debt securities, such as U.S. government securities.
The value of a futures contract tends to increase and decrease
with the value of the underlying instrument. The purchase of a futures
contract will tend to increase exposure to positive and negative price
fluctuations in the underlying instrument in the same manner as if the
underlying instrument had been purchased directly. By contrast, the sale
of a futures contract will tend to offset both positive and negative
market price changes.
As the contract's value fluctuates, payments known as variation
margin or maintenance margin are made to or received from the FCM. If the
contract's value moves against the Fund, (i.e., the Fund's futures
position declines in value), the Fund may be required to make payments to
the FCM, and, conversely, the Fund may be entitled to receive payments
from the FCM if the value of its futures position increases. This process
is known as "marking-to-market" and takes place on a daily basis.
Variation margin does not involve borrowing to finance the futures
transactions, but rather represents a daily settlement of the Fund's
obligations to or from a clearing organization.
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
11
<PAGE>
pay the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.
Over-the-counter and Exchange-traded Options
Each Fund may purchase and write both over-the-counter ("OTC")
and exchange-traded options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on
which the option is listed which, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC options are
contracts between a Fund and its contra-party with no clearing
organization guarantee. Thus, when a Fund purchases an OTC option, it
relies on the dealer from which it has purchased the OTC option to
make/take delivery of the securities underlying the option. Failure by
the dealer to do so would result in the loss of the premium paid by the
Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC
market. Exchange markets for options on debt securities exist, but the
ability to establish and close out positions on the exchanges is subject
to the maintenance of a liquid secondary market.
Value Trust, Total Return Trust and Special Investment Trust each
may invest up to 10% of its assets in illiquid securities. The term
"illiquid securities" includes purchased OTC options. Assets used as
cover for OTC options written by the Fund also will be deemed illiquid
securities, unless the OTC options are sold to qualified dealers who agree
that the Fund may repurchase any OTC options it writes for a maximum price
to be calculated by a formula set forth in the option agreement. The
cover for an OTC option subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the
formula exceeds the intrinsic value of the option.
Cover for Options and Futures Strategies
Each Fund will not use leverage in its hedging strategies
involving options and futures contracts. Each Fund will hold securities,
options or futures positions whose values are expected to offset ("cover")
its obligations under the transactions. Each Fund will not enter into
hedging strategies involving options and futures contracts that expose the
Fund to an obligation to another party unless it owns either (i) an
offsetting ("covered") position in securities, options or futures
contracts or (ii) has cash, receivables and liquid debt securities with a
value sufficient at all times to cover its potential obligations. Each
Fund will comply with guidelines established by the SEC with respect to
coverage of these strategies by mutual funds and, if the guidelines so
require, will set aside cash and/or liquid, high-grade debt securities in
a segregated account with its custodian in the amount prescribed.
Securities, options or futures contracts used for cover and securities
held in a segregated account cannot be sold or closed out while the
strategy is outstanding, unless they are replaced with similar assets. As
a result, there is a possibility that the use of cover or segregation
12
<PAGE>
involving a large percentage of a Fund's assets could impede the portfolio
management or the Fund's ability to meet redemption requests or other
current obligations.
Risks of Futures and Related Options Trading
Successful use of futures contracts and related options depends
upon the ability of the Adviser to assess movements in the direction of
overall securities and interest rates, which requires different skills and
techniques than assessing the value of individual securities. Moreover,
futures contracts relate not to the current price level of the underlying
instrument, but to the anticipated price level at some point in the
future; trading of stock index futures may not reflect the trading of the
securities that are used to formulate the index or even actual
fluctuations in the index itself. There is, in addition, the risk that
movements in the price of the futures contract will not correlate with the
movements in the prices of the securities being hedged. Price distortions
in the marketplace, such as result from increased participation by
speculators in the futures market, may also impair the correlation between
movements in the prices of futures contracts and movements in the prices
of the hedged securities. If the price of the futures contract moves less
than the price of securities that are subject to the hedge, the hedge will
not be fully effective; however, if the price of the securities being
hedged has moved in an unfavorable direction, a Fund normally would be in
a better position than if it had not hedged at all. If the price of
securities being hedged has moved in a favorable direction, this advantage
may be partially offset by losses on the futures position.
Options have a limited life and thus can be disposed of only
within a specific time period. Positions in futures contracts may be
closed out only on an exchange or board of trade that provides a secondary
market for such futures contracts. Although each Fund intends to purchase
and sell futures only on exchanges or boards of trade where there appears
to be a liquid secondary market, there is no assurance that such a market
will exist for any particular contract at any particular time. In such
event, it may not be possible to close a futures position and, in the
event of adverse price movements, the Fund would continue to be required
to make variation margin payments.
Purchasers of options on futures contracts pay a premium in cash
at the time of purchase which, in the event of adverse price movements,
could be lost. Sellers of options on futures contracts must post initial
margin and are subject to additional margin calls that could be
substantial in the event of adverse price movements. In addition, a
Fund's activities in the futures markets may result in a higher portfolio
turnover rate and additional transaction costs in the form of added
brokerage commissions. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price
of a futures contract or related option is permitted to change in a single
13
<PAGE>
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
14
<PAGE>
day is available runs the risk that the level of the underlying index may
subsequently change.
Each Fund's activities in the options markets may result in
higher portfolio turnover rates and additional brokerage costs.
Additional Limitations on Futures and Options
As a non-fundamental policy, each Fund will write a put or call
on a security only if (a) the security underlying the put or call is
permitted by the investment policies of that Fund, and (b) the aggregate
value of the securities underlying the calls or obligations underlying the
puts determined as of the date the options are sold does not exceed 25% of
that Fund's net assets.
Also as a non-fundamental policy, each Fund will purchase and
write puts and calls on securities, stock index futures or options on
stock index futures, or on financial futures, only if: (a) (i) such
options or futures are offered through the facilities of a national
securities association approved by the Commissioner under Rule 260.105.35
of the California Blue Sky Regulations or are listed on a national
securities or commodities exchange or (ii) such options are OTC options
and (A) the OTC options involved are not readily available on an exchange
market, (B) at the time of purchase of any OTC option there is, in the
judgment of the Fund's investment adviser, an active OTC market which will
provide liquidity and pricing for such options and (C) any dealer involved
in the purchase or sale of the OTC option has a net worth of at least $20
million as reported on its most recent financial statement; (b) the
aggregate premiums paid on all such options which are held by the Fund at
any time do not exceed 20% of that Fund's total net assets; and (c) the
aggregate margin deposits required on all such futures or options on
futures contracts held at any time do not exceed 5% of the Fund's total
assets.
Under regulations adopted by the Commodity Futures Trading
Commission ("CFTC"), futures contracts and related options may be used by
each Fund (a) for hedging purposes, without quantitative limits, and (b)
for other purposes to the extent that the amount of margin deposit on all
such non-hedging futures contacts owned by the Fund, together with the
amount of premiums paid by that Fund on all such non-hedging options held
on futures contracts, does not exceed 5% of the market value of that
Fund's total assets.
