<PAGE>
INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc. REPORT TO SHAREHOLDERS
Baltimore, MD FOR THE YEAR ENDED
MARCH 31, 1996
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore THE
Charles F. Haugh
Arnold L. Lehman LEGG MASON
Dr. Jill E. McGovern SPECIAL
T. A. Rodgers INVESTMENT
Edward A. Taber, III TRUST, INC.
TRANSFER AND SHAREHOLDER SERVICING AGENT PRIMARY CLASS
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR
ACCOMPANIED BY A PROSPECTUS.
PUTTING YOUR FUTURE FIRST
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(recycle logo) PRINTED ON RECYCLED PAPER (Legg Mason Funds Logo)
LMF-009
5/96
<PAGE>
TO OUR SHAREHOLDERS,
The Special Investment Trust's net asset value per share rose 10%, from
$22.81 to $25.09, in the quarter ended March 31, 1996. That gain compares
to total returns (appreciation plus reinvested dividends) of 5.4% and 4.9%
on Standard & Poor's 500 stock composite index and the Value Line index of
1700 stocks. In the twelve months ended March 31, the Trust's total return
was 28.5% compared to returns of 32.1% and 21.2% on the Standard & Poor's
and Value Line indices.
The Trust continues to invest primarily in common stocks of small and
medium-sized companies which, based on our research and analysis, appear to
be undervalued in relation to their earnings, book value and/or future
prospects. We believe that buying such stocks when they are out-of-favor,
having the patience to wait until their value is recognized by others, and
being willing to sell when others become enthusiastic buyers, should
continue to produce favorable LONG-TERM investment results.
Coopers & Lybrand L.L.P., the Special Investment Trust's independent
accountants, have completed their annual examination, and audited financial
statements for the fiscal year ended March 31, 1996 are included in this
report.
The Board of Directors has approved a short-term capital gain
distribution of $0.374 and a long-term capital gain distribution of $0.553
per share, payable on May 15 to shareholders of record on May 10. Most
shareholders will receive this distribution in the form of additional
shares credited to their accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
May 10, 1996
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Your fund had an excellent first quarter, rising 10%. This result exceeded
the returns of the major market indices as well as those of funds investing in
small and mid-size companies. Our 3 and 12-month returns for the periods ending
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Special
Investment S&P Dow
Trust 500 Jones
<S> <C> <C> <C>
3 months 10.00% 5.37% 9.80%
1 year 28.47% 32.09% 37.70%
</TABLE>
<TABLE>
<CAPTION>
Lipper
Small-Cap Lipper
Russell Growth Mid-Cap
2000 Funds Funds
<S> <C> <C> <C>
3 months 5.14% 6.41% 6.04%
1 year 29.09% 31.25% 30.15%
</TABLE>
As you can see, our 12-month return still modestly trails that of other
funds investing in our market sector, although the gap has narrowed
substantially due to our results this quarter.
Our outperformance was not due to unusual strength in any particular
industry, but was fairly broad based. Our biggest gainer, insurance company LIFE
PARTNERS, agreed to be acquired by Conseco. We bought the shares last year after
the stock declined sharply due to disappointing earnings. In many cases the
market overreacts to earnings shortfalls, driving share prices well below
intrinsic value. This offers patient, value investors an opportunity to profit
when the market later prices the shares more sensibly. It is rare, but pleasant,
when events lead to value being realized as quickly as with LIFE PARTNERS.
There were few common threads to our other large gainers last quarter. Our
largest holding, AMERICA ONLINE, continued to benefit from extremely strong
business trends and from the expected benefits of recently announced alliances
with both Microsoft and ATT. SERFIN'S price improved with the improving economic
situation in Mexico. CMAC bounced back from a fourth quarter sell-off
precipitated by unfounded fears of profits being hurt by credit quality
problems. CALIFORNIA ENERGY rallied as its strong multi-year earnings prospects
became better appreciated.
We added substantially to our position in several companies whose shares
declined in the quarter. SUNRISE MEDICAL, which makes wheelchairs and other
medical products, had to restate profits due to accounting irregularities in a
subsidiary. We bought more shares in this well-managed company in the sell-off.
