<PAGE>
As filed with the Securities and Exchange Commission on June 2, 1995.
1933 Act File No. 33-1271
1940 Act File No. 811-4451
---------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: ____ [ ]
Post-Effective Amendment No: 14 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 16
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 M Street, N.W.
(Name and Address of South Lobby - Ninth Floor
Agent for Service) Washington, D.C. 20036-5891
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on ___________________, 1995 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ X ] on August 1, 1995 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on ___________________, 1995 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[___] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and filed the notice required by such Rule
for its most recent fiscal year on May 31, 1995.
Page 1 of _______________
<PAGE>
Legg Mason Special Investment Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and
documents:
Table of Contents
Cross Reference Sheets
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Special Investment Trust, Inc. (Primary Shares)
Form N-1A Cross Reference Sheet
-------------------------------
Part A Item No. Prospectus Caption
--------------- ------------------
1 Cover Page
2 Prospectus Highlights; Fund Expenses
3 Financial Highlights; Performance Information
4 Investment Objective and Policies; Description of
the Fund and Its Shares
5 Fund Expenses; The Fund's Management and
Investment Adviser; The Fund's Distributor
6 Prospectus Highlights; Dividends and Other
Distributions; Shareholder Services; Tax
Treatment of Dividends and Other Distributions;
Description of the Fund and Its Shares
7 How You Can Invest In the Fund; How Your
Shareholder Account Is Maintained; How Net Asset
Value Is Determined; The Fund's Distributor;
Investing Through Tax-Deferred Retirement Plans
8 How You Can Redeem Your Primary Shares
9 Not Applicable
<PAGE>
Legg Mason Special Investment Trust, Inc.
Navigator Special Investment Trust
Form N-1A Cross Reference Sheet
-------------------------------
Part A Item No. Prospectus Caption
--------------- ------------------
1 Cover Page
2 Fund Expenses
3 Financial Highlights; Performance Information
4 Investment Objective and Policies;
Description of the Fund and Its Shares
5 Fund Expenses; The Fund's Management and
Investment Adviser; The Fund's Distributor
6 Dividends and Other Distributions; Shareholder
Services; Tax Treatment of Dividends and Other
Distributions; Description of the Fund and Its
Shares
7 How To Purchase and Redeem Shares; How
Shareholder Accounts Are Maintained; How Net
Asset Value Is Determined; The Fund's
Distributor;
8 How To Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason Special Investment Trust, Inc.
Primary Shares
Navigator Shares
Form N-1A Cross Reference Sheet
-------------------------------
Statement of Additional
Part B Item No. Information Caption
--------------- -----------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About Investment
Limitations and Policies; Portfolio Transactions
and Brokerage
14 The Fund's Directors and Officers
15 The Fund's Directors and Officers
16 The Fund's Investment Adviser; The Fund's
Distributor; The Fund's Independent Accountants;
The Fund's Legal Counsel; The Fund's Custodian
and Transfer and Dividend - Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares; Additional Purchase and
Redemption Information
20 Additional Tax Information; Tax-Deferred
Retirement Plans
21 Portfolio Transactions and Brokerage; The Fund's
Distributor;
22 Performance Information
23 Financial Statements
<PAGE>
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Fund Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objective and Policies 6
How You Can Invest in the Fund 9
How Your Shareholder Account is Maintained 11
How You Can Redeem Your Primary Shares 11
How Net Asset Value is Determined 12
Dividends and Other Distributions 12
Tax Treatment of Dividends and Other Distributions 13
Shareholder Services 13
Investing Through Tax-Deferred Retirement Plans 15
The Fund's Management and Investment Adviser 15
The Fund's Distributor 16
Description of the Fund and its Shares 16
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE PRINCIPAL UNDERWRITER IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
(Recycle Logo Appears Here) PRINTED ON RECYCLED PAPER
LMF-008
PROSPECTUS
JULY 31, 1995
LEGG MASON
SPECIAL
INVESTMENT
TRUST, INC.
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
--Legg Mason Logo Appears Here--
<PAGE>
THE LEGG MASON SPECIAL INVESTMENT TRUST , INC. -- PRIMARY SHARES
PROSPECTUS
Legg Mason Special Investment Trust, Inc. ("Fund") is a diversified,
open-end management investment company seeking capital appreciation. The
Fund invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of the
Fund's investment adviser, Legg Mason Fund Adviser, Inc. ("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. The Fund also invests in the
securities of companies with larger capitalizations which have one or more
of these characteristics.
The Primary Class of Shares ("Primary Shares") offered in this
Prospectus is available to all investors except certain institutions (see
page 4). No initial sales charge is payable on purchases, and no
redemption charge is payable on sales, of Primary Shares of the Fund. The
Fund pays management fees to the Adviser and distribution fees with
respect to Primary Shares to Legg Mason Wood Walker, Incorporated ("Legg
Mason"), as described in this Prospectus.
This Prospectus sets forth concisely the information about the Fund
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 Fund 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 reference. The Statement of
Additional Information is available without charge upon request from Legg
Mason (address and telephone numbers listed at right).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: July 31, 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
THE LEGG MASON SPECIAL INVESTMENT TRUST, INC. -- PRIMARY SHARES
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
FUND'S INCEPTION:
December 30, 1985
NET ASSETS:
Over $628 million as of April 30, 1995
FUND TYPE:
The Fund is an open-end, diversified management investment company.
You may purchase or redeem Primary Shares of the Fund through a brokerage
account with Legg Mason or certain of its affiliates. See "How You Can
Invest in the Fund," page 9, and "How You Can Redeem Your Primary Shares,"
page 11.
INVESTMENT OBJECTIVE AND POLICIES:
The Fund's investment objective is capital appreciation. The Fund
attempts to meet this objective by investing principally in the equity
securities of companies with market capitalizations of less than $2.5
billion which the Adviser believes have one or more of the following
characteristics: they are not closely followed by, or are out of favor
with, investors generally, and the Adviser believes they are undervalued
in relation to their long-term earning power or asset values; unusual
developments have occurred which suggest the possibility that the market
value of the securities will increase; or they are involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code.
Of course, there can be no assurance that the Fund will achieve its
objective. See "Investment Objective and Policies," page 6.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER:
Legg Mason Fund Adviser, Inc.
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
CUSTODIAN:
State Street Bank and Trust Company
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 14.
DIVIDENDS:
Declared and paid at the end of each taxable year. See "Dividends and
Other Distributions," page 12.
REINVESTMENT :
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
INITIAL PURCHASE:
$1,000 minimum, generally.
SUBSEQUENT PURCHASES:
$100 minimum, generally.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Fund," page 9.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
2
<PAGE>
FUND EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares will bear directly or indirectly. The expenses and fees set forth
in the table are based on average net assets and annual Fund operating
expenses related to Primary Shares for the year ended March 31, 1995.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
ANNUAL FUND OPERATING EXPENSES -- PRIMARY
SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.79 %
12b-1 fees 1.00 %
Other expenses 0.16 %
Total operating expenses(1) 1.95 %
</TABLE>
(1) Total operating expenses have been restated to reflect current 12b-1
fees.
For further information concerning Fund expenses, please see "The
Fund's Management and Investment Adviser," page 15, and "The Fund's
Distributor," page 16. Because the Fund pays a 12b-1 fee with respect to
Primary Shares, long-term investors in Primary Shares may pay more in
distribution expenses than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD").
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. As noted in the table above, the Fund charges no redemption fees
of any kind.
<TABLE>
<S> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$20 $61 $104 $225
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT,
THE PROJECTED OR ACTUAL PERFORMANCE OF PRIMARY SHARES. THE ABOVE TABLES
AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The
actual expenses attributable to Primary Shares will depend upon, among
other things, the level of average net assets, the levels of sales and
redemptions of shares, the extent to which Primary Shares incur variable
expenses, such as transfer agency costs, and whether the Adviser
reimburses all or a portion of the Fund's expenses.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Effective December 1, 1994, the Fund commenced the sale of a second
class of shares, known as Navigator Shares. Navigator Shares are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they
act in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment
management responsibility, to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to
The Legg Mason Profit Sharing Plan and Trust. Navigator Shares pay no 12b-1
distribution fees and may pay lower transfer agency fees. Except as
indicated, the information below is for Primary Shares and reflects the
12b-1 fees paid by that Class.
The financial highlights for the period December 30, 1985 (commencement
of operations) to March 31, 1986, and the years ended March 31, 1987
through 1995 have been derived from financial statements which have been
audited by Coopers & Lybrand L.L.P., independent accountants. The Fund's
financial statements for the year ended March 31, 1995 and the report of
Coopers & Lybrand L.L.P. thereon are included in each class' annual report
and are incorporated by reference into the Statement of Additional
Information. The annual report 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.
<TABLE>
<CAPTION>
PRIMARY CLASS
NAVIGATOR
CLASS For the Years Ended March 31,
1995(2) 1995 1994 1993 1992 1991
<CAPTION>
<S> <C> <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 $13.58
Net investment income
(loss) 0.07 (0.06) (.11) .03 .12 .18
Net realized and
unrealized
gain (loss) on
investments 0.85 (1.31) 3.93 1.66 2.83 2.42
Total from investment
operations 0.92 (1.37) 3.82 1.69 2.95 2.60
Distributions to
shareholders from:
Net investment income -- -- (.03) -- (.14) (.27)
Net realized gain on
investments -- (0.23) (.14) (.78) (.40) (1.32)
Net asset value, end of
period $20.03 $19.96 $21.56 $17.91 $17.00 $14.59
Total return 4.81%(5) (6.37)% 21.35% 10.50% 20.46% 21.46%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.90%(7) 1.93%(6) 1.94%(6) 2.00%(6) 2.10%(6) 2.30%(6)
Net investment income (loss) 1.0%(7) (0.2)% (0.6)% 0.2% 0.8% 1.4%
Portfolio turnover rate 27.5% 27.5% 16.7% 32.5% 56.9% 75.6%
Net assets, end of
period
(in thousands) $26,123 $612,093 $565,486 $322,572 $201,772 $106,770
<CAPTION>
<S> <C>
1990 1989 1988 1987 1986(1)
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $11.84 $10.14 $12.80 $11.53 $10.00
Net investment income
(loss) .12 .06(3) .13(3) --(3) .04(3)
Net realized and
unrealized
gain (loss) on
investments 1.70 1.65 (1.825) 1.51 1.49
Total from investment
operations 1.82 1.71 (1.695) 1.51 1.53
Distributions to
shareholders from:
Net investment income (.08) (.01) (.075) (.02) --
Net realized gain on
investments -- -- (.89) (.22) --
Net asset value, end of
period $13.58 $11.84 $10.14 $12.80 $11.53
Total return 15.37% 16.99% (14.18%) 13.39% 15.3%(4)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 2.30%(6) 2.50%(6) 2.50%(6) 2.50%(6) 2.50%(6)(7)
Net investment income 1.0% 0.7% 1.0% -- 1.2%(7)
Portfolio turnover rate 115.9% 122.4% 158.9% 77.0% 41.0%(7)
Net assets, end of
period
(in thousands) $68,240 $44,450 $43,611 $55,822 $34,337
</TABLE>
(1) FOR THE PERIOD DECEMBER 30, 1985 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1986.
(2) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(3) EXCLUDES INVESTMENT ADVISORY FEES AND OTHER EXPENSES IN EXCESS OF A
2.5% STATUTORY-IMPOSED EXPENSE LIMITATION.
(4) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 60.70%.
(5) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 14.52%.
(6) INCLUDES DISTRIBUTION FEE OF 1.0%.
(7) ANNUALIZED.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund 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, including changes in share price and assuming
reinvestment of dividends and other distributions, of an investment in the
fund. 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.
Performance information is based on historical results and is not
intended to indicate future performance. The investment return and
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Average annual returns, which differ from actual
year-to-year results, tend to smooth out variations in a fund's returns.
Total returns as of March 31, 1995 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Shares:
One Year -6.37 % -6.37%
Five Years +83.68 +12.93
Life of Class(1) +178.15 +11.69
Navigator Shares:
Life of Class(2) +4.81 % --%
</TABLE>
(1) Primary Shares inception -- December 30, 1985.
(2) Navigator Shares inception -- December 1, 1994.
No adjustment has been made for any income taxes payable by
shareholders. Returns would have been lower if the Adviser and/or
Distributor had not waived certain fees in the years 1986 through 1995.