The foregoing limitations, as well as those set forth in 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.
15
<PAGE>
However, each Fund will not modify the above limitations to increase its
permissible futures and options activities without supplying additional
information, as appropriate, in a current Prospectus or Statement of
Additional Information.
Indexed Securities
Indexed securities are securities whose prices are indexed to the
prices of securities indexes, currencies or other financial statistics.
Indexed securities typically are debt securities or deposits whose value
at maturity and/or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities fluctuates
(either directly or inversely, depending upon the instrument) with the
performance of the index, security, currency or other instrument to which
they are indexed and may also be influenced by interest rate changes in
the U.S. and abroad. At the same time, indexed securities are subject to
the credit risks associated with the issuer of the security, and their
value may substantially decline if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations and certain U.S. government agencies. The Adviser will only
purchase indexed securities of issuers which it determines present minimal
credit risks and will monitor the issuer's creditworthiness during the
time the indexed security is held. The Adviser will use its judgment in
determining whether indexed securities should be treated as short-term
instruments, bonds, stock or as a separate asset class for purposes of
each Fund's investment allocations, depending on the individual
characteristics of the securities. Each Fund currently does not intend to
invest more than 5% of its total assets in indexed securities. Indexed
securities may fluctuate according to a multiple of changes in the
underlying instrument and, in that respect, have a leverage-like effect on
a Fund.
Forward Currency Contracts
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. Each Fund will not
speculate with forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect
to specific transactions. For example, when a Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency,
or when a Fund anticipates the receipt in a foreign currency of dividend
or interest payments on a security that it holds, the Fund may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment, as the case may be, by entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the
underlying transaction. A Fund will thereby be able to protect itself
against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the
16
<PAGE>
payment is declared, and the date on which such payments are made or
received.
Each Fund also may use forward currency contracts in connection
with portfolio positions to lock-in the U.S. dollar value of those
positions or to shift the Fund's exposure to foreign currency fluctuations
from one country to another. For example, when the Adviser believes that
the currency of a particular foreign country may suffer a substantial
decline relative to the U.S. dollar or another currency, it may enter into
a forward currency contract to sell the amount of the former foreign
currency approximating the value of some or all of a Fund's securities
denominated in such foreign currency. This investment practice generally
is referred to as "cross-hedging" when another foreign currency is used.
At or before the maturity date of a forward currency contract
requiring a Fund to sell a currency, the Fund may either sell a portfolio
security and use the sale proceeds to make delivery of the currency or
retain the security and offset its contractual obligation to deliver the
currency by purchasing a second contract pursuant to which the Fund will
obtain, on the same maturity date, the same amount of the currency that it
is obligated to deliver. Similarly, a Fund may close out a forward
currency contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of
the same currency on the maturity date of the first contract. A Fund
would realize a gain or loss as a result of entering into such an
offsetting forward currency contract under either circumstance to the
extent the exchange rate or rates between the currencies involved moved
between the execution dates of the first contract and the offsetting
contract.
The precise matching of the forward contract amount and the value
of the securities involved will not generally be possible because the
future value of such securities in a foreign currency will change as a
consequence of market movements in the value of those securities between
the date the forward currency contract is entered into and the date it
matures. Accordingly, it may be necessary for a Fund to purchase
additional foreign currency on the spot (i.e., cash) market (and bear the
expense of such purchase) if the market value of the security is less than
the amount of foreign currency the Fund is obligated to deliver under the
forward contract and the decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell
on the spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of foreign
currency a Fund is obligated to deliver under the forward contract. The
projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward currency contracts involve the risk that anticipated
currency movements will not be accurately predicted, causing a Fund to
sustain losses on these contracts and transaction costs. Each Fund may
enter into forward contracts or maintain a net exposure to such contracts
only if (1) the consummation of the contracts would not obligate the Fund
to deliver an amount of foreign currency in excess of the value of the
17
<PAGE>
Fund's portfolio securities or other assets denominated in that currency
or (2) the Fund maintains cash, U.S. government securities or other
liquid, high-grade debt securities in a segregated account in an amount
not less than the value of the Fund's total assets committed to the
consummation of the contract.
The cost to a Fund of engaging in forward currency contracts
varies with factors such as the currencies involved, the length of the
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.
Warrants
Although not a fundamental policy subject to shareholder vote, so
long as a Fund's shares continue to be registered in certain states, that
Fund may not invest more than 5% of the value of its net assets, taken at
the lower of cost or market value, in warrants or invest more than 2% of
the value of such net assets in warrants not listed on the New York or
American Stock Exchanges.
For each Fund:
Portfolio Lending
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, is continuously maintained by the borrower with the Fund. During
the time portfolio securities are on loan, the borrower will pay the Fund
an amount equivalent to any dividends or interest paid on such securities,
and the Fund may invest the cash collateral and earn income, or it may
18
<PAGE>
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
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) or more than
10% of net assets (with respect to Value Trust, Total Return Trust and
Special Investment 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 the Adviser/LMCM 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
the Funds custodian 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 be
applicable to them.
General
Each Fund intends to continue to qualify for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code of
19
<PAGE>
1986, as amended ("Code"). In order to continue to qualify for that
treatment, each Fund must distribute annually to its shareholders at least
90% of its investment company taxable income (generally, net investment
income plus any net short-term capital gain and any net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. For each Fund, these requirements
include the following: (1) at least 90% of a Fund's gross income each
taxable year must be derived from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition
of securities (or foreign currencies), or other income (including gains
from options, futures or forward currency contracts) derived with respect
to its business of investing in securities (or those currencies) ("Income
Requirement"); (2) a Fund must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any
of the following, that were held for less than three months -- options or
futures contracts, or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to that Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of a
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 that Fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities; and (4) at the close of
each quarter of a Fund's taxable year, not more than 25% of the value of
its total assets may be invested in the securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for that year and
capital gain net income for the one-year period ending on October 31 of
that year, plus certain other amounts.
Dividends and interest received by each Fund may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign
investors.
Dividends and Other Distributions
Dividends and other distributions declared by a Fund in December
of any year and payable to shareholders of record on a date in that month
will be deemed to have been paid by the Fund and received by the
shareholders on December 31 if the distributions are paid by the Fund
during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
20
<PAGE>
A portion of the dividends from each Fund's investment company
taxable income (whether paid in cash or reinvested in Fund shares) may be
eligible for the dividends-received deduction allowed to corporations.
The eligible portion for any Fund may not exceed the aggregate dividends
received by that Fund for the taxable year from domestic corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax. Distributions of net capital gain (the excess of
net long-term capital gain over net short-term capital loss) made by each
Fund do not qualify for the dividends-received deduction.
If Fund shares are sold at a loss after being held for six months
or less, the loss will be treated as a long-term, instead of a short-term,
capital loss to the extent of any capital gain distributions received on
those shares.
