As filed with the Securities and Exchange Commission on May 29, 1998.
1933 Act File No. 33-1271
1940 Act File No. 811-4451
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
Post-Effective Amendment No: 18 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 20
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
100 Light Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on June 1 , 1998 pursuant to Rule 485(b)
----------
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1998 pursuant to Rule 485(a)(i)
-----------
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1998 pursuant to Rule 485(a)(ii)
-----------
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason 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--Primary Shares
Prospectus--Navigator Shares
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; Expenses
3 Financial Highlights; Performance Information
4 Investment Objectives and Policies;
Description of each Corporation and Its
Shares
5 Expenses; The Funds' Management and
Investment Advisers; The Funds' Distributor
6 Prospectus Highlights; Dividends and Other
Distributions; Shareholder Services;
Tax Treatment of Dividends and Other
Distributions; How Your Shareholder Account
Is Maintained; Description of each Corporation
and Its Shares
7 How You Can Invest In the Funds; How Your
Shareholder Account Is Maintained; How Net
Asset Value Is Determined; The Funds' Distributor
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 Expenses
3 Financial Highlights; Performance Information
4 Investment Objectives and Policies; Description of
each Corporation and Its Shares
5 Expenses; The Funds' Management and
Investment Advisers; The Funds' Distributor
6 Dividends and Other Distributions; Shareholder
Services; Tax Treatment of Dividends and Other
Distributions; Description of each Corporation
and Its Shares; How Shareholder
Accounts are Maintained
7 How To Purchase and Redeem Shares;
How Shareholder Accounts are Maintained;
How Net Asset Value Is Determined; The Funds'
Distributor;
8 How To Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason Special Investment Trust, Inc.
(Primary Shares)
(Navigator Special Investment Trust)
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 Funds' Directors and Officers
15 The Funds' Directors and Officers
16 The Funds' Investment Adviser/Manager;
The Funds' Distributor;
The Funds' Independent
Accountants/Auditors;
The Funds' Legal Counsel;
The Funds' 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 -Primary Shares
21 Portfolio Transactions and Brokerage;
The Funds' Distributor; The Funds'
Custodian and Transfer and Dividend-
Disbursing Agent
22 Performance Information
23 Financial Statements
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 5
Performance Information 7
Investment Objectives and Policies 8
How You Can Invest in the Funds 19
How Your Shareholder Account is Maintained 20
How You Can Redeem Your Primary Shares 20
How Net Asset Value is Determined 21
Dividends and Other Distributions 22
Tax Treatment of Dividends and Other Distributions 23
Shareholder Services 24
The Funds' Management and Investment Advisers 24
The Funds' Distributor 27
Description of Each Corporation and its Shares 27
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036
INDEPENDENT ACCOUNTANTS /AUDITORS:
Coopers & Lybrand L.L.P.
250 W. Pratt Street, Baltimore, Maryland 21201
Ernst & Young LLP
2001 Market Street, Philadelphia, Pennsylvania 19103
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
LMF-001
Legg Mason
Equity
Funds
Value Trust
Total Return Trust
Special Investment
Trust
American Leading
Companies Trust
Balanced Trust
U.S. Small-Cap Value
Trust
Primary Shares
--------------------------
The Art of Investing
Prospectus
June 1, 1998
[LEGG MASON FUNDS LOGO]
<PAGE>
LEGG MASON EQUITY FUNDS -- PRIMARY SHARES
<TABLE>
<S> <C>
LEGG MASON VALUE TRUST, INC. LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON TOTAL RETURN TRUST, INC. LEGG MASON AMERICAN LEADING
LEGG MASON SPECIAL INVESTMENT TRUST, INC. COMPANIES TRUST
LEGG MASON BALANCED TRUST
LEGG MASON U.S. SMALL-CAPITALIZATION
VALUE TRUST
</TABLE>
This Prospectus sets forth concisely the information about the
funds that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the funds dated June 1, 1998 has been
filed with the Securities and Exchange Commission ("SEC") and, as
amended or supplemented from time to time, is incorporated herein by
reference. The Statement of Additional Information is available
without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers
listed below).