Further information about the Fund's performance is contained in each
class' 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.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation. This
objective may not be changed without shareholder approval; however, except
as otherwise noted, the investment policies of the Fund described below
may be changed by the Fund's Board of Directors without a shareholder
vote. There can be no assurance that the Fund's investment objective will
be achieved. 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 Fund's Adviser believes have one or
more of the following characteristics:
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the
company's business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company
operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger
activities.
3. Equity securities of companies involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. No more than
20% of the Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of possible loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
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
small and mid-sized 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 securites of smaller companies
generally are more volatile than those of larger companies; the securities
of smaller companies generally are less liquid; and smaller companies
generally are more likely to be adversely affected by poor economic or
market conditions.
It is anticipated that some of the portfolio securities of the Fund
may not be widely traded, and that the Fund's position in such securities
may be substantial in relation to the market for such securities.
Accordingly, it may be difficult for the Fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
6
<PAGE>
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 Standard &
Poor's Ratings Group ("S&P"), or below Baa by Moody's Investors Service,
Inc. ("Moody's"), and unrated securities deemed by the Adviser to be of
comparable quality. Moody's considers debt securities rated Baa to have
speculative characteristics; changes in economic conditions or other
circumstances are likely to lead to a weakened capacity for the issuers of
such securities to make principal and interest payments than is the case
for higher-grade debt securities. The Adviser currently anticipates that
no debt securities rated below B, or if unrated, of comparable quality,
will be purchased and that purchases of securities rated BB or Ba or below
will not exceed 5% of the Fund's total assets. Debt securities rated below
BBB or Baa or unrated securities of comparable quality are regarded as
high yield/high risk securities and are considered predominantly
speculative.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. It
should be emphasized that 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 on unrated) are analyzed
by the Adviser to determine, to the extent possible, that the planned
investment is sound.
The 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
issues, 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 the Fund will invest no more than 25% of its total
assets in foreign securities.
The Fund 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, and thus may be subject to exchange
controls and variations in the exchange rate.
When cash is temporarily available, or for temporary defensive
purposes, the Fund may invest without limit in repurchase agreements. A
repurchase agreement is an agreement under which either U.S. government
obligations or other 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 the Fund by State Street Bank and Trust
Company ("State Street"), the Fund's 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. The 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 Fund
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
7
<PAGE>
Fund's Board of Directors. The Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% of its net
assets would be invested in such agreements and other illiquid
investments. 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.
The Fund may engage in securities lending. However, the Fund does not
currently intend to loan securities with a value exceeding 5% of its total
assets. For further information concerning securities lending, see the
Statement of Additional Information.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which it invests. For example, the
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 the Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. The
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 the 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.
The Fund may purchase a call option on an interest rate futures
contract to hedge against a market advance in debt securities that the
Fund plans to acquire at a future date. The purchase of such an option is
analogous to the purchase of a call option on an individual debt security
that can be used as a temporary substitute for a position in the security
itself. The Fund 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 Fund. The Fund may
purchase and write options in combination with each other to adjust the
risk and return of the overall position. For example, the Fund 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 Fund 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 the premium
and transaction costs), the 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 Fund may write put options as an alternative to purchasing actual
securities. If stock prices rise, the 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, the 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, the 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
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options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, the Fund would seek to
mitigate the effects of a price decline. At the same time, the Fund would
give up some ability to participate in security price increases when
writing call options.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the Fund's
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Fund, if the Adviser is not
successful in employing such instruments in managing the 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. It is also
possible that the 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 the 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 the Fund may
be unable to close out or liquidate its hedged position. In addition, the
Fund will pay commissions and other costs in connection with such
investments, which may increase the 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. The Fund's current policy is to limit options and
futures transactions to those described above. The Fund may purchase and
write both over-the-counter and exchange-traded options.
The 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. The 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 Fund 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, the Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. The Fund may enter into these contracts for the
purpose of hedging against risk arising from the Fund's investment in
securities denominated in foreign currencies or when the Fund anticipates
investing in such securities. Forward currency contracts involve certain
risks, including the risk that anticipated currency movements will not be
accurately predicted causing the Fund to sustain losses on these
contracts.
INVESTMENT LIMITATIONS
The 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.
HOW YOU CAN INVEST IN THE FUND
You may purchase Primary Shares of the Fund through a brokerage
account with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason (Legg Mason is a wholly owned subsidiary of Legg Mason,
Inc., a financial services holding company). Your Legg Mason or affiliated
investment executive will be pleased to explain the shareholder services
available from the
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Fund and answer any questions you may have. Documents available from your
Legg Mason or affiliated investment executive should be completed if you
invest in shares of the Fund through an Individual Retirement Account
("IRA"), Self-Employed Individual Retirement Plan ("Keogh Plan"),
Simplified Employee Pension Plan ("SEP") or other qualified retirement
plan.
The minimum initial investment in Primary Shares for each account,
including investments made by exchange from other Legg Mason funds, is
$1,000, and the minimum investment for each purchase of additional shares
is $100, except as noted below. Initial investments in an IRA account
established on behalf of a nonworking spouse of a shareholder who has an
IRA invested in the Fund require a minimum amount of only $250. Subsequent
investments in an IRA or similar plan require a minimum amount of $100.
However, once an account is established, the minimum amount for subsequent
investments will be waived if an investment in an IRA or similar plan will
bring the investment for the year to the maximum amount permitted under
the Internal Revenue Code of 1986, as amended ("Code"). For those
investing through the Fund's Future First Systematic Investment Plan,
payroll deduction plans and plans involving automatic payment of funds
from financial institutions or automatic investment of dividends from
certain unit investment trusts, minimum initial and subsequent investments
are lower. The Fund may change these minimum amount requirements at its
discretion. You should always furnish your shareholder account number when
making additional purchases of shares.
There are three ways you can invest in Primary Shares of the Fund:
1. THROUGH YOUR LEGG MASON OR AFFILIATED INVESTMENT EXECUTIVE
Shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to open an
account for you, explain to you the shareholder services available from
the Fund, and answer any questions you may have. After you have
established a Legg Mason or affiliated account, you can order shares from
your investment executive in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Fund of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Fund's transfer agent, to prepare a check each month drawn
on your checking account. There is no minimum initial investment. Please
contact any Legg Mason or affiliated investment executive for further
information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Fund through any Legg Mason or
affiliated investment executive.
Primary Shares purchased on behalf of an IRA, Keogh Plan, SEP or other
qualified retirement plan will be processed at the net asset value next
determined after Legg Mason's Funds Processing receives a check for the
amount of the purchase. Other Primary Share purchases will be processed at
the net asset value next determined after your Legg Mason or affiliated
investment executive has received your order; payment must be made within
three business days to Legg Mason. Orders received by your Legg Mason or
affiliated investment executive before the close of business of the New
York Stock Exchange, Inc. ("Exchange") (normally 4:00 p.m. Eastern time)
("close of the Exchange") on any day the Exchange is open will be executed
at the net asset value determined as of the close of the Exchange on that
day. Orders received by your Legg Mason or affiliated investment executive
after the close of the Exchange or on days the Exchange is closed will be
executed at the net asset value determined as of the close of the Exchange
on the next day the Exchange is open. See "How Net Asset Value is
Determined," page 12. The Fund reserves the right to reject any order for
shares of the Fund or to suspend the offering of shares for a period of
time.
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HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. No certificates are issued
unless you specifically request them in writing. Shareholders who elect to
receive certificates can redeem their shares only by mail. Certificates
will be issued in full shares only. No certificates will be issued for
shares prior to 15 business days after purchase of such shares by check
unless the Fund can be reasonably assured during that period that payment
for the purchase of such shares has been collected. Shares may not be held
in, or transferred to, an account with any brokerage firm other than Legg
Mason or its affiliates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated investment executive an order for
repurchase of your shares. Please have the following information ready
when you call: the number of shares to be redeemed and your shareholder
account number. Second, you may send a written request for redemption to
"Legg Mason Special Investment Trust, Inc., c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476."
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated investment executive before the close of
the Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Fund, for redemption at the net asset value
per share determined as of the close of the Exchange on that day. Requests
for redemption received by your Legg Mason or affiliated investment
executive after the close of the Exchange will be executed at the net
asset value determined as of the close of the Exchange on its next trading
day. A redemption request received by your Legg Mason or affiliated
investment executive may be treated as a request for repurchase and, if it
is accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason brokerage
account two business days after trade date. However, the Fund reserves the
right to take up to seven days to make payment upon redemption if, in the
judgment of the Adviser, the Fund could be adversely affected by immediate
payment. (The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) The proceeds of your redemption or repurchase
may be more or less than your original cost. If the shares to be redeemed
or repurchased were paid for by check (including certified or cashier's
checks) within 15 business days of the redemption or repurchase request,
the proceeds may not be disbursed unless the Fund can be reasonably
assured that the check has been collected.
A redemption request will be considered to be received in "good order"
only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17 Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Legg Mason or
affiliated investment executive.
The Fund will not be responsible for the authenticity of redemption
instructions received by
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telephone, provided it follows reasonable procedures to identify the
caller. The Fund may request identifying information from callers or
employ identification numbers. The 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 Legg
Mason or affiliated investment executive for further instructions.
To redeem your Fund retirement account, a Distribution Request Form
must be completed and returned to Legg Mason Client Services for
processing. This form can be obtained through your Legg Mason or
affiliated investment executive or Legg Mason Client Services in
Baltimore, Maryland.
Because of the relatively high cost of maintaining small accounts, the
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
you. However, the Fund will not redeem accounts that fall below $500
solely as a result of a reduction in net asset value per share. If the
Fund elects to redeem the shares in your account, you will be notified
that your account is below $500 and will be allowed 60 days in which to
make an additional investment in order to avoid having your account
closed.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per share is determined daily as of the close of the
Exchange, on every day that the Exchange is open, by subtracting the
liabilities attributable to Primary Shares from the total assets
attributable to such shares and dividing the result by the number of
Primary Shares outstanding. Securities owned by the 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 the Fund's Board of Directors.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund declares and pays dividends to holders of Primary Shares out
of its investment company taxable income attributable to those shares,
which generally consists of net investment income, net short-term capital
gain and any net gains from certain foreign currency transactions,
following the end of each taxable year. The Fund also distributes to
shareholders substantially all net capital gain (the excess of net
long-term capital gain over net short-term capital loss) after the end of
the taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Dividends and other distributions, if
any, on shares held in an IRA, Keogh Plan, SEP or other qualified
retirement plan and by shareholders maintaining a Systematic Withdrawal
Plan generally are reinvested in Primary Shares on the payment dates.
Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares;
2. Receive dividends in cash and other distributions in Primary
Shares;
3. Receive dividends in Primary Shares and other distributions in
cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, you may reinvest your dividends and other
distributions in Primary Shares of another Legg Mason fund. Please contact
your Legg Mason or affiliated investment executive for additional
information about this option.
If no election is made, both dividends and other distributions will be
credited to your account in Primary Shares at the net asset value of the
shares determined as of the close of the Exchange on the reinvestment
date. Shares received pursuant to any of the first three (reinvestment)
elections above also will be credited to your account at that net asset
value. If you elect to receive dividends and/or other distributions in
cash, you will be sent a check or will have your Legg Mason account
credited after the payment date. You may elect at any time to change your
option by notifying the Fund in writing at: Legg Mason Special Investment
Trust, Inc., c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore,
Maryland 21203-1476. Your election must be received at least
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<PAGE>
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
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of federal
income tax on that part of its investment company taxable income
(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 the Fund's investment company taxable income (whether
paid in cash or reinvested in Fund shares) are taxable to its shareholders
(other than IRAs, Keogh Plans, SEPs, other qualified retirement plans and
other tax-exempt investors) as ordinary income to the extent of the Fund's
earnings and profits. Distributions of the Fund's net capital gain
(whether paid in cash or reinvested in Fund shares), when designated as
such, are taxable to those shareholders as long-term capital gain,
regardless of how long they have held their Fund shares.