Passive Foreign Investment Companies
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general,
meets either of the following tests: (1) at least 75% of its gross income
is passive or (2) an average of at least 50% of its assets produce, or are
held for the production of, passive income. Under certain circumstances,
a Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on
disposition of that stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly,
will not be taxable to it to the extent that income is distributed to its
shareholders.
Pursuant to proposed regulations, open-end RICs, such as the
Funds, would be entitled to elect to "mark-to-market" their stock in
certain PFICs. "Marking-to-market," in this context, means recognizing as
gain for each taxable year the excess, as of the end of that year, of the
fair market value of such a PFIC's stock over the adjusted basis in that
stock (including mark-to-market gain for each prior year for which an
election was in effect).
Options, Futures, Forward Currency Contracts and Foreign Currencies
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income
tax purposes the character and timing of recognition of the gains and
losses each Fund realizes in connection therewith.
Income from foreign currencies (except certain gains therefrom
that may be excluded by future regulations), and income from transactions
in options derived by American Leading Companies or options, futures and
forward currency contracts derived by Value Trust, Total Return Trust or
21
<PAGE>
Special Investment Trust with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under
the Income Requirement. However, income from the disposition of options
(with respect to American Leading Companies), options and futures
contracts (other than those on foreign currencies) (with respect to Value
Trust, Total Return Trust and Special Investment Trust) will be subject to
the Short-Short Limitation if they are held for less than three months.
For Value Trust, Total Return Trust and Special Investment Trust, income
from the disposition of foreign currencies and options, futures and
forward contracts thereon, that are not directly related to a Fund's
principal business of investing in securities (or options and futures with
respect thereto) also will be subject to the Short-Short Limitation if
they are held for less than three months. For American Leading Companies,
income from the disposition of foreign currencies that are not directly
related to the Fund s principal business of investing in securities (or
options with respect thereto), if any, also will be subject to the Short-
Short Limitation if they are held for less than three months.
Value Trust, Total Return Trust and Special Investment Trust:
If a Fund satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether the Fund satisfies the Short-Short Limitation. Thus, only the net
gain (if any) from the designated hedge will be included in gross income
for purposes of this limitation. To the extent this treatment is not
available, a Fund may be forced to defer the closing out of certain
options, futures and forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for it to continue to
qualify as a RIC.
Regulated futures contracts and options that are subject to
Section 1256 of the Code (collectively, "Section 1256 contracts") and are
held by a Fund at the end of each taxable year will be required to be
"marked-to-market" for federal income tax purposes (that is, treated as
having been sold at that time at market value). Any unrealized gain or
loss recognized under this mark-to-market rule will be added to any
realized gains and losses on Section 1256 contracts actually sold by the
Fund during the year, and the resulting gain or loss will be treated
(without regard to the holding period) as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. These rules may operate to
increase the amount of dividends, which will be taxable to shareholders,
that must be distributed to meet the Distribution Requirement and avoid
imposition of the Excise Tax, without providing the cash with which to
make the distributions. Each Fund may elect to exclude certain
transactions from Section 1256, although doing so may have the effect of
increasing the relative proportion of short-term capital gain (taxable as
ordinary income when distributed to a Fund's shareholders).
22
<PAGE>
For each Fund:
When a covered call option written (sold) by a Fund expires, the
Fund realizes a short-term capital gain equal to the amount of the premium
it received for writing the option. When a Fund terminates its
obligations under such an option by entering into a closing transaction,
the Fund realizes a short-term capital gain (or loss), depending on
whether the cost of the closing transaction is less than (or exceeds) the
premium received when the option was written. When a covered call option
written by a Fund is exercised, the Fund is treated as having sold the
underlying security, producing long-term or short-term capital gain or
loss, depending on the holding period of the underlying security and
whether the sum of the option price received upon the exercise plus the
premium received when the option was written exceeds or is less than the
basis of the underlying security.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares
and Navigator Shares. Primary Shares are available from Legg Mason and
certain of its affiliates. Navigator Shares are currently offered for
sale only to Institutional Clients, to clients of Trust Company for which
Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. Navigator Shares may not be
purchased by individuals directly, but Institutional Clients may purchase
shares for Customer Accounts maintained for individuals. Primary Shares
are available to all other investors.
Future First Systematic Investment Plan and Transfer of Funds from
Financial Institutions
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future
First Systematic Investment Plan. Under this plan you may arrange for
automatic monthly investments in Primary Shares of $50 or more by
authorizing Boston Financial Data Services ("BFDS"), each Fund's transfer
agent, to prepare a check each month drawn on your checking account. Each
month the transfer agent will send a check to your bank for collection,
and the proceeds of the check will be used to buy Primary Shares at the
per share net asset value determined on the day the check is sent to your
bank. You will receive a quarterly account statement. You may terminate
the Future First Systematic Investment Plan at any time without charge or
penalty. Forms to enroll in the Future First Systematic Investment Plan
are available from any Legg Mason or affiliated office.
Investors in Primary Shares may also buy additional Primary
Shares through a plan permitting transfers of funds from a financial
institution. Certain financial institutions may allow the investor, on a
pre-authorized basis, to have $50 or more automatically transferred
monthly for investment in shares of a Fund to:
23
<PAGE>
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is
drawn on, the investor may be subject to extra charges in order to cover
collection costs. These charges may be deducted from the investor's
shareholder account.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or
more, you may also elect to make systematic withdrawals from your Fund
account of a minimum of $50 on a monthly basis. The amounts paid to you
each month are obtained by redeeming sufficient shares from your account
to provide the withdrawal amount that you have specified. The Systematic
Withdrawal Plan is not currently available for shares held in an
Individual Retirement Account ("IRA"), Self-Employed Individual Retirement
Plan ("Keogh Plan"), Simplified Employee Pension Plan ("SEP") or other
qualified retirement plan. You may change the monthly amount to be paid
to you without charge not more than once a year by notifying Legg Mason or
the affiliate with which you have an account. Redemptions will be made at
the Primary Shares' net asset value per share determined as of the close
of regular trading of the New York Stock Exchange ("Exchange") (normally
4:00 p.m., eastern time) ("close of the Exchange") on the first day of
each month. If the Exchange is not open for business on that day, the
shares will be redeemed at the per share net asset value determined as of
the close of regular trading of the Exchange on the preceding business
day. The check for the withdrawal payment will usually be mailed to you
on the next business day following redemption. If you elect to
participate in the Systematic Withdrawal Plan, dividends and other
distributions on all Primary Shares in your account must be automatically
reinvested in Primary Shares. You may terminate the Systematic Withdrawal
Plan at any time without charge or penalty. Each Fund, its transfer
agent, and Legg Mason Wood Walker, Incorporated ("Legg Mason") also
reserve the right to modify or terminate the Systematic Withdrawal Plan at
any time.