PLAYERS INTERNATIONAL continued to be plagued by worries about anti-gaming
legislation affecting its operations in Louisiana. We believed these concerns
were way overdone and added substantially to our position. The shares have
recently begun to recover nicely. We also added to PHYSICIAN CORP. OF AMERICA, a
Florida based managed-care company currently having profit problems. We estimate
the shares, now trading under $15, could be worth between $25 and $30 per share.
The company has indicated it is studying ways to realize full value.
The bond market did not join the stock market in providing strong returns in
the first quarter. Bond investors have a bad case of opsophobia: fear of
prosperity. Whenever the economic numbers come in stronger than expected,
whenever unemployment is low and employment growth is strong, whenever commodity
prices or gold begin to stir, bonds retreat. Prosperity is associated in bond
investors' minds with inflation. Bond holders have indelibly etched into their
consciousness the period from the late 1940s to the early 1980s when interest
rates on government bonds rose from 3% to 14%, when inflation went from being
benign to malignant. This devastated the value of their investments and even
after almost 15 years of inflation being well contained, they are extremely
sensitive to any data that suggest an increase in underlying inflation pressure.
During the first quarter, 30-year Treasury bonds had their sharpest price
decline in history unaccompanied by Federal Reserve action to raise rates.
Stocks and bonds decoupled: equity investors did well while bond holders lost
money. We believe this decoupling has about run its course. If bonds continue to
decline, we think stocks will follow. We also think that the fears of an
overheating
2
<PAGE>
economy are way overdone and that bond yields approaching 7% offer excellent
value. As the year unfolds, we expect the inflation worries plaguing bonds will
dissipate as it becomes clear the economy remains on a moderate growth path and
that inflation is unlikely to exceed 3% or so.
Feeding the fears of inflation has been first, the strong rise in gold
prices at the beginning of the year and, more recently, rising prices in oil and
grains. The broadening out of the price rise reflected in some commodity price
indices has raised the specter of persistent underlying inflation pressures
about to erupt. We think such worries are groundless.
Gold has already retreated back to the $390 level, from a peak of over $420
reached in January. Not only is the price in a short-term downtrend, it recently
broke below its two-year average price. Those who were most insistent that
rising gold prices signal rising inflation are now silent about the portent of
falling gold prices.
Oil prices have also rallied sharply this year, recently surpassing $25.00
per barrel on the nearby futures contract, the highest price in years. Wheat and
other feed grains have likewise risen, the result of low inventories and drier
than normal weather.
We have long held the view that oil bulls are a peculiar breed of
inflationist whose beliefs are generally impervious to facts. Many of the
arguments they offer as reasons prices are going to go up are reasons why either
prices have already gone up or reasons why prices are about to go down. Two of
these humbugs are particularly hearty: prices in real terms are the lowest in 40
years and inventories among oil companies and refiners are the lowest in 10
years. The argument is that prices are so low they must soon rise and that low
inventories mean supply is tight and, since demand grows steadily, prices will
be forced higher sooner rather than later.
The short version of why these are wrong is as follows (there is a much
longer version): commodities prices tend to trade close to the marginal cost of
production, which for most commodities falls in real terms due mainly to
technological improvements in the ability to extract, produce, or grow the
products. The long-term trend in commodities prices has been down since the
industrial revolution began, save for short episodes, the most unusual of which
was the 1970s, a period commodity bulls constantly try to recreate. That prices
are at 40-year lows in real terms is not an aberration soon to be corrected; it
is the norm.
Inventories are low because a colder than normal winter led to a price spike
in oil. Companies drew down inventories because they could sell oil on the spot
market at higher prices than were available in the forward market, a condition
known as backwardation. They have been reluctant to replenish inventories today
at high prices when they can lock in supplies in the futures market at lower
prices. The last time oil companies actively drew down inventories was in late
1985, just before prices collapsed. We don't think prices are going to collapse,
but we do think they are headed 20% lower over the course of the year, measured
by the near-term futures contract.
If we are right that the recent inflation and growth scare will abate as the
year progresses, interest rates should gradually decline, allowing stocks to
continue to advance. Corporate profits growth so far appears solid, and we are
optimistic that stocks will again be the best performing asset class this year.