The Fund sends each shareholder a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. The Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. The Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of any other Legg Mason fund
generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege," page 14. If Fund shares are purchased
within 30 days before or after redeeming 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 the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Fund, depending on the laws of your home
state and locality. Prospective shareholders are urged to consult their
tax advisers with respect to the effects of this investment on their own
tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from the distributor a confirmation after each
transaction (except a reinvestment of dividends, capital gains and
purchases made through the Future First Systematic Investment Plan or
through automatic investments). An account statement will be sent to you
monthly unless there has been no activity in the account or you are
purchasing shares through the Future First Systematic Investment Plan or
through automatic investments, in which case an account statement will be
sent quarterly. Reports will be sent to shareholders at least semiannually
showing the Fund's portfolio and other information; the annual report will
contain financial statements audited by the Fund's independent
accountants.
Shareholder inquiries should be addressed to "Legg Mason Special
Investment Trust, Inc., c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476.
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SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of the Fund while they are participating in the Systematic
Withdrawal Plan. Please contact your Legg Mason or affiliated investment
executive for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of the Fund for the corresponding class of shares of the following
funds in the Legg Mason Family of Funds, provided that such shares are
eligible for sale in your state of residence:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking high current income exempt from federal
income tax, preservation of capital, and liquidity.
Legg Mason U.S. Government Money Market Portfolio
A money market fund seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total investment return consistent with
reasonable risk.
Legg Mason American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Legg Mason Global Equity Trust
A mutual Fund seeking maximum long-term total return, by investing in
common stocks of companies located in at least three different countries.
Legg Mason U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, primarily
through investment in a diversified portfolio of investment grade debt
securities.
Legg Mason High Yield Portfolio
A mutual fund primarily seeking a high level of current income and
secondarily, capital appreciation, by investing principally in
lower-rated, fixed-income securities.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Legg Mason Maryland Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Legg Mason Pennsylvania Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
*Shares of these funds are sold with an initial sales charge.
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<PAGE>
Investments by exchange into the Legg Mason funds sold without an
initial sales charge 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. Investments by exchange into the Legg Mason funds sold
with an initial sales charge are made at the per share net asset value,
plus the applicable sales charge, determined on the same business day as
redemption of the Fund shares you wish to redeem; except that no sales
charge will be imposed upon proceeds from the redemption of Fund shares to
be exchanged that were originally purchased by exchange from a fund on
which the same or higher initial sales charge previously was paid. There
is no charge for the exchange privilege, but the Fund reserves the right
to terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the Fund in one calendar year. To obtain
further information concerning the exchange privilege and prospectuses of
other Legg Mason funds, or to make an exchange, please contact your Legg
Mason or affiliated investment executive. To effect an exchange by
telephone, please call your Legg Mason or affiliated investment executive.
To effect an exchange by telephone, please call your Legg Mason or
affiliated investment executive with the information described in the
section "How You Can Redeem Your Primary Shares," page 11. The other
factors relating to telephone redemptions described in that section apply
also to telephone exchanges. Please read the prospectus for the other
funds carefully before you invest by exchange. The 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.
INVESTING THROUGH TAX-DEFERRED RETIREMENT PLANS
An investment in shares of the Fund may be appropriate for IRA, Keogh
Plans, SEPs and other qualified retirement plans. Investors who are
considering establishing such a plan may wish to consult their attorneys
or tax advisers with respect to individual tax questions. Your Legg Mason
or affiliated investment executive can make available to you forms of
plans. The option of investing in these plans through regular payroll
deductions may be arranged with Legg Mason and your employer. Additional
information with respect to these plans is available upon request from any
Legg Mason or affiliated investment executive.
THE FUND'S MANAGEMENT AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Directors.
ADVISER
Pursuant to an advisory agreement with the Fund ("Advisory
Agreement"), which was approved by its Board of Directors, the Adviser, a
wholly owned subsidiary of Legg Mason, Inc., serves as the Fund's
investment adviser. The Adviser administers and acts as the portfolio
manager for the Fund and has responsibility for the actual investment
management of the Fund, including the responsibility for making decisions
and placing orders to buy, sell or hold a particular security. The Adviser
acts as investment adviser, manager or consultant to fifteen investment
company portfolios (excluding the Fund) which had aggregate assets under
management of approximately $4.3 billion as of April 30, 1995. The
Adviser's address is 111 South Calvert Street, Baltimore, Maryland 21202.
The Adviser receives for its services a management fee, calculated
daily and payable monthly, 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 is higher than fees paid by most other funds to their
investment advisers. During the fiscal year ended March 31, 1995, the
Fund's expenses as a percentage of average net assets were 1.93%.
William H. Miller, III has been primarily responsible for the
day-to-day management of the Fund 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.
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The Fund uses Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities consistent with the
policy of best execution.
THE FUND'S DISTRIBUTOR
Legg Mason is the distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Fund. The Underwriting Agreement obligates
Legg Mason to pay certain expenses in connection with the offering of
shares of the Fund, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1995, Legg Mason received from BFDS $178,389 for
performing such services in connection with this Fund.
The Board of Directors of the Fund has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). The Plan provides that as
compensation for its ongoing services to investors in Primary Shares and
its activities and expenses related to the sale and distribution of
Primary Shares, Legg Mason receives from the Fund an annual distribution
fee payable from the assets attributable to Primary Shares of up to 0.75%
of the average daily net assets attributable to Primary Shares and an
annual service fee equal to 0.25% of the average daily net assets
attributable to Primary Shares. The distribution fee and the service fee
are calculated daily and paid monthly. The fees received by Legg Mason
during any year may be more or less than its costs of providing
distribution and shareholder services for Primary Shares.
NASD rules limit the amount of annual distribution fees that may be
paid by mutual funds and impose a ceiling on the cumulative distribution
fees received. The Fund's Plan complies with those rules.
The Chairman, President and Treasurer of the Fund are employed by Legg
Mason.
DESCRIPTION OF THE FUND AND ITS SHARES
The Fund is a diversified open-end investment company incorporated in
Maryland on October 31, 1985. The Fund has authorized capital of 100
million shares of common stock, par value $0.001 per share. The Fund
currently offers two Classes of Shares -- Class A (known as "Primary
Shares") and Class Y (known as "Navigator Shares"). Each Class represents
interests in the same pool of assets of the Fund. A separate vote is taken
by a Class of Shares of the Fund if a matter affects just that Class of
Shares. Each Class of Shares may bear differing Class-specific expenses.
Salespersons and others entitled to receive compensation for selling or
servicing Fund shares may receive more with respect to one Class than
another.
The initial and subsequent investment minimums for Navigator Shares
are $50,000 and $100, respectively. Investments in Navigator Shares may be
made through investment executives of Fairfield Group, Inc., Horsham,
Pennsylvania, or Legg Mason. For information about Navigator Shares, call
800-822-5544.
The Fund pays no Rule 12b-1 fee with respect to Navigator Shares. 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. Navigator
Shares of the Fund may be exchanged for the corresponding class of shares
of certain other Legg Mason Funds. Investments by exchange into the other
Legg Mason Funds are made at the per share net asset value, determined on
the same business day as redemption of the Navigator Shares the investors
wish to redeem.
The Board of Directors of the Fund does 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 Board will consider
whether any such conflict exists and, if so, take appropriate action.
16
<PAGE>
Shareholders of the Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The 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.
17
<PAGE>
Prospectus
July 31, 1995
Navigator
Special
Investment
Trust
Putting Your Future First
Legg Mason Funds
<PAGE>
Table of Contents
Fund Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objective and Policies 6
How to Purchase and Redeem Shares 10
How Shareholder Accounts are Maintained 11
How Net Asset Value is Determined 12
Dividends and Other Distributions 12
Tax Treatment of Dividends and Other Distributions 13
Shareholder Services 13
The Fund's Management and Investment Adviser 15
The Fund's Distributor 15
Description of the Fund and Its Shares 16
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
No person has been authorized to give any information or to
make any representations not contained in this Prospectus or
the Statement of Additional Information in connection with
the offering made by the Prospectus and, if given or made,
such information or representations must not be relied upon
as having been authorized by the Fund or its distributor. The
Prospectus does not constitute an offering by the Fund or by
the principal underwriter in any jurisdiction in which such
offering may not lawfully be made.
<PAGE>
Navigator Special Investment Trust
Prospectus
Shares of Navigator Special Investment Trust ("Navigator Shares")
represent a separate class ("Navigator Class") of interests in Legg Mason
Special Investment Trust, Inc. ("Fund"), a diversified open-end management
investment company seeking capital appreciation. The Fund invests
principally in equity securities of companies with market capitalizations
of less than $2.5 billion which, in the opinion of the Fund's investment
adviser, Legg Mason Fund Adviser, Inc. ("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. The Fund also invests in the securities of companies
with larger capitalizations which have one or more of these
characteristics.
The Navigator Class of Shares, described in this Prospectus, is
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 the Trust Company exercises
discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and
accounts of such Clients are referred to collectively as "Customer
Accounts"), to qualified retirement plans managed on a discretionary basis
and having net assets of at least $200 million, and to The Legg Mason
Profit Sharing Plan and Trust. Navigator Shares may not be purchased by
individuals directly, but Institutional Clients may purchase shares for
Customer Accounts maintained for individuals.
Navigator Shares are sold and redeemed without any purchase or
redemption charge imposed by the Fund, 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." The Fund will pay management fees to Legg Mason Fund Adviser,
Inc., but Navigator Class pays no distribution fees.
Mutual fund shares are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution.
Shares are not insured by the FDIC, the Federal Reserve Board, or any
other agency, and are subject to investment risk, including the possible
loss of the principal amount invested.
This Prospectus sets forth concisely the information about the
Fund 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 Fund 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 reference. The Statement of
<PAGE>
Additional Information is available without charge upon request from Legg
Mason (address and telephone numbers listed below).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: July 31, 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000
800-822-5544
2
<PAGE>
Fund Expenses
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares will bear directly or indirectly. The expenses and fees set forth
in the table are based on actual expenses for the initial period of
operations of the Navigator Class.
Shareholder Transaction Expenses
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)
Management fees 0.79%
12b-1 fees None
Other expenses 0.11%
Total operating expenses 0.90%
For further information concerning Fund expenses, please see "The
Fund's Management and Investment Adviser" and "The Fund's Distributor,"
page 15.
Example of Effect of Fund Expenses
The following example illustrates the expenses that you would pay
on a $1,000 investment in Navigator Shares over various time periods
assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period. As noted in the table above, the Fund charges no
redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
$9 $29 $50 $111
This example assumes that all dividends and other distributions
are reinvested and that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same over the time periods shown. The
above tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of Navigator Shares. The above tables
and example should not be considered a representation 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 Navigator Shares incur variable
3
<PAGE>
expenses, such as transfer agency costs, and whether the Adviser
reimburses all or a portion of the Fund's expenses.
4
<PAGE>
Financial Highlights
Effective December 1, 1994, the Fund commenced the sale of
Navigator Shares. Navigator Shares pay no 12b-1 distribution fees. Except
as indicated, the information below is for Primary Shares and reflects
12b-1 fees paid by that class and not by Navigator Shares.
The financial highlights for the period December 30, 1985
(commencement of operations) to March 31, 1986, and the years ended March
31, 1987 through 1995 have been derived from financial statements which
have been audited by Coopers & Lybrand L.L.P., independent accountants.