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. Each Fund will not knowingly accept purchase orders from
you for additional shares if you maintain a Systematic Withdrawal Plan
unless your purchase is equal to at least one year's scheduled
24
<PAGE>
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 by securities valued in the same way as they would be valued for
purposes of computing the Fund's net asset value per share. If payment is
made in securities, a shareholder should expect to incur brokerage
expenses in converting those securities into cash and will be subject to
fluctuation in the market price of those securities until they are sold.
Each Fund does not redeem "in kind" under normal circumstances, but would
do so where the Adviser determines that it would be in the best interests
of the shareholders as a whole.
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily for each
Class as of the close of the Exchange, on every day the Exchange is open,
by dividing the value of the total assets attributable to that Class, less
liabilities attributable to that Class, by the number of shares of that
Class outstanding. Pricing will not be done on days when the Exchange is
closed. The Exchange currently observes the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas. As described in the Prospectuses,
securities for which market quotations are readily available are valued at
current market value. Securities traded on an exchange or NASD National
Market System securities are normally valued at last sale prices. Other
over-the-counter securities, and securities traded on exchanges for which
there is no sale on a particular day (including debt securities), are
valued at the mean of latest closing bid and asked prices. Short-term
securities, except commercial paper, are valued at cost. Commercial paper
is valued at amortized cost. Securities and other assets quoted in
25
<PAGE>
foreign currencies will be valued in U.S. dollars based on the currency
exchange rates prevailing at the time of the valuation. All other
securities are valued at fair value as determined by or under the
direction of the appropriate Fund's Board of Directors. Premiums received
on the sale of call options are included in the net asset value of each
Class, and the current market value of options sold by a Fund will be
subtracted from net assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal
year, of a hypothetical investment of $10,000 made in each Fund at
commencement of operations of each class of Fund shares. The tables
assume that all dividends and other distributions are reinvested in each
respective Fund. They include the effect of all charges and fees
applicable to the respective class of shares the Fund has paid. (There
are no fees for investing or reinvesting in the Funds, and there are no
redemption fees.) They do not include the effect of any income tax that
an investor would have to pay on distributions.
Value Trust:
Primary Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends 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
26
<PAGE>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends Value
1993 50,184 8,819 59,003
1994 52,789 9,548 62,337
1995 57,817 10,610 68,427
</TABLE>
* April 16, 1982 (commencement of operations) to March 31, 1983.
Navigator Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends Value
1995* $10,805 $6 $10,811
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not
reinvested dividends and other distributions, the total value of the
hypothetical investment as of March 31, 1995 would have been $40,420, and
the investor would have received a total of $13,797 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1983-1995 fiscal years, returns would have been lower.
27
<PAGE>
Total Return Trust:
Primary Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends 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
</TABLE>
* November 21, 1985 (commencement of operations) to March 31, 1986.
Navigator Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends Value
1995* $10,203 $160 $10,363
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
28
<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, 1995 would have been $12,790, and
the investor would have received a total of $4,940 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1986-1995 fiscal years, returns would have been lower.
Special Investment Trust:
Primary Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends 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
</TABLE>
* December 30, 1985 (commencement of operations) to March 31, 1986.
Navigator Shares
<TABLE>
<CAPTION>
29
<PAGE>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of Total
Fiscal Year Distributions Income Dividends Value
1995* $10,481 - $10,481
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not
reinvested dividends and other distributions, the total value of the
hypothetical investment as of March 31, 1995 would have been $19,960, and
the investor would have received a total of $4,605 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1986-1995 fiscal years, returns would have been lower.
American Leading Companies:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of Total
Year Distributions Income Dividends Value
1994* $9,690 $ 24 $9,714
1995 10,180 140 10,320
</TABLE>
* September 1, 1993 (commencement of operations) to March 31, 1994.
If the investor had not reinvested dividends and other
distributions, the total value of the hypothetical investment as of March
31, 1995 would have been $10,180, and the investor would have received a
total of $135 in distributions. If the Adviser had not waived or
reimbursed certain Fund expenses in the 1994 and 1995 fiscal years,
returns would have been lower.
30
<PAGE>
The table above is based only on Primary Shares of American
Leading Companies. As of the date of this Statement of Additional
Information, Navigator Shares have no performance history of their own.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
n
P(1+T) = ERV
where: a hypothetical initial
P = payment of $1,000
average annual total return
T = number of years
ending redeemable value of a
n = hypothetical $1,000 payment
made at the beginning of that
ERV = period
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at
least to the last day of the most recent quarter prior to submission of
the Performance Advertisements for publication. Total return, or "T" in
the formula above, is computed by finding the average annual change in the
value of an initial $1,000 investment over the period. In calculating the
ending redeemable value, all dividends and other distributions by a Fund
are assumed to have been reinvested at net asset value on the reinvestment
dates during the period.
From time to time each Fund may compare the performance of a
Class of Shares in advertising and sales literature to the performance of
other 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.
31
<PAGE>
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.
32
<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 low price levels.
Each Fund may discuss Legg Mason's tradition of service. Since
1899, Legg Mason and its affiliated companies have helped investors meet
their specific investment goals and have provided a full spectrum of
financial services. Legg Mason affiliates serve as investment advisers
for private accounts and mutual funds with assets of more than $17 billion
as of March 31, 1995.
In advertising, each Fund may discuss the advantages of saving
through tax-deferred retirement plans or accounts, including the
advantages and disadvantages of "rolling over" a distribution from a
retirement plan into an IRA, factors to consider in determining whether
you qualify for such a rollover, and the other options available. These
discussions may include graphs or other illustrations that compare the
growth of a hypothetical tax-deferred investment to the after-tax growth
of a taxable investment.
Lipper Analytical Services, Inc., an independent rating service
which measures the performance of most U.S. mutual funds, reported that
Value Trust's total return ranked 273 among 1536 general equity funds it
measured during the one year ended June 30, 1995. For the five years
ended June 30, 1995, Value Trust's total return ranked 349 among 674
general equity funds and for the ten years ended June 30, 1995, Value
Trust's total return ranked 288 among 384 general equity funds. Of
course, there can be no assurance that results similar to those achieved
by Value Trust in the past will be realized in future periods. From time
to time, performance rankings and ratings as reported in national
financial publications such as Money Magazine, Forbes and Barron's may be
used in describing Value Trust's performance.
TAX-DEFERRED RETIREMENT PLANS
33
<PAGE>
In general, income earned through the investment of assets of
qualified retirement plans is not taxed to the beneficiaries of such plans
until the income is distributed to them. Primary Share investors who are
considering establishing and IRA, Keogh Plan, SEP or other qualified
retirement plan should consult their attorneys or other tax advisers with
respect to individual tax questions. The option of investing in these
plans with respect to Primary Shares through regular payroll deductions
may be arranged with a Legg Mason or affiliated investment executive and
your employer. Additional information with respect to these plans is
available upon request from any Legg Mason or affiliated investment
executive.