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE
NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
June 1, 1998
Legg Mason Wood Walker, Incorporated
100 Light Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
The LEGG MASON VALUE TRUST, INC. ("Value Trust") is a diversified,
open-end management investment company seeking long-term growth of
capital. Value Trust invests principally in those equity securities which
its investment adviser, Legg Mason Fund Adviser, Inc. ("LMFA"), believes
are undervalued and therefore offer above-average potential for capital
appreciation.
The LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
diversified, open-end management investment company seeking capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. In attempting to
achieve this objective, LMFA selects a diversified portfolio composed of
dividend-paying common stocks and securities convertible into common stock
which, in the opinion of LMFA, offer the potential for long-term growth;
common stocks or securities convertible into common stock which do not pay
current dividends but which offer prospects for capital appreciation and
future income; and debt instruments of various maturities. Due to Total
Return Trust's investment objective, however, investors should not expect
capital appreciation comparable to funds devoted solely to growth, or
income comparable to funds devoted to maximum current income.
The LEGG MASON SPECIAL INVESTMENT TRUST, INC. ("Special Investment
Trust") is a diversified, open-end management investment company seeking
capital appreciation. Special Investment Trust invests principally in
equity securities of companies with market capitalizations of less than
$2.5 billion which, in the opinion of LMFA, have one or more of the
following characteristics: they are not closely followed by, or are out of
favor with, investors generally, and LMFA believes they are undervalued in
relation to their long-term earning power or asset values; unusual
developments have occurred which suggest the possibility that the market
value of the securities will increase; or they are involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code.
Special Investment Trust also invests in the securities of companies with
larger capitalizations which have one or more of these characteristics.
Special Investment Trust may invest up to 35% of its assets in debt
securities rated below investment grade.
The LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies") is a professionally managed portfolio seeking long-term
capital appreciation and current income consistent with prudent investment
risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Investors Trust"), a diversified, open-end
management investment company. Under normal market conditions, American
Leading Companies will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMFA
defines a "Leading Company" as a company that, in the opinion of LMFA, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the Standard & Poor's
Composite Index of 500 Stocks ("S&P 500").
The LEGG MASON BALANCED TRUST ("Balanced Trust") is a professionally
managed portfolio seeking long-term capital appreciation and current
income in order to achieve an attractive total investment return
consistent with reasonable risk. Balanced Trust is a separate series of
Investors Trust. Under normal conditions, Balanced Trust will invest no
more than 75% of its assets in equity securities. The term "equity
securities" includes, without limitation, common stocks and convertible
securities of domestic issuers, securities of closed-end investment
companies and U.S. dollar-denominated securities of foreign issuers,
including American Depositary Receipts ("ADRs") and Global Depositary
Receipts ("GDRs"). Balanced Trust will
2
<PAGE>
invest at least 25% of its portfolio in fixed income securities.
The LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST ("Small-Cap
Value"), a separate series of Investors Trust, is a professionally managed
portfolio seeking long-term capital appreciation. Small-Cap Value invests
principally in equity securities of companies with market capitalizations
ranging between $10 million and the median New York Stock Exchange
("NYSE") market capitalization. Brandywine Asset Management, Inc.
("Brandywine"), as investment adviser, favors securities it believes to be
undervalued. Brandywine believes that small company stocks, with the
lowest prices relative to current earnings, provide superior returns over
longer periods of time. Under normal circumstances, Small-Cap Value does
not intend to invest in debt securities, foreign securities, futures or
options.
Shares of Value Trust, Total Return Trust, Special Investment Trust,
American Leading Companies, Balanced Trust and Small-Cap Value (each a
"Fund") may be appropriate for investments by Individual Retirement
Accounts, Simplified Employee Pension Plans, Savings Incentive Match Plans
for Employees and other tax-qualified retirement plans (collectively
referred to as "Retirement Plans").
Each Fund (except Small-Cap Value) may invest a significant portion
of its assets in debt securities, and may invest to some extent in
securities rated below investment grade. Each Fund (except Small-Cap
Value) may invest in foreign securities, which would expose it to the
possibility of currency fluctuations and other risks of foreign investing.