The Fund's financial statements for the year ended March 31, 1995 and the
report of Coopers & Lybrand L.L.P. thereon are included in the Fund's
annual report and are incorporated by reference into the Statement of
Additional Information. The annual report is available to shareholders
without charge by calling an investment executive at Fairfield or Legg
Mason or Legg Mason's Funds Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
NAVIGATOR PRIMARY SHARES
SHARES
For the Years Ended March 31,
___________________________________________________________________________________
1995(2) 1995 1994 1993 1992 1991 1990
<S> <C> <C> <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 $13.58 $11.84
Net investment income .07 (.06) (.11) .03 .12 .18 .12
Net realized and
unrealized gain (loss) on .85 (1.31) 3.93 1.66 2.83 2.42 1.70
investments
Total from investment
operations .92 (1.37) 3.82 1.69 2.95 2.60 1.82
Distributions to
shareholders from:
Net investment income -- -- (.03) -- (.14) (.27) (.08)
Net realized gain on
investments -- (.23) (.14) (.78) (.40) (1.32) --
Net asset value, end of
period $20.03 $19.96 $21.56 $17.91 $17.00 $14.59 $13.58
5
<PAGE>
Total return
4.81%(5) (6.37%) 21.35% 10.50% 20.46% 21.46% 15.37%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.90%(6) 1.93%(7) 1.94%(7) 2.00%(7) 2.10%(7) 2.30%(7) 2.30%(7)
Net investment income 1.0%(6) (0.2)% (0.6)% 0.2% 0.8% 1.4% 1.0%
(loss)
Portfolio turnover rate 27.5% 27.5% 16.7% 32.5% 56.9% 75.6% 115.9%
Net assets, end of period
(in thousands) $26,123 $612,093 $565,486 $322,572 $201,772 $106,770 $68,240
6
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
PRIMARY SHARES
For the Years Ended March 31,
_________________________________________________________
1989 1988 1987 1986(1)
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of $10.14 $12.80 $11.53 $10.00
period
Net investment income .06(3) .13(3) --(3) .04(3)
Net realized and
unrealized gain (loss) 1.65 (1.825) 1.51 1.49
on investments
Total from investment
operations 1.71 (1.695) 1.51 1.53
Distributions to
shareholders from:
Net investment (.01) (.075) (.02) --
income
Net realized
gain on -- (.89) (.22) --
investments
Net asset value, end of
period $11.84 $10.14 $12.80 $11.53
Total return 16.99% (14.18)% 13.39% 15.3%(4)
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 2.50%(7) 2.50%(7) 2.50%(7) 2.50%(6)(7)
Net investment 0.7% 1.0% -- 1.2%(6)
income
Portfolio turnover rate 122.4% 158.9% 77.0% 41.0%(6)
Net assets, end of
period $44,450 $43,611 $55,822 $34,337
(in thousands)
7
<PAGE>
</TABLE>
(1) For the period December 30, 1985 (commencement of operations) to
March 31, 1986.
(2) For the period December 1, 1994 (commencement of Navigator Shares) to
March 31, 1995.
(3) Excludes investment advisory fees and other expenses in excess of a
1.2% Adviser-imposed expense limitation.
(4) Not annualized. The annualized total return for the period would
have been 60.70%.
(5) Not annualized. The annualized total return for the period would
have been 14.52%.
(6) Annualized.
(7) Includes distribution fee of 1.0%.
8
<PAGE>
Performance Information
From time to time the Fund 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, including changes in share price and assuming
reinvestment of dividends and other distributions, of an investment in the
fund. 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.
Performance information is based on historical results and is not
intended to indicate future performance. The investment return and
principal value of an investment in the fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Average annual returns, which differ from actual
year-to-year results, tend to smooth out variations in a fund's returns.
Total returns as of March 31, 1995 were as follows:
Cumulative Average Annual
Total Return Total Return
Navigator Shares:
Life of Class(1) +4.81% --%
Primary Shares:
One Year -6.37 -6.37
Five Years +83.68 +12.93
Life of Fund(2) +178.15 +11.69
(1) Class inception - December 1, 1994.
(2) Fund's inception - December 30, 1985.
No adjustment has been made for any income taxes payable by
shareholders. Total returns would have been lower if the Adviser and/or
Distributor had not waived certain fees in the years 1986 through 1995.
Because Navigator Shares have lower total expenses, they will generally
have a higher return than Primary Shares.
Further information about the Fund's performance is contained in
the Annual Report to Shareholders, which may be obtained without charge by
calling an investment executive at Fairfield or Legg Mason or Legg Mason's
Funds Marketing Department at 800-822-5544.
9
<PAGE>
Investment Objective and Policies
The Fund's investment objective is capital appreciation. This
objective may not be changed without shareholder approval; however, except
as otherwise noted, the investment policies of the Fund described below
may be changed by the Fund's Board of Directors without a shareholder
vote. There can be no assurance that the Fund's investment objective will
be achieved. 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 Fund's Adviser believes have one or
more of the following characteristics:
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the
company's business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company
operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger
activities.
3. Equity securities of companies involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code.
No more than 20% of the Fund's total assets may be invested in such
securities.
The Fund also invests in debt securities of companies having one
or more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of possible loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
10
<PAGE>
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the
Fund may not be widely traded, and that the Fund's position in such
securities may be substantial in relation to the market for such
securities. Accordingly, it may be difficult for the Fund to dispose of
such securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities
of companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active
monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
assets may be invested in debt securities rated below BBB by Standard &
Poor's Ratings Group ("S&P"), or below Baa by Moody's Investors Service,
Inc. ("Moody's"), and unrated securities deemed by the Adviser to be of
comparable quality. Moody's considers debt securities rated Baa to have
speculative characteristics; changes in economic conditions or other
circumstances are likely to lead to a weakened capacity for the issuers of
such securities to make principal and interest payments, than is the case
for higher-grade debt securities. The Adviser currently anticipates that
no debt securities rated below B, or if unrated, of comparable quality,
will be purchased and that purchases of securities rated BB or Ba or below
will not exceed 5% of the Fund's total assets. Debt securities rated below
BBB or Baa or unrated securities of comparable quality are regarded as
high yield/high risk securities and are considered predominantly
speculative.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. It
should be emphasized that such ratings are relative and subjective, and
11
<PAGE>
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.
The 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 the Fund will invest no more than 25% of its total
assets in foreign securities.
The Fund 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, and thus may be subject to exchange
controls and variations in the exchange rate.
When cash is temporarily available, or for temporary defensive
purposes, the Fund may invest without limit in repurchase agreements. A
repurchase agreement is an agreement under which either U.S. government
obligations or other 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 the Fund by State Street Bank and Trust
Company ("State Street"), the Fund's 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. The 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 Fund
will enter into repurchase agreements only with financial institutions
determined by the Adviser to present minimal risk of default during the
12
<PAGE>
term of the agreement based on guidelines established by the Fund's Board
of Directors. The Fund will not enter into repurchase agreements of more
than seven days' duration if more than 10% of its net assets would be
invested in such agreements and other illiquid investments. 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.
The Fund may engage in securities lending. However, the Fund does
not currently intend to loan securities with a value exceeding 5% of its
total assets. For further information concerning securities lending, see
the Statement of Additional Information.
Futures and Options Transactions
The Fund may engage in futures strategies to attempt to reduce
the overall investment risk that would normally be expected to be
associated with ownership of the securities in which it invests. For
example, the 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 the Fund's
portfolio correlates with a given stock index, the sale of futures
contracts on that index could reduce the risks associated with a market
decline and thus provide an alternative to the liquidation of securities
positions. The 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 the 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.
The Fund may purchase a call option on an interest rate futures
contract to hedge against a market advance in debt securities that the
Fund plans to acquire at a future date. The purchase of such an option is
analogous to the purchase of a call option on an individual debt security
that can be used as a temporary substitute for a position in the security
itself. The Fund 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 Fund. The Fund may
purchase and write options in combination with each other to adjust the
risk and return of the overall position. For example, the Fund 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 Fund 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
13
<PAGE>
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 the premium
and transaction costs), the 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 Fund may write put options as an alternative to purchasing
actual securities. If stock prices rise, the 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, the 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, the 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, the Fund would seek to
mitigate the effects of a price decline. At the same time, the Fund would
give up some ability to participate in security price increases when
writing call options.
The purchase and sale of options and futures contracts involve
risks different from those involved with direct investments in securities,
and also require different skills from the Adviser in managing the Fund's
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Fund, if the Adviser is not
successful in employing such instruments in managing the 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. It is also
possible that the 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 the 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 the Fund may
be unable to close out or liquidate its hedged position. In addition, the
Fund will pay commissions and other costs in connection with such
investments, which may increase the 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. The Fund's current policy is to limit options and
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<PAGE>
futures transactions to those described above. The Fund may purchase and
write both over-the-counter and exchange-traded options.
The 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. The 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 Fund 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, the Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. The Fund may enter into these contracts for the
purpose of hedging against risk arising from the Fund's investment in
securities denominated in foreign currencies or when the Fund anticipates
investing in such securities. Forward currency contracts involve certain
risks, including the risk that anticipated currency movements will not be
accurately predicted causing the Fund to sustain losses on these
contracts.
Investment Limitations
The 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.
How to Purchase and Redeem Shares
Institutional Clients of Fairfield Group, Inc. 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 Wood Walker, Inc. ("Legg Mason").
(Legg Mason and Fairfield are wholly owned subsidiaries of Legg Mason,
Inc., a financial services holding company.)
Purchase of Shares
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The minimum investment is $50,000 for the initial purchase of
Navigator Shares and $100 for each subsequent investment. The Fund
reserves the right to change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in Accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange, Inc. ("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 13. The Fund reserves the right to reject any order
for shares of the Fund, to suspend the offering of shares for a period of
time, or to waive any minimum investment requirements.
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 the Fund 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 Fund. 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.
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<PAGE>
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 Fund, for redemption at the net asset value per share determined as of
the close of the Exchange on that day. Requests for redemption received by
Legg Mason or Fairfield after the close of the Exchange will be executed
at the net asset value determined as of the close of the Exchange on its
next trading day. A redemption request received by Legg Mason or Fairfield
may be treated as a request for repurchase and, if it is accepted by Legg
Mason, your shares will be purchased at the net asset value per share
determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by
a direct wire to a domestic commercial bank account previously designated
by the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the Fund. Such payments will
normally be transmitted on the next business day following receipt of a
valid request for redemption. However, the Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the Adviser, the Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) 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.
The Fund will not be responsible for the authenticity of
redemption instructions received by telephone, provided it follows
reasonable procedures to identify the caller. The Fund may request
identifying information from callers or employ identification numbers. The
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, the 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 Fund will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value
per share. If the 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.
17
<PAGE>
How Shareholder Accounts are Maintained
A shareholder account is established automatically for each
investor. Any shares the investor purchases or receives as a dividend or
other distribution will be credited directly to the account at the time of
purchase or receipt. No certificates are issued unless the shareholder
specifically requests them in writing. Shareholders who elect to receive
certificates can redeem their shares only by mail. Certificates will be
issued in full shares only. No certificates will be issued for shares
prior to 15 business days after purchase of such shares by check unless
the Fund can be reasonably assured during that period that payment for the
purchase of such shares has been collected. Fund shares may not be held
in, or transferred to, an account with any brokerage firm other than
Fairfield, Legg Mason or their affiliates.
Every shareholder of record will receive a confirmation of each
new share transaction with the Fund, which will also show the total number
of shares being held in safekeeping by the Fund's transfer agent for the
account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a
fiduciary, advisory, custodial, or other similar capacity on behalf of
persons maintaining Customer Accounts at Institutional Clients will
normally be held of record by the Institutional Clients. Therefore, in
the context of Institutional Clients, references in this Prospectus to
shareholders mean the Institutional Clients rather than their customers.
Institutional Clients purchasing or holding Navigator Shares on behalf of
their customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to the Fund on a timely
basis.
How Net Asset Value is Determined
Net asset value per share 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 the 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 the Fund's Board of Directors.
Dividends and Other Distributions
The Fund declares and pays dividends to holders of Navigator
Shares out of its investment company taxable income attributable to those
shares, which generally consists of net investment income and net
short-term capital gain and any net gains from certain foreign currency
transactions, following the end of each taxable year. The Fund also
distributes to shareholders substantially all 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
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<PAGE>
distribution of net capital gain may be necessary in some years to avoid
imposition of the excise tax described under the heading "Additional Tax
Information" in the Statement of Additional Information. Shareholders may
elect to:
1. Receive both dividends and other distributions in Navigator
Shares of the Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the Fund;
3. Receive dividends in Navigator Shares of the 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. Please contact an
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 the
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 in writing Navigator Special Investment
Trust, c/o Fairfield Group, Inc., 200 Gibraltar Road, Horsham,
Pennsylvania 19044. Those purchasing through Legg Mason should write to
Navigator Special Investment Trust, 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
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended, 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 the Fund's investment company taxable income (whether
paid in cash or reinvested in Fund shares) are taxable to its shareholders
(other than tax-exempt investors) as ordinary income to the extent of the
Fund's earnings and profits. Distributions of the Fund's net capital gain
(whether paid in cash or reinvested in Fund shares), when designated as
19
<PAGE>
such, are taxable to those shareholders as long-term capital gain,
regardless of how long they have held their Fund shares.
The Fund sends each shareholder a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. The Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to certain noncorporate shareholders who
do not provide the Fund with a certified taxpayer identification number.