Portfolio additions were modest in the quarter. Positions sold exceeded
purchases as we continue to concentrate our research efforts on the best
opportunities.
We bought a significant position in COTT CORPORATION, the largest producer
of private label beverages. Just two years ago COTT traded above $30 a share and
many believed that private labels posed a long-term threat to the branded
consumer product companies. COTT overexpanded about the time Coke and Pepsi
increased competitive pressure, causing profits to evaporate. The stock recently
languished around $6. We believe it is worth about $12 and potentially much more
if business improves the way we believe it can.
GATEWAY 2000 is a personal computer company that sells direct instead of
through dealers. During
3
<PAGE>
the first quarter, Compaq and others issued profits' warnings, leading to a
sell-off in GATEWAY'S shares. We believe the direct distribution model has
important competitive advantages over the indirect model used by IBM, Compaq and
others. We were able to buy GATEWAY'S shares at a single digit price earnings
multiple on this year's expected earnings.
WORLD COLOR is a well-managed company in the consolidating, printing
industry. It has been able to acquire other printing companies on favorable
terms, consistently adding to earnings. We participated in the company's initial
public offering. It trades at a significant discount to similar companies such
as RR Donnelly, a discrepancy that we believe will attenuate as WORLD COLOR
becomes better known.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
May 8, 1996
DJIA 5420.95
MANAGEMENT'S DISCUSSION AND ANALYSIS
In fiscal 1996 the fund moderately underperformed the S&P 500 and performed
about in line with the Russell 2000 index. The fund invests primarily in the
stocks of smaller and mid-size companies, while the S&P 500 is a broad
securities index of mostly large companies. The Russell 2000 index is a measure
of smaller companies.
In fiscal 1996, the fund benefited from its holdings in the financial
sector, which generally provided above index returns due to falling long and
short-term interest rates. Holdings of Mexican securities continued to lag, due
in part to the recession in that country. The fund generally does not invest a
substantial portion of its assets in technology, an area that performed
particularly well in much of the fiscal year. Two securities in the health care
insurance area declined sharply due to earnings disappointments. The fund added
to its holdings in these companies as it believes they are substantially
undervalued.
The fund follows a strategy of searching for mispriced securities, those
whose present price does not accurately reflect estimated intrinsic value. This
strategy usually involves holding securities for several years and contrasts
with the approach of many funds which seek to trade in and out of stocks based
on anticipated near-term price movements. As a result, the fund's turnover of
securities tends to be less than that of comparable funds. The fund's management
believes that assessing companies on the basis of value and not actual or
anticipated popularity will deliver the best results for shareholders over the
longer term, despite periodic setbacks.
The fund's manager provides commentary each quarter on the fund's
performance, strategies, and outlook in the section which precedes this,
entitled: PORTFOLIO MANAGER'S COMMENTS.
4
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
TOTAL RETURN FOR ONE, FIVE, TEN YEARS AND LIFE OF FUND, AS OF MARCH 31, 1996
The returns shown on this page are based on historical results and are
not intended to indicate future performance. The investment return and
principal value of an investment in the fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Average annual returns tend to smooth out variations in the
fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur Rule
12b-1 distribution fees.
Total returns as of March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Class:
One Year +28.47% +28.47%
Five Years +94.29 +14.21
Ten Years +209.91 +11.98
Life of Class(dagger) +257.33 +13.22
Navigator Class:
One Year +29.85% +29.85%
Life of Class(doubledagger) +36.10 +25.99
</TABLE>
(dagger) Primary Class inception-December 30, 1985
(doubledagger) Navigator Class inception-December 1, 1994
TEN-YEAR PERFORMANCE COMPARISON OF A $10,000 INVESTMENT AS OF MARCH 31, 1996
[Performance Graph Here]
<TABLE>
<CAPTION>
Special Investment Trust Standard & Poor's 500
For the Years Ended March 31, Primary Class Stock Composite Index(1) Value Line Geometric Average(2)
<S> <C> <C> <C>
1986 10,000 10,000 10,000
1987 11,339 12,620 11,428
1988 9,731 11,569 10,007
1989 11,384 13,668 11,078
1990 13,134 16,302 11,341
1991 15,961 18,652 11,376
1992 19,214 20,711 12,753
1993 21,233 23,865 14,298
1994 25,766 24,216 14,950
1995 24,124 27,986 15,716
1996 30,991 36,915 19,046
</TABLE>
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
The returns for the Indexes do not include any expenses or transaction costs.