Each Fund (except American Leading Companies and Small-Cap Value) may use
futures contracts and/or options for hedging or income purposes, which may
expose it to the potential for losses greater than the value of the Fund's
investment in such instruments.
Of course, there can be no assurance that any Fund will achieve its
objective. See "Investment Objectives and Policies," page 8, which also
includes a discussion of risks.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISERS:
Legg Mason Fund Adviser, Inc. (for Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies)
Bartlett & Co. (for Balanced Trust)
Brandywine Asset Management, Inc. (for Small-Cap Value)
PURCHASE METHODS:
Send bank/personal check or wire federal funds. There is a $1,000
minimum, generally, for initial purchases, and a $100 minimum, generally,
for subsequent purchases. Lower minimums for initial and subsequent
purchases apply for automatic investments. See "How You Can Invest in the
Funds," page 19.
REDEMPTION METHODS:
Redeem by calling your financial advisor or service provider, or
redeem by mail. See "How You Can Redeem Your Primary Shares," page 20.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 24.
DIVIDENDS:
Declared and paid quarterly for Value Trust, Total Return Trust and
Balanced Trust. Declared and paid after the end of each taxable year of
Special Investment Trust, American Leading Companies and Small-Cap Value.
See "Dividends and Other Distributions," page 22.
REINVESTMENT:
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth below are based on average net assets and annual Fund operating
expenses related to Primary Shares for the year ended March 31, 1998. For
Small-Cap Value, which has no operating history prior to the date of this
Prospectus, other expenses are based on estimates for the current fiscal
year, and fees are adjusted for current expense limits and fee waiver
levels.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
TOTAL SPECIAL AMERICAN SMALL-
VALUE RETURN INVESTMENT LEADING BALANCED CAP
TRUST TRUST TRUST COMPANIES TRUST VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management fees 0.69% 0.75% 0.74% 0.71%(A) 0.46%(A) 0.55%(A)
12b-1 fees 0.95% 1.00% 1.00% 1.00% 0.75% 1.00%
Other expenses 0.09% 0.13% 0.12% 0.24% 0.64% 0.45%
----------------------------------------------------------------
Total operating expenses 1.73% 1.88% 1.86% 1.95%(A) 1.85%(A) 2.00%(A)
----------------------------------------------------------------
</TABLE>
--------------------
(A) After fee waivers. LMFA and Legg Mason have voluntarily agreed to waive
management and 12b-1 fees to the extent necessary to limit total
operating expenses relating to Primary Shares (exclusive of taxes,
brokerage commissions, interest and extraordinary expenses) as follows:
for Total Return Trust and American Leading Companies, 1.95% of each
Fund's average daily net assets attributable to Primary Shares
indefinitely; for Balanced Trust, 1.85% of average daily net assets
attributable to Primary Shares until July 31, 1999; and for Small-Cap
Value, 2.00% of average daily net assets attributable to Primary Shares
until July 31, 1999. In the absence of such waivers, the management fee,
12b-1 fee, other expenses and total operating expenses relating to
Primary Shares would have been as follows: for American Leading
Companies, 0.75%, 1.00%, 0.24% and 1.99% of average net assets; for
Balanced Trust, 0.75%, 0.75%, 0.64% and 2.14% of average net assets; and
for Small-Cap Value, 0.85%, 1.00%, 0.45%, and 2.30% of average net
assets. In the fiscal year ended March 31, 1998, no fee waivers were
necessary for Total Return Trust.
Because each Fund pays 12b-1 fees with respect to Primary Shares,
long-term investors in Primary Shares may pay more in distribution expenses
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD").
For further information concerning the Funds' expenses, please see "The
Funds' Management and Investment Advisers" and "The Funds' Distributor,"
pages 24-27.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. The Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN SMALL-
VALUE RETURN INVESTMENT LEADING BALANCED CAP
TRUST TRUST TRUST COMPANIES TRUST VALUE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 18 $ 19 $ 19 $ 20 $ 19 $ 20
3 Years $ 54 $ 59 $ 58 $ 61 $ 58 $ 63
5 Years $ 94 $102 $101 $ 105 $100 N/A
10 Years $204 $220 $218 $ 227 $217 N/A
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
table and the assumption in the example of a 5% annual return are required
by regulations of the SEC applicable to all mutual funds. THE ASSUMED 5%
ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED
OR ACTUAL PERFORMANCE OF, PRIMARY SHARES OF THE FUNDS. THE ABOVE TABLE AND
EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The
actual expenses
4
<PAGE>
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 LMFA and/or Legg Mason waive their fees and the extent
to which Primary Shares incur variable expenses, such as transfer agency
costs.