The Fund also is required to withhold 31% of all dividends and capital
gain distributions payable to such shareholders who otherwise are subject
to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of any other Navigator fund
generally will have similar tax consequences. See "Shareholder Services -
Exchange Privilege," page 14. If Fund shares are purchased within 30 days
before or after redeeming 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 the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Fund, depending on the laws of your home
state and locality. 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 the distributor a confirmation after
each transaction (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
shareholders at least semiannually showing the Fund's portfolio and other
information; the annual report will contain financial statements audited
by the Fund's independent accountants.
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<PAGE>
Confirmations for purchases and redemptions of Navigator Shares made
by Institutional Clients acting in a fiduciary, advisory, custodial, or
other similar capacity on behalf of persons maintaining Customer Accounts
at Institutional Clients will be sent to the Institutional Client.
Beneficial ownership of shares by Customer Accounts will be recorded by
the Institutional Client and reflected in the regular account statements
provided by them to their customers.
Shareholder inquiries should be addressed to "Navigator Special
Investment Trust, 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 U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
21
<PAGE>
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 11. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
The 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 Fund's Management and Investment Adviser
Board of Directors
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Directors.
Adviser
Pursuant to an advisory agreement with the Fund ("Advisory
Agreement"), which was approved by its Board of Directors, the Adviser, a
wholly owned subsidiary of Legg Mason, Inc., serves as the Fund's
investment adviser. The Adviser administers and acts as the portfolio
manager for the Fund and has responsibility for the actual investment
management of the Fund, 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 fifteen investment company
portfolios (excluding the Fund) which had aggregate assets under
management of approximately $4.3 billion as of April 30, 1995. The
Adviser's address is 111 South Calvert Street, Baltimore, Maryland 21202.
The Adviser receives for its services a management fee, calculated
daily and payable monthly, 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 is higher than fees paid by most other funds to their
investment advisers. During the fiscal year ended March 31, 1995, the
expenses of Navigator Shares as a percentage of average net assets were
0.90%.
William H. Miller, III has been primarily responsible for the
day-to-day management of the Fund since its inception in 1985. Mr. Miller
22
<PAGE>
is a portfolio manager and President of the Adviser. Mr. Miller has been
employed by the Adviser since 1982.
The Fund uses 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 Fund's Distributor
Legg Mason is the distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Fund. The Underwriting Agreement obligates
Legg Mason to pay certain expenses in connection with the offering of
shares of the Fund, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1995, Legg Mason received from BFDS $178,389 for
performing such services in connection with the Fund.
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 Fund's
Distributor, Legg Mason. Neither Fairfield nor Legg Mason receives
compensation from the Fund for selling Navigator Shares.
The Chairman, President and Treasurer of the Fund are employed by
Legg Mason.
Description of the Fund and Its Shares
The Fund is a diversified open-end investment company incorporated in
Maryland on October 31, 1985. The Fund has authorized capital of 100
million shares of common stock, par value $0.001 per share. The Fund
currently offers two Classes of Shares -- Class Y (known as "Navigator
Shares") and Class A (known as "Primary Shares"). Each Class represents
interests in the same pool of assets of the Fund. A separate vote is
taken by a Class of Shares of the Fund if a matter affects just that Class
of Shares. Each Class of Shares may bear 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
23
<PAGE>
through a Legg Mason or affiliated investment executive, through the
Future First Systematic Investment Plan or through automatic investment
arrangements. For information about Primary Shares, call 800-822-5544.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 1.0% of the net assets attributable to Primary
Shares. 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 Fund may be exchanged for the
corresponding Class of Shares of other Legg Mason Funds. Investments by
exchange into the Legg Mason Funds sold with an initial sales charge are
made at the per share net asset value, plus the sales charge, determined
on the same business day as redemption of the Fund shares the investors in
Primary Shares wish to redeem.
The Board of Directors of the Fund does 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 Board will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the 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). The 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.
24
<PAGE>
THE LEGG MASON SPECIAL INVESTMENT TRUST, INC.
PRIMARY SHARES
NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
Legg Mason Special Investment Trust, Inc. ("Fund") is a mutual fund
seeking capital appreciation. The Fund invests principally in equity
securities of companies with market capitalizations of less than $2.5
billion which, in the opinion of the Fund's investment adviser, Legg Mason
Fund Adviser, Inc. ("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.
The Fund may also invest in the securities of companies with larger
capitalizations which have one or more of these characteristics.
Shares of Navigator Special Investment Trust ("Navigator Shares")
represent interests in the Fund 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 such Clients 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 Legg Mason Special Investment Trust
("Primary Shares") is offered for sale to all other investors and may be
purchased directly by individuals.
Navigator and Primary Shares are sold and redeemed without any
purchase or redemption charge imposed by the Fund, although Institutions
may charge their Customer Accounts for services provided in connection
with the purchase or redemption of Navigator Shares. The Fund pays
management fees to Legg Mason Fund Adviser, Inc. Primary Shares pay a
12b-1 distribution fee, but Navigator Shares pay no distribution fees.
See "The Fund's Distributor."
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.
<PAGE>
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 Fund at (410) 539-
0000.
Dated: July 31, 1995
LEGG MASON WOOD WALKER,
Incorporated
--------------------------------------------------------------------
111 South Calvert Street
P.O. Box 1476Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
Table of Contents
Page
----
Additional Information About
Investment Limitations and Policies 2
Additional Tax Information 14
Additional Purchase and Redemption
Information 18
Valuation of Fund Shares 20
Performance Information 20
Tax-Deferred Retirement Plans 24
The Fund's Directors and Officers 26
The Fund's Investment Adviser 31
Portfolio Transactions and Brokerage 32
The Fund's Distributor 34
The Fund's Custodian and Transfer and
Dividend-Disbursing Agent 36
The Fund's Legal Counsel 36
The Fund's Independent Accountants 37
Financial Statements 37
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 offering made by the
Prospectuses 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 Prospectuses and the Statement of Additional Information
do not constitute an offering by the Fund or by the distributor in any
jurisdiction in which such offering 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>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective described in the
Prospectuses, the Fund has adopted certain fundamental investment
limitations that cannot be changed except by vote of the holders of a
majority of the Fund's outstanding voting securities. The Fund may not:
1. Borrow money, except from banks or through reverse
repurchase agreements for temporary purposes, in an aggregate amount not
to exceed 10% of the value of the total assets of the 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, the
Fund will not purchase securities if borrowings, including reverse
purchase agreements, exceed 5% of its total assets);
2. 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, 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
the 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 the Fund from purchasing or selling
options and futures contracts;
6. Underwrite 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;
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 the 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, the Fund will not purchase or sell interests in real estate limited
partnerships); or
9. Make short sales of securities or maintain a short
position, except that the Fund may (a) make short sales and maintain short
<PAGE>
positions in connection with its use of options, futures contracts and
options on futures contracts and (b) sell short "against the box."
If a percentage restriction described above is complied with at
the time an investment is made, a later increase or decrease in percentage
resulting from a change in value of portfolio securities or in the amount
of net assets of the Fund will not be considered a violation of any of the
restrictions.
As non-fundamental policies, changeable without shareholder vote,
the Fund: (i) will 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 the Fund's total assets (taken at market
value) would be invested in such securities.
Unless otherwise stated, the investment policies and limitations
contained in this Statement of Additional Information are not fundamental,
and can be changed without shareholder approval.
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 issues. 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 the Fund are uninvested
and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of
a portfolio security due to settlement problems could result in losses to
the Fund due to subsequent declines in value of the portfolio security or,
if the Fund has entered into a contract to sell the security, could result
in liability to the purchaser.
Since the Fund may invest in securities denominated in currencies
other than the U.S. dollar and since the Fund may hold foreign currencies,
the 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 the Fund's Shares, and also may affect the value of dividends and
interest earned by the Fund and gains and losses realized by the Fund.
3
<PAGE>
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, the 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 the Fund's investment policies and limitations, ADRs are
considered to have the same classification as the securities underlying
them.
Illiquid Securities
-------------------
The Fund may invest up to 10% of its net assets in illiquid
securities. For this purpose, "illiquid securities" are those that cannot
be disposed of within seven days for approximately the price at which the
Fund values the security. Illiquid securities include restricted
securities other than those the Adviser has determined are liquid pursuant
to guidelines established by the Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the
Securities Act of 1933, or pursuant to an exemption from registration.
The 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, acting pursuant to
guidelines established by the Board of Directors, may determine that
certain restricted securities qualified for trading on this newly
developing market are liquid. If the market does not develop as
anticipated, restricted securities in the Fund's portfolio may adversely
affect the Fund's liquidity.
Risks of Lower Rated Debt Securities
------------------------------------
Debt securities rated B by Moody's Investors Service, Inc.
("Moody's") are deemed by Moody's to generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small. Standard & Poor's Ratings Group ("S&P") states that debt
4
<PAGE>
rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
Lower rated debt securities are especially affected by adverse
changes in the industries in which the issuers are engaged and by changes
in the financial condition of the issuers. Highly leveraged issuers may
also experience financial stress during periods of rising interest rates.
The market for lower rated debt securities expanded rapidly in
the 1980's, which growth paralleled a long economic expansion. In the late
1980's, the prices of many lower rated debt securities declined,
indicating that many issuers of such securities might experience financial
difficulties. The yields on lower rated debt securities rose
dramatically, reflecting the risk that holders of such securities could
lose a substantial portion of their value as a result of the issuers'
financial restructuring or default. There can be no assurance that such
declines will not recur.
The market for lower rated debt securities generally is thinner
and less active than that for higher quality securities, which may limit
the Fund's ability to sell such securities at fair value. Judgment plays
a greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower rated securities, especially in a thinly traded
market.
If an investment grade security purchased by the Fund is
subsequently given a rating below investment grade, the Adviser will
consider that fact in determining whether to retain that security in the
Fund's portfolio.
Futures Contracts
-----------------
The Fund may from time to time purchase or sell futures
contracts. In the purchase of a futures contract, the purchaser agrees to
buy a specified underlying instrument at a specified future date. In the
sale of a futures contract, the seller agrees to sell the underlying
instrument at a specified future date. The price at which the purchase or
sale will take place is fixed at the time the contract is entered into.
Some currently available contracts are based on specific securities, such
as U.S. Treasury bonds or notes, and some are based on indexes of
securities such as Standard & Poor's Composite Index of 500 Stocks ("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.
5
<PAGE>
As the purchaser or seller of a futures contract, the 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 the Fund when the futures position is
terminated, after all contractual obligations have been satisfied.
Initial margin may be maintained either in cash or in liquid high-quality
debt securities, such as U.S. government securities.
The value of a futures contract tends to increase and decrease
with the value of the underlying instrument. The purchase of a futures
contract will tend to increase exposure to positive and negative price
fluctuations in the underlying instrument in the same manner as if the
underlying instrument had been purchased directly. By contrast, the sale
of a futures contract will tend to offset both positive and negative
market price changes.
As the contract's value fluctuates, payments known as variation
margin or maintenance margin are made to or received from the FCM. If the
contract's value moves against the Fund, (i.e., the Fund's futures
position declines in value), the Fund may be required to make payments to
the FCM, and, conversely, the Fund may be entitled to receive payments
from the FCM if the value of its futures position increases. This process
is known as "marking-to-market" and takes place on a daily basis.
Variation margin does not involve borrowing to finance the futures
transactions, but rather represents a daily settlement of the Fund's
obligations to or from a clearing organization.
Options on Securities, Indexed Securities and Futures Contracts
---------------------------------------------------------------
PURCHASING PUT OR CALL OPTIONS By purchasing a put (or call)
option, the 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).
The 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,
the Fund takes the opposite side of the transaction from the option's
6
<PAGE>
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, the Fund will be required to make margin
payments to an FCM as described above for futures contracts.
Before exercise, the Fund may seek to terminate its position in
an option it has written by closing out the option in the secondary market
at its current price. If the secondary market is not liquid for an option
the Fund has written, however, the Fund must continue to be prepared to
pay the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.
Over-the-counter and Exchange-traded Options
--------------------------------------------
The 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 the Fund and its contra-party with no clearing
organization guarantee. Thus, when the 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.
The Fund may invest up to 10% of its assets in illiquid
securities. The term "illiquid securities" includes purchased OTC
options. Assets used as cover for OTC options written by the Fund also
will be deemed illiquid securities, unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC options
it writes for a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
Cover for Options and Futures Strategies
----------------------------------------
The Fund will not use leverage in its hedging strategies
involving options and futures contracts. The Fund will hold securities,
options or futures positions whose values are expected to offset ("cover")
its obligations under the transactions. The 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
7
<PAGE>
value sufficient at all times to cover its potential obligations. 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.