Individual Retirement Account -- IRA
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, if neither you nor your spouse is an
active participant in a qualified employer or government retirement plan,
or if either you or your spouse is an active participant and your adjusted
gross income does not exceed a certain level, you may deduct cash
contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. In
addition, if your spouse is not employed and you file a joint return, you
may establish a separate IRA for your spouse and contribute up to a total
of $2,250 to the two IRAs, provided that the contribution to either does
not exceed $2,000. If you and your spouse are both employed and neither
of you is an active participant in a qualified employer or government
retirement plan and you establish separate IRAs, you each may contribute
all of your earned income, up to $2,000 each and thus may together receive
tax deductions of up to $4,000 for contributions to your IRAs. If your
employer's plan permits voluntary contributions and meets certain
requirements, you may make voluntary contributions to that plan that are
treated as deductible IRA contributions.
Even if you are not in one of the categories described in the
preceding paragraph, you may find it advantageous to invest in Primary
Shares through IRA contributions, up to certain limits, because all
dividends and other distributions on your Fund shares are then not
immediately taxable to you or the IRA; they become taxable only when
distributed to you. To avoid penalties, your interest in an IRA must be
distributed, or start to be distributed, to you not later than the end of
the taxable year in which you attain age 70-1/2. Distributions made
before age 59-1/2, in addition to being taxable, generally are subject to
a penalty equal to 10% of the distribution, except in the case of death or
disability or where the distribution is rolled over into another qualified
plan or certain other situations.
Self-Employed Individual Retirement Plan -- Keogh Plan
Legg Mason makes available to self-employed individuals a Plan
and Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. Primary Share investors have the right to use a bank of their
own choice to provide these services at their own cost. There are
34
<PAGE>
penalties for distributions from a Keogh Plan prior to age 59-1/2, except
in the case of death or disability.
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP
for investment in Primary Shares.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain
periodic payments) from the foregoing retirement plans (except IRAs and
SEPs), unless the recipient transfers the distribution directly to an
"eligible retirement plan" (including IRAs and other qualified plans) that
accepts those distributions. Other distributions generally are subject to
regular wage withholding at the rate of 10% (depending on the type and
amount of the distribution), unless the recipient elects not to have any
withholding apply.
THE FUNDS' DIRECTORS AND OFFICERS
Each Fund's officers are responsible for the operation of the
Fund under the direction of the Board of Directors. The officers and
directors of the Funds and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates officers and/or
directors who are "interested persons" of the Funds as defined by the
Investment Company Act of 1940 ("1940 Act"). The business address of each
officer and director is 111 South Calvert Street, Baltimore, Maryland
21202, unless otherwise indicated.
RAYMOND A. MASON* [58], Chairman of the Board and Director of
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.* [56], President and Director of Value Trust,
Total Return Trust and Special Investment Trust; Chairman of the Board and
Director of American Leading Companies; Vice Chairman and Director of Legg
Mason, Inc. and Legg Mason Wood Walker, Incorporated; Director of Legg
Mason Fund Adviser, Inc. and Western Asset Management Company (each a
registered investment adviser); Officer and/or Director of various other
affiliates of Legg Mason, Inc.; Chairman of the Board and Director of
three Legg Mason funds; Chairman of the Board, President and Trustee of
one Legg Mason fund; Chairman of the Board and Trustee of one Legg Mason
fund.
RICHARD G. GILMORE [68], Director of each Fund; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS
Industries, Inc. (diversified holding company whose subsidiaries are
engaged in manufacture and sale of decorative paper products, business
forms, and specialty metal packaging); Director of PECO Energy Company
35
<PAGE>
(formerly Philadelphia Electric Company); Director of four other Legg
Mason funds; and Trustee of one Legg Mason fund. Formerly: Senior Vice
President and Chief Financial Officer of Philadelphia Electric Company
(now PECO Energy Company); Executive Vice President and Treasurer, Girard
Bank, and Vice President of its parent holding company, the Girard
Company; and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH [69], Director of each Fund; 14201 Laurel Park
Drive, Suite 104, Laurel, Maryland. Real Estate Developer and Investor;
President and Director of Resource Enterprises, Inc. (real estate
brokerage); Chairman of Resource Realty LLC (management of retail and
office space); Partner in Greater Laurel Health Park Ltd. Partnership
(real estate investment and development); Director of four other Legg
Mason funds; and Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN [51], Director of each Fund; The Baltimore
Museum of Art, Art Museum Drive, Baltimore, Maryland. Director of the
Baltimore Museum of Art; Director of four other Legg Mason funds; Trustee
of two Legg Mason funds.
JILL E. McGOVERN [50], Director of each Fund; 1500 Wilson
Boulevard, Arlington, Virginia. Chief Executive Officer of the Marrow
Foundation. Director of four other Legg Mason funds; Trustee of two Legg
Mason funds. Formerly: Executive Director of the Baltimore International
Festival (January 1991 - March 1993); and Senior Assistant to the
President of The Johns Hopkins University (1986-1991).
T. A. RODGERS [60], Director of each Fund; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director of four other Legg Mason funds; Trustee of one Legg
Mason fund. Formerly: Director and Vice President of Corporate
Development, Polk Audio, Inc. (manufacturer of audio components).
EDWARD A. TABER, III* [51], Director of each Fund; President of
American Leading Companies; Executive Vice President of Legg Mason, Inc.
and Legg Mason Wood Walker, Inc.; Vice Chairman and Director of Legg Mason
Fund Adviser, Inc.; President and Director of two Legg Mason funds;
Trustee of one Legg Mason fund; Vice President of Worldwide Value Fund,
Inc. Formerly: Executive Vice President of T. Rowe Price-Fleming
International, Inc. (1986-1992) and Director of the Taxable Fixed Income
Division at T. Rowe Price Associates, Inc. (1973-1992).
The executive officers of the Funds, other than those who also
serve as directors, are:
MARIE K. KARPINSKI* [46], Vice President and Treasurer of each
Fund; Treasurer of the Adviser; Vice President and Treasurer of six other
Legg Mason funds; and Secretary/Treasurer of Worldwide Value Fund, Inc.;
Vice President of Legg Mason.
36
<PAGE>
KATHI D. GLENN* [30], Secretary and Assistant Treasurer of
Special Investment Trust; Secretary and Assistant Treasurer of two other
Legg Mason funds.
SUSAN T. LIND* [53], Secretary and Assistant Treasurer of Value
Trust, Inc.; Secretary of one other Legg Mason fund; Assistant Secretary
of Worldwide Value Fund, Inc.
STEFANIE L. WONG* [27], Secretary of American Leading Companies;
Secretary of one Legg Mason fund; employee of Legg Mason since 1990.
BLANCHE P. ROCHE* [47], Assistant Secretary and Assistant Vice
President of each Fund; Assistant Secretary and Assistant Vice President
of five other Legg Mason funds; employee of Legg Mason since 1991.
Formerly: Manager of Consumer Financial Services, Primerica Corporation
(1989-1991).