The returns for the Fund include such expenses.
5
<PAGE>
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 1st quarter 1996*
<S> <C>
1. Life Partners Group, Inc. +52.3%
2. America Online, Inc. +49.3%
3. Grupo Financiero Serfin S.A. de C.V. ADR +37.0%
4. California Energy Company, Inc. +36.5%
5. Mego Financial Corporation Warrants +32.1%
6. CMAC Investment Corporation +28.4%
7. Mirage Resorts, Incorporated +27.2%
8. Boomtown Inc. +25.0%
9. The Bear Stearns Companies Inc. +24.5%
10. Argyle Television, Inc. +24.3%
</TABLE>
<TABLE>
<CAPTION>
Biggest laggers for the 1st quarter 1996*
<S> <C>
1. Sunrise Medical, Inc. -24.3%
2. John Alden Financial Corp. -15.6%
3. Players International, Inc. -11.0%
4. Republic of Argentina Par Bonds
5.0% 3-31-23 -9.1%
5. Targeted Genetics Corporation -8.9%
6. Magellan Health Services, Inc. -6.3%
7. Physician Corporation of America -5.9%
8. Peoples Heritage Financial Group, Inc. -4.4%
9. Biogen, Inc. -3.3%
10. Olsen & Associates AG -3.0%
</TABLE>
* SECURITIES HELD FOR THE ENTIRE QUARTER.
PORTFOLIO CHANGES
Securities Added
Cott Corporation Quebec
Gateway 2000, Inc.
World Color Press, Inc.
Securities Sold
BankAmerica Corporation
Grupo Mexicano de Desarrollo S.A. ADR
8.25% 2-17-01
Johnstown America Industries, Inc.
Ultimate Electronics, Inc.
UNR Industries, Inc.
Worldcom, Inc.
6
<PAGE>
PORTFOLIO OF INVESTMENTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 94.7%
Advertising -- 4.1%
WPP Group P.L.C. 10,200 $ 31,135
WPP Group P.L.C. ADR 89 2,726
33,861
Apparel -- 0.2%
Salant Corporation 450 2,025(A,B)
Salant Corporation Class B
Warrants 285 36(A,B)
2,061
Banking -- 2.8%
Grupo Financiero Serfin S.A. de
C.V. ADR 1,583 7,320(A)
Peoples Heritage Financial Group,
Inc. 720 15,660
22,980
Biotechnology -- 2.1%
Biogen, Inc. 55 3,273(A)
Somatix Therapy Corporation 1,976 12,103(A,B)
Somatix Therapy Corporation
Warrants 152 304(A)
Targeted Genetics Corporation 400 2,050(A)
17,730
Broadcast Media -- 0.6%
Argyle Television, Inc. 225 4,894
Computer Services and Systems -- 15.1%
America Online, Inc. 1,180 66,080(A)
Bell & Howell Company 300 9,825(A)
Gateway 2000, Inc. 425 11,847(A)
InaCom Corp. 805 13,786(A,B)
Storage Technology Corporation 900 23,512(A)
125,050
Construction -- 0.2%
Grupo Mexicano de Desarrollo
S.A. ADR 540 1,552(A)
Energy -- 2.4%
California Energy Company, Inc. 750 19,969(A)
Entertainment -- 10.5%
Boomtown Inc. 900 5,625(A,B)
Circus Circus Enterprises, Inc. 750 25,219(A)
Hollywood Park, Inc. 1,746 17,245(A,B)
Mirage Resorts, Incorporated 274 12,017(A)
Players International, Inc. 2,000 19,031(A,B)
Stratosphere Corporation 700 7,481(A)
86,618
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Finance -- 9.9%