Securities, options or futures contracts used for cover and securities
held in a segregated account cannot be sold or closed out while the
strategy is outstanding, unless they are replaced with similar assets. As
a result, there is a possibility that the use of cover or segregation
involving a large percentage of the 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, the 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 the 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
8
<PAGE>
substantial in the event of adverse price movements. In addition, the
Fund's activities in the futures markets may result in a higher portfolio
turnover rate and additional transaction costs in the form of added
brokerage commissions. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price
of a futures contract or related option is permitted to change in a single
day. If the price of a contract moves to the limit for several
consecutive days, the Fund may be unable during that time to close its
position in that contract and may have to continue making payments of
variation margin. The 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 the 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 the 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 the 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 the Fund will enter into OTC options
with dealers capable of entering into closing transactions with the Fund,
there can be no assurance that the 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, the Fund may be unable to liquidate or
exercise an OTC option, and the Fund 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
the Fund would have to exercise those options which it has purchased in
order to realize any profit. 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 or index,
the 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 the Fund's ability to sell a portfolio security or
9
<PAGE>
make an investment at a time when such a sale or investment might be
advantageous.
Options on indexes are settled exclusively in cash. If the Fund
writes a call option on an index, the Fund will not know in advance the
difference, if any, between the closing value of the index on the exercise
date and the exercise price of the call option itself, and thus will not
know the amount of cash payable upon settlement. In addition, a holder of
an index option who exercises it before the closing index value for that
day is available runs the risk that the level of the underlying index may
subsequently change.
The 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, the 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 the 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
the Fund's net assets.
Also as a non-fundamental policy, the 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 at any time do
not exceed 20% of the 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
the 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 the Fund on all such non-hedging options held
on futures contracts, does not exceed 5% of the market value of the Fund's
total assets.
The foregoing limitations, as well as those set forth in the
Fund's prospectus regarding the Fund's investment in futures and related
10
<PAGE>
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 the Fund's investments in futures
contracts and options may be changed as regulatory agencies permit.
However, the 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 the
Fund's investment allocations, depending on the individual characteristics
of the securities. The 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 the Fund.
Forward Currency Contracts
--------------------------
The Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. The Fund will not
speculate with forward currency contracts or foreign currencies.
The Fund may enter into forward currency contracts with respect
to specific transactions. For example, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when the 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
11
<PAGE>
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. The Fund will thereby be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such payments are made or
received.
The 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 the Fund's securities
denominated in such foreign currency. This investment practice generally
is referred to as "cross-hedging" when another foreign currency is used.
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 the 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 and if a
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 the Fund is
obligated to deliver. 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 the Fund to sustain losses on these
contracts and transaction costs. The Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an
amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency or (2) the Fund
maintains cash, U.S. government securities or other liquid, high-grade
debt securities in a segregated account in an amount not less than the
value of the Fund's total assets committed to the consummation of the
contract.
At or before the maturity date of a forward currency contract
requiring the 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
12
<PAGE>
Fund will obtain, on the same maturity date, the same amount of the
currency that it is obligated to deliver. Similarly, the 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.
The 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 cost to the 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. The 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 the 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 the 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. The 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 the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Portfolio Lending
-----------------
The Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, is continuously maintained by the borrower with the Fund. During
the time portfolio securities are on loan, the borrower will pay the Fund
an amount equivalent to any dividends or interest paid on such securities,
and the Fund may invest the cash collateral and earn income, or it may
receive an agreed upon amount of interest income from the borrower who has
delivered equivalent collateral. These loans are subject to termination
at the option of the Fund or the borrower. The 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. The Fund does not have the
right to vote securities on loan, but would terminate the loan and regain
13
<PAGE>
the right to vote if that were considered important with respect to the
investment. The Fund presently does not intend to lend more than 5% of
its portfolio securities at any given time.
Warrants
--------
Although not a fundamental policy subject to shareholder vote, so
long as the Fund's Shares continue to be registered in certain states, the
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.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the 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
-------
The Fund intends to continue to qualify for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code of
1986, as amended ("Code"). In order to continue to qualify for that
treatment, the 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. These requirements include the
following: (1) at least 90% of the Fund's gross income each taxable year
must be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from
options, futures or forward currency contracts) derived with respect to
its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any
of the following, that were held for less than three months -- options or
futures contracts, or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed
5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (4) at
the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in the securities (other
14
<PAGE>
than U.S. government securities or the securities of other RICs) of any
one issuer.
The 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 the Fund may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on the Fund's 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 the 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 dividends and other
distributions will be taxed to shareholders for the year in which that
December 31 falls.
A portion of the dividends from the 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 may not exceed the aggregate dividends received by
the 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 the
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
------------------------------------
The 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,
15
<PAGE>
the 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.
If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings
and net capital gain, which most likely would have to be distributed to
satisfy the Distribution Requirement and to avoid imposition of the Excise
Tax, even if those earnings and gain are not received by the Fund. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
The "Tax Simplification and Technical Corrections Bill of 1993,"
passed in May 1994 by the House of Representatives, would substantially
modify the taxation of U.S. shareholders of foreign corporations,
including eliminating the provisions described above dealing with PFICs
and replacing them (and other provisions) with a regulatory scheme
involving entities called "passive foreign corporations." Three similar
bills were passed by Congress in 1991 and 1992 and were vetoed. It is
unclear at this time whether, and in what form, the proposed modifications
may be enacted into law.
Pursuant to proposed regulations, open-end RICs, such as the
Fund, 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 the Fund realizes in connection therewith.
Income from foreign currencies (except certain gains therefrom
that may be excluded by future regulations), and income from transactions
in options, futures and forward currency contracts derived by the Fund
with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income
16
<PAGE>
Requirement. However, income from the disposition of options and futures
contracts (other than those on foreign currencies) will be subject to the
Short-Short Limitation if they are held for less than three months.
Income from the disposition of foreign currencies, and options, futures
and forward contracts thereon, that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect thereto) also will be subject to the Short-Short Limitation if
they are held for less than three months.
If the 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, the 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 the 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. The 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 the Fund's shareholders).
When a covered call option written (sold) by the Fund expires,
the Fund realizes a short-term capital gain equal to the amount of the
premium it received for writing the option. When the 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 the 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.
17
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The 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"), the 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 the Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is
drawn on, the investor may be subject to extra charges in order to cover
collection costs. These charges may be deducted from the investor's
shareholder account.
Systematic Withdrawal Plan
--------------------------
If you own Primary Shares with a net asset value of $5,000 or
more, you may also elect to make systematic withdrawals from your Fund
18
<PAGE>
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, Inc. ("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. The 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 a capital gain distribution. These payments are taxable
to the extent that the total amount of the payments exceeds the tax basis
of the shares sold. If the periodic withdrawals exceed reinvested
dividends and distributions, the amount of your original investment may be
correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund
if you maintain a Systematic Withdrawal Plan because you may incur tax
liabilities in connection with such purchases and withdrawals. The Fund
will not knowingly accept purchase orders from you for additional shares
if you maintain a Systematic Withdrawal Plan unless your purchase is equal
to at least one year's scheduled withdrawals. In addition, if you
maintain a Systematic Withdrawal Plan you may not make periodic
investments under the Future First Systematic Investment Plan.
Other Information Regarding Redemption
--------------------------------------
The date of payment for redemption may not be postponed for more
than seven days, and the right of redemption may not be suspended, 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 the 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.
19
<PAGE>
The Fund reserves the right, under certain conditions, to honor
any request or combination of requests for redemption from the same
shareholder in any 90-day period, totalling $250,000 or 1% of the net
assets of the Fund, whichever is less, by making payment in whole or in
part by securities valued in the same way as they would be valued for
purposes of computing the Fund's net asset value per share. If payment is
made in securities, a shareholder should expect to incur brokerage
expenses in converting those securities into cash and will be subject to
fluctuation in the market price of those securities until they are sold.
The 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 Prospectus,
securities for which market quotations are readily available are valued at
current market value. Securities traded on an exchange or NASD National
Market System securities are normally valued at last sale prices. Other
over-the-counter securities, and securities traded on exchanges for which
there is no sale on a particular day (including debt securities), are
valued at the mean of latest closing bid and asked prices. Short-term
securities, except commercial paper, are valued at cost. Commercial paper
is valued at amortized cost. Securities and other assets quoted in
foreign currencies will be valued in U.S. dollars based on the currency
exchange rates prevailing at the time of the valuation. All other
securities are valued at fair value as determined by or under the
direction of the 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 the 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 the Fund at
commencement of operations of each class of Fund shares. The tables
assume that all dividends and other distributions are reinvested in the
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 Fund, 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.
20
<PAGE>
<TABLE>
<CAPTION>
Primary Shares
--------------
<S> <C> <C> <C>
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Fiscal Capital Gain Reinvestment of
Year Distributions Income Dividends Total Value
1986* $11,530 - $11,530
1987 13,051 $ 23 13,074
1988 11,107 113 11,220
1989 12,982 144 13,126
1990 14,890 253 15,143
1991 17,777 615 18,392
1992 21,249 905 22,154
1993 23,528 953 24,481
1994 28,511 1,197 29,708
1995 26,707 1,108 27,815
* December 30, 1985 (commencement of operations) to March 31, 1986.
</TABLE>
<TABLE>
<CAPTION>
Navigator Shares
----------------
<S> <C> <C> <C>
Value of Original
Shares Plus Shares Value of Shares
Obtained Through Acquired Through
Fiscal Reinvestment of Capital Reinvestment of
Year Gain Distributions Income Dividends Total Value
1995* $10,481 - $10,481
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
21
<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 $19,960, and
the investor would have received a total of $4,610 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1986-1995 fiscal years, returns would have been lower.
Total Return Calculations
-------------------------
Average annual total return quotes used in the Fund's advertising
and other promotional materials ("Performance Advertisements") are
calculated separately for each Class according to the following formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at
least to the last day of the most recent quarter prior to submission of
the Performance Advertisements for publication. Total return, or "T" in
the formula above, is computed by finding the average annual change in the
value of an initial $1,000 investment over the period. In calculating the
ending redeemable value, all dividends and other distributions by a Fund
are assumed to have been reinvested at net asset value on the reinvestment
dates during the period.
From time to time the 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 Fund
invests in many securities that are not included in the S&P 500.
The 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. The Fund may also refer in such materials to mutual
fund performance rankings, ratings, comparisons with funds having similar
22
<PAGE>
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.
The 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, the 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.
The Fund may use other recognized sources as they become available.
The 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.
The 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.
The Fund may also include in advertising biographical information
on key investment and managerial personnel.
23
<PAGE>
The 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.
The 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, the 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.
TAX-DEFERRED RETIREMENT PLANS
As noted in the Prospectus for Primary Shares, an investment in
those shares may be appropriate for IRAs, Keogh Plans, SEPs and other
qualified retirement plans. In general, income earned through the
investment of assets of qualified retirement plans is not taxed to the
beneficiaries of such plans until the income is distributed to them.
Primary Share investors who are considering establishing such a plan
should consult their attorneys or other tax advisers with respect to
individual tax questions. The option of investing in these plans with
respect to Primary Shares through regular payroll deductions may be
arranged with a Legg Mason or affiliated investment executive and your
employer. Additional information with respect to these plans is available
upon request from any Legg Mason or affiliated investment executive.
Individual Retirement Account -- IRA
------------------------------------
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, if neither you nor your spouse is an
active participant in a qualified employer or government retirement plan,
or if either you or your spouse is an active participant and your adjusted
gross income does not exceed a certain level, you may deduct cash
contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. In
addition, if your spouse is not employed and you file a joint return, you
may establish a separate IRA for your spouse and contribute up to a total
24
<PAGE>
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
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.
25
<PAGE>
THE FUND'S DIRECTORS AND OFFICERS
The 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 Fund 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 Fund 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;
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; Chairman of the Board and Director
of two other Legg Mason funds.
JOHN F. CURLEY, JR.* [56], President and Director; 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; President and Director of two 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; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia
Electric Company); Director of six 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; 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 six Legg Mason funds; and Trustee of two Legg
Mason funds.