The Nominating Committee of the Board of Directors is responsible
for the selection and nomination of disinterested directors. The
Committee is composed of Messrs. Haugh, Gilmore, Lehman, Rodgers and Dr.
McGovern.
Officers and directors of a Fund who are "interested persons" of
the Fund receive no salary or fees from the Fund. Each Director of a Fund
who is not an interested person of the Fund ("Independent
Directors")receives a fee of $400 annually for serving as a director, and
a fee of $400 for each meeting of the Board of Directors attended by him
or her. On April 30, 1995, the directors and officers of each Fund
beneficially owned in the aggregate less than 1% of that Fund's
outstanding shares.
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31,
1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
37
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total
Pension Compen-
Aggre- Aggre- or sation
Aggre- gate gate Retire- From
Aggre- gate Compen- Compen- ment Each
gate Compen- sation sation Benefits Es- Fund and
Compen- sation From From Accrued timated Fund
sation From Special American as Part Annual Complex
Name of From Total Invest- Leading of Each Benefits Paid to
Person and Value Return ment Com- Fund's Upon Re- Direc-
Position Trust* Trust* Trust* panies* Expenses tirement tors**
---------- ------- ------- ------- -------- -------- -------- --------
Raymond A.
Mason -
Chairman None None None None N/A N/A None
of the
Board and
Director
John F.
Curley, None None None None N/A N/A None
Jr. -
President
and
Director
Edward A.
Taber, None None None None N/A N/A None
III -
Director
Marie K.
Karpinski
- Vice None None None None N/A N/A None
President
and
Treasurer
Richard G.
Gilmore - $3,600 $2,000 $2,000 $2,000 N/A N/A $21,600
Director
Charles F.
Haugh - $3,600 $2,000 $2,000 $2,000 N/A N/A $23,600
Director
Arnold L.
Lehman - $3,600 $2,000 $2,000 $2,000 N/A N/A $23,600
Director
38
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total
Pension Compen-
Aggre- Aggre- or sation
Aggre- gate gate Retire- From
Aggre- gate Compen- Compen- ment Each
gate Compen- sation sation Benefits Es- Fund and
Compen- sation From From Accrued timated Fund
sation From Special American as Part Annual Complex
Name of From Total Invest- Leading of Each Benefits Paid to
Person and Value Return ment Com- Fund's Upon Re- Direc-
Position Trust* Trust* Trust* panies* Expenses tirement tors**
---------- ------- ------- ------- -------- -------- -------- --------
Jill E.
McGovern - $3,200 $2,000 $2,000 $2,000 N/A N/A $23,200
Director
T. A.
Rodgers - $3,600 $2,000 $2,000 $2,000 N/A N/A $21,600
Director
</TABLE>
* Represents fees paid to each director during the fiscal year
ended March 31, 1995.
** Represents aggregate compensation paid to each director during
the calendar year ended December 31, 1994.
THE FUNDS' INVESTMENT ADVISER/MANAGER
The Adviser, a Maryland Corporation, is located at 111 South
Calvert Street, Baltimore, Maryland 21202. The Adviser is a wholly owned
subsidiary of Legg Mason, Inc., which is also the parent of Legg Mason.
The Adviser serves as investment adviser to Value Trust, Total Return
Trust and Special Investment Trust and as manager to American Leading
Companies under separate Investment Advisory and Management Agreements
with each Fund ("Advisory Agreement" with respect to Value Trust, Total
Return Trust and Special Investment Trust and "Management Agreement" with
respect to American Leading Companies). The Advisory Agreement for Value
Trust originally became effective as of April 19, 1982 and was most
recently approved by the shareholders of Value Trust on July 20, 1984.
The Advisory Agreement for Total Return Trust originally became effective
as of August 5, 1985 and was most recently approved by the shareholders of
Total Return Trust on July 17, 1986. The Advisory Agreement for Special
Investment Trust originally became effective as of December 10, 1985 and
was most recently approved by the shareholders of Special Investment Trust
39
<PAGE>
on July 17, 1986. The Management Agreement for American Leading Companies
originally became effective as of August 2, 1993.
The Advisory Agreement (for Value Trust, Total Return Trust and
Special Investment Trust) and the Management Agreement (for American
Leading Companies) 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 the Adviser/Manager, on October 21, 1994.
Each Advisory Agreement and Management Agreement provides that,
subject to overall direction by the Fund's Board of Directors, the
Adviser/Manager manages the investment and other affairs of each Fund.
The Adviser/Manager is responsible for managing each Fund consistent with
the Fund's investment objective and policies described in its Prospectuses
and this Statement of Additional Information. The Adviser/Manager also is
obligated to (a) furnish the Fund with office space and executive and
other personnel necessary for the operation of each Fund; (b) supervise
all aspects of each Fund's operations; (c) bear the expense of certain
informational and purchase and redemption services to each Fund's
shareholders; (d) arrange, but not pay for, the periodic updating of
prospectuses, proxy material, tax returns and reports to shareholders and
state and federal regulatory agencies; and (e) report regularly to each
Fund's officers and directors. In addition, the Adviser paid 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. The Adviser/Manager and its affiliates pay
all compensation of directors and officers of each Fund who are officers,
directors or employees of the Adviser. Each Fund pays all of its expenses
which are not expressly assumed by the Adviser/Manager. 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.
The Adviser/Manager receives for its services to each Fund a
management fee, calculated daily and payable monthly. The Adviser
receives from Value 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. The Adviser receives from Total Return Trust a management fee at
an annual rate of 0.75% of the average daily net assets of that Fund. The
40
<PAGE>
Adviser receives from 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 and 0.75% of average daily
net assets exceeding $100 million. The Manager receives from American
Leading Companies a management fee at an annual rate of 0.75% of the
average daily net assets of that Fund. The Manager has agreed to waive
its fees and to reimburse American Leading Companies for its expenses
related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of 1.95% of the Fund s average net
assets indefinitely.
The management fee for each Fund is higher than fees paid by most
other funds to their investment advisers. The advisory fee of each Fund
may be reduced under regulations of various states where Fund shares are
qualified for sale which impose limitations on the annual expense ratio of
each Fund. The most restrictive annual expense limitation currently
requires that the Adviser reimburse each Fund for certain expenses,
including the advisory fees received by it (but, excluding interest,
taxes, brokerage fees and commissions, distribution fees, certain other
expenses and extraordinary charges) in any fiscal year in which a Fund's
expenses exceed 2.5% of the first $30 million of that Fund's average net
assets, 2.0% of the next $70 million of average net assets, and 1.5% of
average net assets in excess of $100 million. During the fiscal years
ended March 31, 1995, 1994 and 1993, management fees of $7,519,155,
$6,847,679 and $6,124,621, respectively were received from Value Trust;
$1,502,358, $1,219,883 and $677,278, respectively were received from Total
Return Trust; and $4,849,166, $3,581,718 and $2,066,295, respectively were
received from Special Investment Trust. For the period September 1, 1993
(commencement of operations) to March 31, 1994, the Manager received
management fees of $188,619 (prior to fees waived of $82,244). For the
fiscal year ended March 31, 1995, the Manager received management fees of
$431,577 (prior to fees waived of $94,444). With respect to Navigator
American Leading Companies, the Manager has agreed to waive its fees and
to reimburse the Fund for its expenses related to Navigator Shares
(exclusive of taxes, interest, brokerage and extraordinary expenses) in
excess of 0.95% of the Fund's average daily net assets indefinitely.