Federal National Mortgage
Association 400 $ 12,750
Mego Financial Corporation
Warrants 300 2,229(A)
Pioneer Group, Inc. 750 21,750
Piper Jaffray Incorporated 294 4,040
The Bear Stearns Companies Inc. 500 12,375
United Asset Management
Corporation 619 28,706
81,850
Food, Beverage, and
Tobacco -- 1.4%
Cott Corporation Quebec 1,837 11,713
Health Care -- 8.6%
Magellan Health Services, Inc. 930 20,925(A)
Physician Corporation of America 1,001 16,013(A)
Sunrise Medical, Inc. 860 12,040(A)
Value Health, Inc. 801 22,014(A)
70,992
Insurance -- 13.7%
CMAC Investment Corporation 400 22,600
Enhance Financial Services Group
Inc. 550 15,194
John Alden Financial Corp. 975 17,184
Leucadia National Corporation 100 2,488
Life Partners Group, Inc. 894 18,540
Orion Capital Corporation 590 26,698
PennCorp Financial Group, Inc. 354 11,157
113,861
Manufacturing -- 2.1%
Briggs & Stratton Corporation 200 8,625
Danaher Corporation 236 8,732
17,357
Miscellaneous -- 2.3%
Asarco, Inc. 117 4,088
Olsen & Associates AG 300 2,522(A,C)
Stewart Enterprises, Inc. 285 12,184
18,794
Publishing -- 0.4%
World Color Press, Inc. 165 3,135
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS -- CONTINUED
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Real Estate -- 2.2%
Resource Mortgage Capital
Corporation 466 $ 9,493
Summit Properties, Inc. 200 4,000
Walden Residential Properties, Inc. 217 4,753
18,246
Savings and Loan -- 8.0%
Cal Fed Bancorp Inc. 900 16,088(A)
Standard Federal Bancorporation 650 27,625
Washington Mutual, Inc. 770 22,907
66,620
Services -- 3.4%
Ideon Group Incorporated 2,558 28,458(B)
Specialty Retail -- 4.7%
Home Shopping Network, Inc. 3,025 30,628(A)
Mac Frugal's
Bargains(Bullet)Close-outs Inc. 608 8,506(A)
39,134
Total Common Stocks and Equity
Interests
(Identified Cost - $575,912) 784,875
PREFERRED STOCK -- 0.3%
Mego Financial Corporation
Series A 12% Cum.
(Identified Cost - $2,000) 200 2,000(B,C)
</TABLE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
SOVEREIGN OBLIGATION -- 1.9%
Republic of Argentina Par Bonds
5.0%(D) 3-31-23
(Identified Cost - $11,458) $30,000 $ 15,562
REPURCHASE AGREEMENT -- 3.2%
Prudential Securities, Inc.
5.5% dated 3-29-96, to be
repurchased at $26,682 on 4-1-96
(Collateral: $28,815 Federal
National Mortgage Association
Mortgage-backed securities, 6.5%
due 4-1-21, value $27,484)
(Identified Cost - $26,670) 26,670 26,670
Total Investments -- 100.1%
(Identified Cost - $616,039) $829,107
</TABLE>
(A) NON-INCOME PRODUCING
(B) AFFILIATED COMPANIES -- AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AN "AFFILIATED COMPANY" REPRESENTS FUND OWNERSHIP OF AT LEAST 5% OF THE
OUTSTANDING VOTING SECURITIES OF THE ISSUER.