ARNOLD L. LEHMAN [51], Director; The Baltimore Museum of Art, Art
Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of
Art; Director of six Legg Mason funds; Trustee of two Legg Mason funds.
26
<PAGE>
JILL E. McGOVERN [50], Director; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation.
Director of six 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; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting);
Director of six 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; Executive Vice President of
Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice Chairman and
Director of Legg Mason Fund Adviser, Inc.; Director of three Legg Mason
funds; 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 Fund, other than those who also
serve as directors, are:
MARIE K. KARPINSKI* [46], Vice President and Treasurer; Treasurer
of the Adviser; Vice President and Treasurer of eight Legg Mason funds;
and Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice President of
Legg Mason.
KATHI D. GLENN* [30], Secretary and Assistant Treasurer;
Secretary and Assistant Treasurer of two Legg Mason funds.
BLANCHE P. ROCHE* [47], Assistant Secretary and Assistant Vice
President; Assistant Secretary and Assistant Vice President of seven 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 the Fund who are "interested persons"
of the Fund receive no salary or fees from the Fund. Each Director of the
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 the Fund
27
<PAGE>
beneficially owned in the aggregate less than 1% of the Fund's outstanding
Shares.
The following table provides certain information relating to the
compensation of the Fund's directors for the fiscal year ended March 31,
1995.
28
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
------------------
<C> <C> <C>
Pension or Estimated Total
Retirement Annual Compensa-
Benefits Benefits tion From
<C> Accrued as Upon Fund and
Aggregate Part of Retirement Fund
<S> Compensat Fund's Complex
Name of Person and ion From Expenses Paid to
Position Fund* Directors**
Raymond A. Mason -
Chairman of the Board
and Director None N/A N/A None
John F. Curley, Jr. -
President and Director None N/A N/A None
Edward A. Taber, III -
Director None N/A N/A None
Marie K. Karpinski -
Vice President and
Treasurer None N/A N/A None
Richard G. Gilmore -
Director $2,000 N/A N/A $21,600
Charles F. Haugh -
Director $2,000 N/A N/A $23,600
Arnold L. Lehman -
Director $2,000 N/A N/A $23,600
Jill E. McGovern -
Director $1,600 N/A N/A $23,200
T. A. Rodgers -
Director $2,000 N/A N/A $21,600
</TABLE>
29
<PAGE>
* 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.
30
<PAGE>
THE FUND'S INVESTMENT ADVISER
The Adviser, a Maryland Corporation, is located at 111 South
Calvert Street, Baltimore, Maryland 21202. The Adviser is a wholly owned
subsidiary of Legg Mason, Inc., which is also the parent of Legg Mason.
The Adviser serves as the Fund's investment adviser and manager under an
Investment Advisory and Management Agreement ("Advisory Agreement"). The
Advisory Agreement originally became effective as of December 10, 1985 and
was most recently approved by the shareholders of the Fund on July 17,
1986.
The Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the directors who are not
"interested persons" of the Fund or the Adviser, on October 21, 1994.
The Advisory Agreement provides that, subject to overall
direction by the Fund's Board of Directors, the Adviser manages the
investment and other affairs of the Fund. The Adviser is responsible for
managing the Fund consistent with the Fund's investment objective and
policies described in its Prospectuses and this Statement of Additional
Information. The Adviser also is obligated to (a) furnish the Fund with
office space and executive and other personnel necessary for the
operation of the Fund; (b) supervise all aspects of the Fund's operations;
(c) bear the expense of certain informational and purchase and redemption
services to the 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 the Fund's officers and directors. In addition, the Adviser
paid the Fund's organizational expenses and has agreed to reimburse the
Fund for auditing fees and compensation of the Fund's independent
directors. The Adviser and its affiliates pay all compensation of
directors and officers of the Fund who are officers, directors or
employees of the Adviser. The Fund pays all of its expenses which are
not expressly assumed by the Adviser. These expenses include, among
others, interest expense, taxes, brokerage fees and commissions, expenses
of preparing and printing prospectuses, proxy statements and reports to
shareholders and of distributing them to existing shareholders, custodian
charges, transfer agency fees, distribution fees to Legg Mason, the 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. The Fund also is liable
for such nonrecurring expenses as may arise, including litigation to which
the Fund may be a party. The Fund may also have an obligation to
indemnify its directors and officers with respect to litigation.
The Adviser receives for its services a management fee,
calculated daily and payable monthly, at an annual rate of 1% of the
average daily net assets of the Fund for the first $100 million of average
daily net assets and 0.75% of average daily net assets exceeding $100
million. The advisory fee is higher than fees paid by most other funds to
their investment advisers. The advisory fee may be reduced under
31
<PAGE>
regulations of various states where Fund Shares are qualified for sale
which impose limitations on the annual expense ratio of the Fund. The
most restrictive annual expense limitation currently requires that the
Adviser reimburse the 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 the Fund's expenses exceed 2.5% of
the first $30 million of the Fund's average net assets, 2.0% of the next
$70 million of average net assets, and 1.5% of average net assets in
excess of $100 million. During the fiscal years ended March 31, 1995,
1994 and 1993, advisory fees were $4,849,166, $3,581,718 and $2,066,295,
respectively.
Under the Advisory Agreement, the Adviser will not be liable for
any error of judgment or mistake of law or for any loss by the Fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties
or from reckless disregard of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of the Fund's Board
of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser, on not less than 60 days' notice to the
other party to the Agreement, and may be terminated immediately upon the
mutual written consent of both parties to the Agreement.
Under the Advisory Agreement, the Fund has the non-exclusive
right to use the name "Legg Mason" until that Agreement is terminated, or
until the right is withdrawn in writing by the Adviser.
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 Fund's portfolio turnover rates were 27.5% and 16.7%, respectively.
Under the Advisory Agreement the Adviser is responsible for the
execution of the Fund's portfolio transactions and must seek the most
favorable price and execution for such transactions, subject to the
possible payment, as described below, of higher brokerage commissions to
brokers who provide research and analysis. The Fund may not always pay
the lowest commission or spread available. Rather, in placing orders for
the Fund the Adviser also takes into account such factors as size of the
order, difficulty of execution, efficiency of the executing broker's
facilities (including the services described below), and any risk assumed
by the executing broker.
Consistent with the policy of most favorable price and execution,
the Adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to the Adviser for its use, may
place orders with brokers who provide supplemental investment and market
32
<PAGE>
research and securities and economic analysis and may pay to these brokers
a higher brokerage commission than may be charged by other brokers. Such
services include, without limitation, advice as to the value of
securities; the advisability of investing in, purchasing, or selling
securities; advice as to the availability of securities or of purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts. Such research and analysis may
be useful to the Adviser in connection with services to clients other than
the Fund. The Adviser's fee is not reduced by reason of its receiving
such brokerage and research services.
From time to time the Fund uses 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, the 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 brokerage commissions
from the Fund totaling $0, $2,000 and $0, respectively. The Fund paid
total brokerage commissions of $883,607, $410,115 and $262,020 during the
fiscal years ended March 31, 1995, 1994 and 1993, respectively.
Except as permitted by SEC rules or orders, the Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated
persons as principal. The 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 the 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) the Fund together with all other registered investment companies
advised by the Adviser, may not purchase more than 4% of the principal
amount of the offering of such class or $500,000 in principal amount,
whichever is greater, but in no event greater than 10% of the principal
amount of the offering; and (ii) the consideration to be paid by the Fund
in purchasing the securities being offered may not exceed 3% of the total
assets of the Fund. In addition, the 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 Fund, unless the affiliate expressly consents by written
contract. The Advisory Agreement expressly provides such consent.
Among the brokers regularly used by the Fund during the fiscal
year ended March 31, 1995, the Fund at that date owned shares of the
33
<PAGE>
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.
Investment decisions for the Fund are made independently from
those of other funds and accounts advised by the Adviser. However, the
same security may be held in the portfolios of more than one fund or
account. When two or more accounts simultaneously engage in the purchase
or sale of the same security, the prices and amounts will be equitably
allocated to each account. In some cases, this procedure may adversely
affect the price or quantity of the security available to a particular
account. In other cases, however, an account's ability to participate in
large-volume transactions may produce better executions and prices.
THE FUND'S DISTRIBUTOR
Legg Mason acts as distributor of the Fund's shares pursuant to
an Underwriting Agreement with the 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.
The 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 Plan, the aggregate fees may not exceed an annual rate of 1.00% of the
Fund'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 the Fund on July 17, 1986.
The Plan has been amended, effective July 1, 1993, to make clear that, of
the aggregate 1.00% fees, 0.75% is paid for distribution services and
0.25% is paid for ongoing services to shareholders. The amendments also
specify that the 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
34
<PAGE>
or a portion of the fee to its investment executives. Continuation of the
Plan was most recently approved on October 21, 1994 by the Board of
Directors of the Fund including a majority of the directors who are not
"interested persons" of the Fund as that term is defined in the 1940 Act
and who have no direct or indirect financial interest in the operation of
the Plan or the Underwriting Agreement ("12b-1 Directors").
In approving the continuation of the Plan, in accordance with the
requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that the Plan would benefit the 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 the Fund's Primary Shares
would be likely to maintain or increase the amount of compensation paid by
the Fund to the Adviser.
In considering the costs of the Plan, the directors gave
particular attention to the fact that any payments made by the Fund to
Legg Mason under the Plan would increase the Fund's level of expenses in
the amount of such payments. Further, the directors recognized that the
Adviser would earn greater management fees if the Fund's assets were
increased, because such fees are calculated as a percentage of the 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 Plan were
implemented.
Among the potential benefits of the Plan, 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 the Fund's Primary Shares and to maintain and enhance the
level of services they provide to the Fund's Primary Class shareholders.
These efforts, in turn, could lead to increased sales and reduced
redemptions, eventually enabling the 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 the Fund in connection with the Plan. Furthermore, the
investment management of the 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.
The 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. The Plan may be terminated
with respect to the Fund by a vote of a majority of the 12b-1 Directors or
by a vote of a majority of the outstanding voting securities of the
Primary Shares. Any change in the Plan that would materially increase the
distribution cost to the Fund requires shareholder approval; otherwise the
35
<PAGE>
Plan may be amended by the directors, including a majority of the 12b-1
Directors, as previously described.
In accordance with Rule 12b-1, the 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, 1994 and 1993, the Fund paid
distribution fees of $4,294,605 and $2,325,639, respectively. For the
fiscal year ended March 31, 1995, the Fund paid Legg Mason $5,917,557 in
fees under the Plan, from assets attributable to Primary Shares. During
the same period, Legg Mason incurred the following expenses with respect
to Primary Shares:
Compensation to sales personnel $ 3,898,000
Advertising 387,000
Printing and mailing of prospectuses to
prospective shareholders 200,000
Other 1,977,000
-----------
Total expenses $ 6,462,000
===========
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 FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of the 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. The Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 M Street N.W., Washington, D.C.
20036, serves as counsel to the Fund.
36
<PAGE>
THE FUND'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, has been selected by the Directors to serve as the Fund's
independent accountants.
FINANCIAL STATEMENTS
The Portfolio of Investments as of March 31, 1995; the Statement
of Assets and Liabilities as of March 31, 1995; the Statement of
Operations for the year ended March 31, 1995; the Statement of Changes in
Net Assets for the years ended March 31, 1995 and 1994; the Financial
Highlights for all periods; the Notes to Financial Statements and the
Report of the Independent Accountants, all of which are included in the
Fund's annual report for the year ended March 31, 1995, are hereby
incorporated by reference in this Statement of Additional Information.
37
<PAGE>
Legg Mason Special Investment Trust, Inc.
Part C. Other Information
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements: The financial statements of the
Legg Mason Special Investment Trust, Inc. for the year
ended March 31, 1995 and the report of the independent
accountants thereon are incorporated into the Fund's
Statement of Additional Information (Part B) by reference
to the Annual Report to Shareholders for the same period.
The Fund's Financial Data Schedule appears as Exhibit 27.