Under each Advisory Agreement or (with respect to American
Leading Companies) 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 the Adviser/Manager.
LMCM, 111 South Calvert Street, Baltimore, MD 21202, an affiliate
of Legg Mason, serves as investment adviser to American Leading Companies
pursuant to an Investment Advisory Agreement dated August 2, 1993, between
LMCM and the Manager ("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, the Adviser or the Manager, on October 21,
1994. The Advisory Agreement was approved by Legg Mason Fund Adviser,
Inc., as the Fund's sole shareholder, on August 2, 1993.
41
<PAGE>
Under the Advisory Agreement, LMCM 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 LMCM's services to the Fund, the Manager (not the Fund)
pays LMCM a fee, computed daily and payable monthly, at an annual rate
equal to 40% of the fee received by the Manager from the Fund. For the
period September 1, 1993 (commencement of operations) to March 31, 1994,
the Manager paid $42,550 to LMCM on behalf of the Fund. For the fiscal
year ended March 31, 1995, the Manager paid $134,853 to LMCM on behalf of
the Fund.
Under each Advisory Agreement and (with respect to American
Leading Companies) Management Agreement, the Adviser/Manager/LMCM 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 or (with respect to American Leading
Companies) Management Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of each Fund's Board
of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser/Manager/LMCM, 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 the Adviser/Manager
have adopted policies that restrict securities trading in the personal
accounts of portfolio managers and others who normally come into advance
possession of information on portfolio transactions. These policies
comply, in all material respects, with the recommendations of the
Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded
from the calculation. For the fiscal years ended March 31, 1995 and 1994,
the portfolio turnover rates for Value Trust were 20.1% and 25.5%,
respectively; the portfolio turnover rates for Total Return Trust were
61.9% and 46.6%, respectively; and the portfolio turnover rates for
Special Investment Trust were 27.5% and 16.7%, respectively. For the
period September 1, 1993 (commencement of operations) to March 31, 1994
and the fiscal year ended March 31, 1995, American Leading Companies'
annualized portfolio turnover rates were 21.0% and 30.5%, respectively.
42
<PAGE>
Under the Advisory Agreement with each Fund, the Adviser/LMCM is
responsible for the execution of the Fund's portfolio transactions and
must seek the most favorable price and execution for such transactions,
subject to the possible payment, as described below, of higher brokerage
commissions to brokers who provide research and analysis. Each Fund may
not always pay the lowest commission or spread available. Rather, in
placing orders for a Fund the Adviser/LMCM also takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below),
and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution,
the Adviser/LMCM may give consideration to research, statistical and other
services furnished by brokers or dealers to the Adviser/LMCM for its use,
may place orders with brokers who provide supplemental investment and
market research and securities and economic analysis and may pay to these
brokers a higher brokerage commission than may be charged by other
brokers. Such services include, without limitation, advice as to the
value of securities; the advisability of investing in, purchasing, or
selling securities; advice as to the availability of securities or of
purchasers or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Such research and
analysis may be useful to the Adviser/LMCM in connection with services to
clients other than the Fund whose brokerage generated the service. The
Adviser's/LMCM'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, 1995, 1994 and 1993, Legg Mason received no brokerage
commissions from Value Trust, no brokerage commissions from Total Return
Trust, and $0, $2,000 and $0, respectively, from Special Investment Trust.
Value Trust paid total brokerage commissions of $397,268, $518,233 and
$520,231, respectively; Total Return Trust paid total brokerage
commissions of $360,860, $349,967 and $176,123, respectively; and Special
Investment Trust paid total brokerage commissions of $883,607, $410,115
and $262,020, respectively, during the fiscal years ended March 31, 1995,
1994 and 1993. For the period September 1, 1993 (commencement of
operations) to March 31, 1994 and the fiscal year ended March 31, 1995,
American Leading Companies paid total brokerage commissions of $75,165 and
43
<PAGE>
61,067, respectively. Legg Mason received no brokerage commissions from
American Leading Companies for the same periods.
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated
persons as principal. Each Fund's Board of Directors has adopted
procedures in conformity with Rule 10f-3 under the 1940 Act whereby the
Fund may purchase securities that are offered in certain underwritings in
which Legg Mason or any of its affiliated persons is a participant. These
procedures, among other things, limit each Fund's investment in the amount
of securities of any class of securities offered in an underwriting in
which Legg Mason or any of its affiliated persons is a participant so
that: (i) a Fund together with all other registered investment companies
advised by the Adviser/LMCM, may not purchase more than 4% of the
principal amount of the offering of such class or $500,000 in principal
amount, whichever is greater, but in no event greater than 10% of the
principal amount of the offering; and (ii) the consideration to be paid by
a Fund in purchasing the securities being offered may not exceed 3% of the
total assets of that Fund. In addition, a Fund may not purchase
securities during the existence of an underwriting if Legg Mason is the
sole underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits
Legg Mason from executing transactions on an exchange for its affiliates,
such as the Funds, unless the affiliate expressly consents by written
contract. The Advisory Agreement expressly provides such consent.
Among the brokers regularly used by each Fund during the fiscal
year ended March 31, 1995, Value Trust at that date owned shares of the
following parent companies: 1,201,000 shares of The Bear Stearns
Companies, Inc. at a market value of $22,218,500 and 415,000 shares of
Salomon, Inc. at a market value of $14,058,125; Total Return Trust at that
date owned shares of the following parent companies: 365,643 shares of
The Bear Stearns Companies, Inc. at a market value of $6,764,396; Special
Investment Trust at that date owned shares of the following parent
companies: 367,500 shares of The Bear Stearns Companies, Inc. at a market
value of $6,798,750 and 318,800 shares of Piper Jaffray Incorporated at a
market value of $3,706,050; and American Leading Companies at that date
owned shares of the following parent companies: 25,000 shares of J.P.
Morgan & Co. Incorporated at a market value of $1,525,000.
Investment decisions for each Fund are made independently from
those of other funds and accounts advised by the Adviser or LMCM.
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.
44
<PAGE>
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.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason,
Inc., with principal offices at 200 Gibraltar Road, Horsham, Pennsylvania,
may act as a dealer for Navigator Shares pursuant to a Dealer Agreement
with Legg Mason. Neither Legg Mason nor Fairfield receives any
compensation from the Fund for its activities in selling Navigator Shares.