(C) PRIVATE PLACEMENT
(D) COUPON INCREASES 0.25% ANNUALLY UNTIL APRIL 1, 1999, THEREAFTER REMAINS
FIXED AT 6.0% UNTIL MATURITY. SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
ASSETS:
Investments at value:
Affiliated companies (Identified Cost - $120,588) $100,308
Other securities (Identified Cost - $495,451) 728,799
$829,107
Receivable for Fund shares sold 6,577
Dividends and interest receivable 1,268
Other assets 29
Total assets 836,981
LIABILITIES:
Payable for:
Investments purchased 976
Fund shares repurchased 6,623
Accrued expenses 254
Due to adviser and distributor 1,157
Total liabilities 9,010
Net assets $827,971
ANALYSIS OF NET ASSETS:
Accumulated paid-in capital applicable to:
31,580 Primary Class shares outstanding $556,048
1,414 Navigator Class shares outstanding 28,071
Undistributed net realized gain on investments 30,784
Unrealized appreciation of investments 213,068
Net assets $827,971
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $25.09
NAVIGATOR CLASS $25.26
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Dividends:
Affiliated companies $ 761
Other securities (net of foreign taxes withheld of $42) 7,386
Interest 5,871
Total investment income $ 14,018
EXPENSES:
Investment advisory fee 5,696
Distribution and service fees 6,956
Transfer agent and shareholder servicing expense 664
Custodian fee 217
Registration fees 196
Reports to shareholders 85
Legal and audit fees 74
Directors' fees 10
Other expenses 37
13,935
Less expenses reimbursed (40)
Total expenses, net of reimbursement 13,895
NET INVESTMENT INCOME 123
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments 42,151
Increase in unrealized appreciation of investments 141,013
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 183,164
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $183,287
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
<TABLE>
<CAPTION>
For the Years Ended March 31,
(Amounts in Thousands) 1996 1995
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income (loss) $ 123 $ (1,431)
Net realized gain on investments 42,151 5,583
Change in unrealized appreciation of investments 141,013 (44,299)
Change in net assets resulting from operations 183,287 (40,147)
Distributions to shareholders from:
Net investment income:
Primary Class (96) --
Navigator Class (27) --
Net realized gain on investments:
Primary Class (14,508) (6,356)
Navigator Class (832) --
Increase in net assets from Fund share transactions:
Primary Class 19,357 94,311
Navigator Class 2,574 24,922
Increase in net assets 189,755 72,730
NET ASSETS:
Beginning of year 638,216 565,486
End of year (including overdistributions of net investment income of $0
and $349, respectively) $827,971 $638,216
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Primary Class Navigator Class
For the Years Ended March 31,
1996 1995 1994 1993 1992 1996 1995(A)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $19.96 $21.56 $17.91 $17.00 $14.59 $20.03 $19.11
Net investment income (loss) -- (0.06) (0.11) 0.03 0.12 0.09 0.07
Net realized and unrealized gain (loss)
on investments 5.60 (1.31) 3.93 1.66 2.83 5.78 0.85
Total from investment operations 5.60 (1.37) 3.82 1.69 2.95 5.87 0.92
Distributions to shareholders from:
Net investment income -- -- (0.03) -- (0.14) (0.17) --
Net realized gain on investments (0.47) (0.23) (0.14) (0.78) (0.40) (0.47) --
Total distributions (0.47) (0.23) (0.17) (0.78) (0.54) (0.64) --
Net asset value, end of period $25.09 $19.96 $21.56 $17.91 $17.00 $25.26 $20.03
Total return 28.47% (6.37)% 21.35% 10.50% 20.46% 29.85% 4.81%(B)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.96% 1.93% 1.94% 2.00% 2.10% 0.88% 0.90%(C)
Net investment income (loss) -- (0.2)% (0.6)% 0.2% 0.8% 1.0% 1.0%(C)
Portfolio turnover rate 35.6% 27.5% 16.7% 32.5% 56.9% 35.6% 27.5%
Net assets, end of period (in
thousands) $792,240 $612,093 $565,486 $322,572 $201,772 $35,731 $26,123
</TABLE>
(A) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF NAVIGATOR CLASS) TO
MARCH 31, 1995.
(B) NOT ANNUALIZED
(C) ANNUALIZED
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
(Amounts in Thousands)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Special Investment Trust, Inc. ("Fund") is registered
under the Investment Company Act of 1940, as amended, as an open-end,
diversified investment company.
The Fund consists of two classes of shares: Primary Class, offered
since 1985, and Navigator Class, offered to certain institutional
investors since December 1, 1994. Expenses of the Fund are allocated
proportionately to the two classes of shares except for 12b-1 distribution
fees, which are charged only on the Primary shares, and transfer agent and
shareholder servicing expenses, which are determined separately for each
class.