(b) Exhibits
(1) (a) Articles of Incorporation1/
(b) Articles of Amendment (dated April 24,
1992)6/
(c) Articles Supplementary (dated August 1,
1994)9/
(2) (a) By-Laws as Amended and Restated2/
(b) Amendment to By-Laws (effective February
19, 1992)6/
(3) Voting Trust Agreement - none
(4) Specimen Security1/
(5) (a) Investment Advisory and Management
Agreement3/
(6) (a) Underwriting Agreement7/
(b) Dealer Agreement with respect to
Navigator Shares (to be filed)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement4/
(a) Addendum dated February 9, 19882/
(b) Addendum dated February 25, 19882/
(9) Transfer Agency and Service Agreement3/
(10) Opinion of Counsel4/
(11) Other opinions, appraisals, rulings and consents
- Accountant's consent -- filed herewith
(12) Financial statements omitted from Item 23 - none
(13) Agreements for providing initial capital4/
(14) (a) Prototype IRA Plan5/
(b) Prototype Corporate Simplified Employee
Pension Plan5/
(c) Prototype Keogh Plan5/
(15) Plan pursuant to Rule 12b-17/
(16) Schedule for Computation of Performance
Quotations -- filed herewith
(27) Financial Data Schedule -- filed herewith
--------------------
<PAGE>
1/ Incorporated herein by reference to corresponding Exhibit of the
initial Registration Statement, SEC File No. 33-1271.
2/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 4 to the initial Registration
Statement, SEC File No. 33-1271.
3/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 9 to the initial Registration
Statement, SEC File No. 33-1271.
4/ Incorporated herein by reference to corresponding Exhibit of Pre-
Effective Amendment No. 1 to the initial Registration Statement,
SEC File No. 33-1271.
5/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 8 to the Registration Statement of
Legg Mason Income Trust, Inc., SEC File No. 33-12092, filed April
28, 1991.
6/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 10 to the Registration Statement,
SEC File No. 33-1271.
7/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 11 to the Registration Statement,
SEC File No. 33-1271.
8/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 12 to the Registration Statement,
SEC File No. 33-1271.
9/ Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 13 to the Registration Statement,
SEC File No. 33-1271.
Item 25. Persons Controlled By or Under Common Control with
Registrant
-------------------------------------------------
None.
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class (as of April 30, 1995)
-------------- ------------------------
Shares of Capital Stock,
($.001 par value)
Legg Mason Special Investment
Trust, Inc. - Primary Shares 61,453
Navigator Special Investment Trust 2
<PAGE>
Item 27. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part
C of Pre-Effective Amendment No. 1 to the Registration
Statement, SEC File No. 33-1271.
Item 28. Business and Other Connections of Manager and Investment
Adviser
--------------------------------------------------------
I. Legg Mason Fund Adviser, Inc. ("Fund Adviser"), the
Registrant's investment adviser, is a registered
investment adviser incorporated on January 20, 1982.
Fund Adviser is engaged primarily in the investment
advisory business. Fund Adviser also serves as
investment adviser or manager to fourteen open-end
investment companies or portfolios and as investment
consultant for one closed-end investment company.
Information as to the officers and directors of Fund
Adviser is included in its Form ADV filed on June, 30
1994 with the Securities and Exchange Commission
(registration number 801-16958) and is incorporated
herein by reference.
Item 29. Principal Underwriters
----------------------
(a) Legg Mason Cash Reserve Trust
Legg Mason Value Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning
each director and officer of the Registrant's principal
underwriter, Legg Mason Wood Walker, Incorporated
("LMWW").
<TABLE>
<CAPTION>
<C>
<S> Position and Offices <C>
Name and Principal with Underwriter - Positions and Offices with
Business Address* LMWW Registrant
------------------- --------------------- --------------------------
Raymond A. Mason Chairman of the Board Chairman of the Board and
Director
John F. Curley, Jr. Vice Chairman President and Director
James W. Brinkley President and Director None
<PAGE>
Position and Offices
Name and Principal with Underwriter - Positions and Offices with
Business Address* LMWW Registrant
------------------- --------------------- --------------------------
Edmund J. Cashman, Jr. Senior Executive Vice None
President and Director
Robert G. Sabelhaus Executive Vice None
President and Director
Richard J. Himelfarb Executive Vice None
President and Director
Edward A. Taber III Executive Vice Director
President and Director
Charles A. Bacigalupo Senior Vice President, None
Secretary and Director
Thomas M. Daly, Jr. Senior Vice President None
and Director
Jerome M. Dattel Senior Vice President None
and Director
Robert G. Donovan Senior Vice President None
and Director
William F. Haneman, Jr. Senior Vice President None
One Battery Park Plaza and Director
New York, New York 10005
Thomas E. Hill Senior Vice President None
One Mill Place and Director
Easton, MD 21601
Arnold S. Hoffman Senior Vice President None
1735 Market Street and Director
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice President None
24th Floor and Director
Two Oliver Plaza
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice President None
1747 Pennsylvania and Director
Avenue, N.W.
Washington, D.C. 20006
Laura L. Lange Senior Vice President None
and Director
Marvin McIntyre Senior Vice President None
1747 Pennsylvania and Director
Avenue, N.W.
Washington, D.C. 20006
<PAGE>
Position and Offices
Name and Principal with Underwriter - Positions and Offices with
Business Address* LMWW Registrant
------------------- --------------------- --------------------------
Douglas C. Petty, Jr. Senior Vice President None
1747 Pennsylvania and Director
Avenue, N.W.
Washington, D.C. 20006
Mark I. Preston Senior Vice President None
and Director
F. Barry Bilson Senior Vice President None
and Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice President None
Edward R. Hipp, III Senior Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23607
Theodore S. Kaplan Senior Vice President None
and General Counsel
Horace M. Lowman, Jr. Senior Vice President None
and Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice President None
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
E. Robert Quasman Senior Vice President None
Gail Reichard Senior Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Timothy C. Scheve Senior Vice President None
and Treasurer
Elisabeth N. Spector Senior Vice President None
Joseph Sullivan Senior Vice President None
Peter J. Biche Vice President None
1735 Market Street
Philadelphia, PA 19103
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
<PAGE>
Position and Offices
Name and Principal with Underwriter - Positions and Offices with
Business Address* LMWW Registrant
------------------- --------------------- --------------------------
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Robert Dickey, IV Vice President None
One World Trade Center
New York, NY 10048
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
John J. Koorey Vice President None
One Battery Park Plaza
New York, NY 10004
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
Eileen M. O'Rourke Vice President None
and Controller
Marie K. Karpinski Vice President Vice President and
Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
<PAGE>
Position and Offices
Name and Principal with Underwriter - Positions and Offices with
Business Address* LMWW Registrant
------------------- --------------------- --------------------------
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
</TABLE>
----------------------
* All addresses are 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 30. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
-------------------
None.
Item 32. Undertakings
------------
Registrant hereby undertakes to provide each person to
whom a prospectus is delivered with a copy of its latest
annual report to shareholders upon request and without
charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant, Legg Mason Special
Investment Trust, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Baltimore and State of Maryland, on the 31st day of May, 1995.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
By:/s/ John F. Curley, Jr.
----------------------------------
John F. Curley, Jr.
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 14 to the Registrant's Registration Statement
has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- -----
/s/ Raymond A. Mason Chairman of the Board May 31, 1995
------------------------ and Director
Raymond A. Mason
/s/ John F. Curley, Jr. President and Director May 31, 1995
------------------------
John F. Curley, Jr.
/s/ Edward A. Taber, III Director May 31, 1995
------------------------
Edward A. Taber, III
/s/ Richard G. Gilmore* Director May 31, 1995
------------------------
Richard G. Gilmore
/s/ Charles F. Haugh* Director May 31, 1995
------------------------
Charles F. Haugh
/s/ Arnold L. Lehman* Director May 31, 1995
------------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Director May 31, 1995
------------------------
Jill E. McGovern
/s/ T. A. Rodgers* Director May 31, 1995
------------------------
T. A. Rodgers
/s/ Marie K. Karpinski Vice President May 31, 1995
------------------------
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney,
dated May 18, 1992, incorporated herein by reference to Post-Effective
Amendment No. 10, SEC File No. 33-1271, filed June 2, 1992.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
_________
To the Shareholders and Directors of
Legg Mason Special Investment Trust, Inc.:
We consent to the incorporation by reference in this
Post-Effective Amendment No. 14 to the Registration Statement of Legg
Mason Special Investment Trust, Inc. (the "Trust") on Form N-1A (File No.
33-1271) of our report dated April 28, 1995 on our audit of the financial
statements and financial highlights of the Trust which report is included
in the Annual Report to Shareholders for the year ended March 31, 1995,
which is incorporated by reference in the Registration Statement. We also
consent to the reference to our Firm under the caption "The Fund's
Independent Accountants" in the Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 1, 1995
LEGG MASON SPECIAL INVESTMENT TRUST, INC. - PRIMARY SHARES
March 31, 1994 - March 31, 1995 (one year)
-------------------------------
Cumulative Total Return
-----------------------
ERV = (19.96 x 1.3935269) - (21.56 x 1.3779226) x 1000 + 1000 = 936.27
-----------------------------------------
(21.56 x 1.3779226)
P = 1000
C = 936.27 - 1 = -.06373 = -6.37%
------ -----
1000
Average Annual Return: Same
March 31, 1990 - March 31, 1995 (five years)
---------------------------------
Cumulative Total Return
-----------------------
ERV = (19.96 X 1.3935269) - (13.58 x 1.1150900) x 1000 + 1000 = 1836.82
-------------------------------------------
(13.58 x 1.1150900)
P = 1000
C = 1836.82 - 1 = 0.83682 = 83.68%
------- -----
1000
Average Annual Return:
---------------------
1
---
5
(0.83682 + 1) - 1 = 12.93%
<PAGE>
LEGG MASON SPECIAL INVESTMENT TRUST, INC. - PRIMARY SHARES
December 30, 1985 - March 31, 1995 (life of fund)
------------------------------------
Cumulative Total Return:
-----------------------
ERV = (19.96 x 1.3935269) - (10.00 x 1.0) x 1000 + 1000 = 2781.48
-----------------------------------
(10.00 x 1.0)
P = 1000
C = 2781.48 - 1 = 1.78148 = 178.15%
------- ------
1000
Average Annual Return:
---------------------
1
------
9.2521
(1.78148 + 1) - 1 = 11.69%
-----
<PAGE>
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
NAVIGATOR SPECIAL INVESTMENT TRUST
December 1, 1994 - March 31, 1995 (life of fund)
-----------------------------------
Cumulative Total Return:
-----------------------
ERV = (20.03 x 1.0) - (19.11 x 1.0) x 1000 + 1000 = 1048.14
-----------------------------
(19.11 x 1.0)
P = 1000
C = 1048.14 - 1 = 0.04814 = 4.81%
------- ----
1000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> LEGG MASON SPECIAL INVESTMENT TRUST, INC. PRIMARY SHARES
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<PERIOD-START> APR-01-1994
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<INVESTMENTS-AT-VALUE> 636,763,203
<RECEIVABLES> 6,806,605
<ASSETS-OTHER> 28,667
<OTHER-ITEMS-ASSETS> 0
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<APPREC-INCREASE-CURRENT> (44,298,589)
<NET-CHANGE-FROM-OPS> (40,146,764)
<EQUALIZATION> 226
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6,356,045)
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<NUMBER-OF-SHARES-REDEEMED> (18,741,010)
<SHARES-REINVESTED> 310,193
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<ACCUMULATED-GAINS-PRIOR> 6,177,721
<OVERDISTRIB-NII-PRIOR> 0
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<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> NAVIGATOR SPECIAL INVESTMENT TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 564,708,000
<INVESTMENTS-AT-VALUE> 636,763,203
<RECEIVABLES> 6,806,605
<ASSETS-OTHER> 28,667
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 643,598,475
<PAYABLE-FOR-SECURITIES> 0
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<TOTAL-LIABILITIES> 5,382,698
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 560,699,874
<SHARES-COMMON-STOCK> 1,304,220
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,488,346
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,972,355
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<DIVIDEND-INCOME> 7,021,679
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<APPREC-INCREASE-CURRENT> (44,298,589)
<NET-CHANGE-FROM-OPS> (40,146,764)
<EQUALIZATION> 226
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,374,985
<NUMBER-OF-SHARES-REDEEMED> (70,765)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 72,729,836
<ACCUMULATED-NII-PRIOR> 1,486,974
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,849,166
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,767,756
<AVERAGE-NET-ASSETS> 24,971,296
<PER-SHARE-NAV-BEGIN> 19.11
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 0.85
<PER-SHARE-DIVIDEND> 0.00
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<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.03
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