Each Fund has adopted a Distribution and Shareholder Services
Plan ("Plan") which, among other things, permits the Fund to pay Legg
Mason fees for its services related to sales and distribution of Primary
Shares and the provision of ongoing services to Primary Class
shareholders. Payments are made only from assets attributable to Primary
Shares. Under the Plans, the aggregate fees may not exceed an annual rate
of 1.00% of Total Return Trust's, Special Investment Trust's or American
Leading Companies average daily net assets attributable to Primary Shares
or 0.95% of Value Trust's average daily net assets attributable to Primary
Shares. Distribution activities for which such payments may be made
include, but are not limited to, compensation to persons who engage in or
support distribution and redemption of Shares, printing of prospectuses
and reports for persons other than existing shareholders, advertising,
preparation and distribution of sales literature, overhead, travel and
telephone expenses, all with respect to Primary Shares only. The Plan was
most recently approved by the shareholders of Value Trust on July 20, 1984
and on July 17, 1986 for both the Total Return Trust and Special
Investment Trust. The Plan was approved by Legg Mason Fund Adviser, Inc.,
as sole shareholder of the Fund, on August 2, 1993. The Plan has been
amended, effective July 1, 1993, to make clear that, of the aggregate
1.00% fees with respect to Total Return Trust, Special Investment Trust
and American Leading Companies, 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 investment executives. Continuation of the Plans was most
recently approved on October 21, 1994 by the Board of Directors of each
respective Fund including a majority of the directors who are not
"interested persons" of each Fund as that term is defined in the 1940 Act
45
<PAGE>
and who have no direct or indirect financial interest in the operation of
the Plan or the Underwriting Agreement ("12b-1 Directors").
In approving the continuation of the Plan, in accordance with the
requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that each Plan would benefit the respective Fund and
its Primary Class shareholders. The directors considered, among other
things, the extent to which the potential benefits of the Plan to the
Fund's Primary Class shareholders outweighed the costs of the Plan; the
likelihood that the Plan would succeed in producing such potential
benefits; the merits of certain possible alternatives to the Plan; and the
extent to which the retention of assets and additional sales of each
Fund's Primary Shares would be likely to maintain or increase the amount
of compensation paid by that Fund to the Adviser/Manager.
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/Manager would earn greater management fees if a Fund's assets were
increased, because such fees are calculated as a percentage of a Fund's
assets and thus would increase if net assets increase. The directors
further recognized that there can be no assurance that any of the
potential benefits described below would be achieved if the Plans were
implemented.
Among the potential benefits of the Plans, the directors noted
that the payment of commissions and service fees to Legg Mason and its
investment executives could motivate them to improve their sales efforts
with respect to each Fund's Primary Shares and to maintain and enhance the
level of services they provide to each Fund's Primary Class shareholders.
These efforts, in turn, could lead to increased sales and reduced
redemptions, eventually enabling each Fund to achieve economies of scale
and lower per share operating expenses. Any reduction in such expenses
would serve to offset, in whole or in part, the additional expenses
incurred by each Fund in connection with its Plan. Furthermore, the
investment management of each Fund could be enhanced, as net inflows of
cash from new sales might enable its portfolio manager to take advantage
of attractive investment opportunities, and reduced redemptions could
eliminate the potential need to liquidate attractive securities positions
in order to raise the funds necessary to meet the redemption requests.
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.
46
<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, 1995, 1994 and 1993, Value
Trust paid Legg Mason $8,917,520, $7,351,819 and $8,243,638, respectively
in distribution and service fees under the Plan, from assets attributable
to Primary Shares. For the same fiscal years, Total Return Trust paid
Legg Mason $1,964,257, $1,601,941 and $886,614 (prior to fees waived of
$100,984), respectively and Special Investment Trust paid Legg Mason
$5,917,557, $4,294,605 and $2,325,639, respectively. For the fiscal years
ended March 31, 1994 and 1995, American Leading Companies paid Legg Mason
$251,492 and $575,436, respectively, in fees under the Plan.
During the year ended March 31, 1995, Legg Mason incurred the
following expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total Special American
Return Investment Leading
Value Trust Trust Trust Companies
Compen-
sation to
sales
personnel $6,194,000 $1,362,000 $3,898,000 $405,000
Advertis-
ing 948,000 224,000 387,000 76,000
Printing
and mail-
ing of
prospec-
tuses to
prospec-
tive share-
holders 117,000 68,000 200,000 40,000
Other 1,185,000 418,000 1,977,000 626,000
Total
expenses $8,444,000 $2,072,000 $6,462,000 $1,147,000
47
<PAGE>
</TABLE>
The foregoing are estimated and do not include all expenses
fairly allocable to Legg Mason's or its affiliates' efforts to distribute
Primary Shares.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-
DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of each Fund's assets. Boston
Financial Data Services, P.O. Box 953, Boston, Massachusetts 02103, serves
as transfer and dividend-disbursing agent, and administrator of various
shareholder services. Legg Mason assists BFDS with certain of its duties
as transfer agent and receives compensation from BFDS for its services.
Shareholders who request an historical transcript of their account will be
charged a fee based upon the number of years researched. Each Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 M Street N.W., Washington, D.C.
20036, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, has been selected by the Directors to serve as independent
accountants for Value Trust, Total Return Trust and Special Investment
Trust. Ernst & Young LLP, One North Charles Street, Baltimore, Maryland
21202, has been selected by the Directors to serve as independent auditors
for American Leading Companies.
FINANCIAL STATEMENTS
The Statement of Net Assets (with respect to Value Trust, Total
Return Trust and American Leading Companies), and the Portfolio of
Investments (with respect to Special Investment Trust) as of March 31,
1995; the Statement of Assets and Liabilities (with respect to Special
Investment Trust) as of March 31, 1995; the Statement of Operations for
the year ended March 31, 1995; the Statement of Changes in Net Assets for
the years ended March 31, 1995 and 1994; the Financial Highlights for all
periods; the Notes to Financial Statements and the Report of the
Independent Accountants/Auditors, all of which are included in the
respective Fund's annual report for the year ended March 31, 1995, are
hereby incorporated by reference in this Statement of Additional
Information.
48
<PAGE>
Table of Contents
Page
_____
Additional Information About
Investment Limitations and Policies 2
Additional Tax Information 17
Additional Purchase and Redemption
Information 20
Valuation of Fund Shares 22
Performance Information 22
Tax-Deferred Retirement Plans 28
The Funds' Directors and Officers 29
The Funds' Investment Adviser/Manager 33
Portfolio Transactions and Brokerage 35
The Funds' Distributor 37
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent 39
The Funds' Legal Counsel 40
The Funds' Independent Accountants/Auditors 40
Financial Statements 40
No person has been authorized to give any information or to make
any representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the
Prospectuses and, if given or made, such information or representations
must not be relied upon as having been authorized by any Fund or its
distributor. The Prospectuses and the Statement of Additional Information
do not constitute offerings by the Funds or by the distributor in any
jurisdiction in which such offerings may not lawfully be made.
Legg Mason Wood Walker, Incorporated
____________________________________
111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