Security Valuation
Securities traded on national securities exchanges are valued at the
last quoted sales price. Over-the-counter and listed securities for which
no sales price is available are valued at the mean between the latest bid
and asked prices. Short-term securities are valued at cost which, when
combined with accrued interest receivable, approximates current value.
Securities for which market quotations are not readily available are
valued at fair value as determined by management and approved in good
faith by the Board of Directors.
Dividends and Distribution to Shareholders
Net investment income for dividend purposes consists of dividends and
interest earned, less expenses. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Net capital gain distributions
are declared and paid after the end of the tax year in which the gains are
realized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of
such collateral includes accrued interest. Risks arise from the possible
delay in recovery or potential loss of rights in the collateral should the
issuer of the repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is
required since the Fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income to its
shareholders.
Equalization
In prior years, the Fund followed the practice of equalization by
which a portion of proceeds from sales and cost of redemptions of Fund
shares is credited or charged to undistributed net investment income. In
the current fiscal year ending March 31, 1996, the Fund discontinued the
practice of equalization, resulting in a reclassification from
undistributed net investment income of $913 to accumulated paid-in
capital -- Primary Class and $575 to accumulated paid-in
capital -- Navigator Class.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the year ended March 31, 1996 (excluding
short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $ 247,817
Proceeds from sales 253,833
</TABLE>
At March 31, 1996, the cost of securities for federal income tax
purposes was $616,364. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$261,193 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $48,450.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
(Amounts in Thousands)
3. FUND SHARE TRANSACTIONS:
At March 31, 1996, there were 100,000 shares authorized at $.001 par
value for all classes of the Fund. On December 1, 1994, when the Navigator
Class became effective, 1,287 shares held in Legg Mason Profit Sharing
Plan accounts, with a value of $24,601, were transferred from Primary
Class to Navigator Class. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
1996 1995
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 20,227 $ 456,482 22,874 $ 464,052
Reinvestment of
distributions 666 14,447 310 6,299
Repurchased (19,985) (451,572) (18,741) (376,040)
Net increase 908 $19,357 4,443 $94,311
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended March 31,
1996 1995(dagger)
Navigator Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 313 $7,199 1,375 $26,290
Reinvestment of
distributions 39 859
Repurchased (242) (5,484) (71) (1,368)
Net increase 110 $2,574 1,304 $24,922
</TABLE>
(dagger) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
CLASS) TO MARCH 31, 1995.
4. TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg Mason
Wood Walker, Incorporated ("Legg Mason"), a member of the New York Stock
Exchange and the distributor for the Fund. Under this agreement, the
Adviser provides the Fund with investment advisory, management and
administrative services for which the Fund pays a fee at an annual rate of
1% of average daily net assets of the Fund for the first $100 million of
such assets and 0.75% of such assets exceeding $100 million, calculated
daily and payable monthly. The agreement with the Adviser provides that an
expense reimbursement be made to the Fund for audit fees and compensation
of the Fund's independent directors.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.75% and an annual service fee of 0.25% of the
Primary Class' average daily net assets, calculated daily and payable
monthly. Legg Mason also has an agreement with the Fund's transfer agent
to assist with certain of its duties. For this assistance, Legg Mason was
paid $189 by the transfer agent for the year ended March 31, 1996.
Brokerage commissions of $17 on Fund security transactions were paid to
Legg Mason during the year ended March 31, 1996.
In November 1995, the Fund, along with certain other Legg Mason Funds,
entered into a $75 million line of credit ("Credit Agreement") to be
utilized as an emergency source of cash in the event of unanticipated,
large redemption requests by shareholders. Pursuant to the Credit
Agreement, each participating Fund is liable only for principal and
interest payments related to borrowings made by that Fund. Borrowings
under the line of credit bear interest at prevailing short-term interest
rates. For the year ended March 31, 1996, the Fund had no borrowings under
the line of credit.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF LEGG MASON SPECIAL INVESTMENT TRUST, INC.:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Legg Mason Special
Investment Trust, Inc. as of March 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years then ended and financial highlights for each of
the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1996, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Legg Mason Special Investment Trust, Inc. as of March 31,
1996, and the results of its operations, changes in its net assets, and
financial highlights for each of the respective periods stated in the
first paragraph, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 29, 1996
15