--------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the tables that follow has been audited
for Value Trust, Total Return Trust and Special Investment Trust by Coopers
& Lybrand L.L.P., independent accountants, and for American Leading
Companies and Balanced Trust, by Ernst & Young LLP, independent auditors.
Each Fund's financial statements for the year ended March 31, 1998 and the
report of Coopers & Lybrand L.L.P. or Ernst & Young LLP thereon are
included in their combined annual reports and are incorporated by reference
in the Statement of Additional Information. The combined annual reports are
available to shareholders without charge by calling your Legg Mason or
affiliated financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544. As of the date of this Prospectus, Small-Cap Value has no
operating history and has not issued any annual reports.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Year (Loss) Investments Operations Income Investments Distributions
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 34.11 $ (.02) $18.37 $18.35 $ (.04) $ (2.32) $ (2.36)
1997 26.99 .13 8.68 8.81 (.16) (1.53) (1.69)
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41)
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09)
1994 17.81 .08 .92 1.00 (.11) (.20) (.31)
1993 15.69 .18 2.12 2.30 (.18) -- (.18)
1992 13.38 .25 2.34 2.59 (.28) -- (.28)
1991 14.19 .32 (.74) (.42) (.36) (.03) (.39)
1990 14.16 .33 .77 1.10 (.33) (.74) (1.07)
1989 12.14 .21 1.99 2.20 (.18) -- (.18)
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 26.55 $ (.31) $11.28 $10.97 $ -- $ (1.50) $ (1.50)
1997 25.09 (.23) 3.10 2.87 -- (1.41) (1.41)
1996 19.96 -- 5.60 5.60 -- (.47) (.47)
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23)
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17)
1993 17.00 .03 1.66 1.69 -- (.78) (.78)
1992 14.59 .12 2.83 2.95 (.14) (.40) (.54)
1991 13.58 .18 2.42 2.60 (.27) (1.32) (1.59)
1990 11.84 .12 1.70 1.82 (.08) -- (.08)
1989 10.14 .06 1.65 1.71 (.01) -- (.01)
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Year Return Net Assets Net Assets Rate Paid(E) (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 50.10 55.34% 1.73% (.1)% 12.9% $.0538 $4,810,409
1997 34.11 33.59% 1.77% .4% 10.5% .0557 2,236,400
1996 26.99 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 20.21 9.77% 1.81% .5% 20.1% -- 986,325
1994 18.50 5.65% 1.82% .5% 25.5% -- 912,418
1993 17.81 14.76% 1.86% 1.1% 21.8% -- 878,394
1992 15.69 19.53% 1.90% 1.7% 39.4% -- 745,833
1991 13.38 (2.88)% 1.90% 2.5% 38.8% -- 690,053
1990 14.19 7.74% 1.86% 2.2% 30.7% -- 808,780
1989 14.16 18.33% 1.96% 1.6% 29.7% -- 720,961
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 36.02 42.88% 1.86% (1.1)% 29.8% $.0481 $1,555,336
1997 26.55 11.58% 1.92% (.9)% 29.2% .0514 947,684
1996 25.09 28.47% 1.96% -- 35.6% -- 792,240
1995 19.96 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.56 21.35% 1.94% (.6)% 16.7% -- 565,486
1993 17.91 10.50% 2.00% .2% 32.5% -- 322,572
1992 17.00 20.46% 2.10% .8% 56.9% -- 201,772
1991 14.59 21.46% 2.30% 1.4% 75.6% -- 106,770
1990 13.58 15.37% 2.30% 1.0% 115.9% -- 68,240
1989 11.84 16.99% 2.50% .7% 122.4% -- 44,450
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Period (Loss) Investments Operations Income Investments Distributions
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 19.39 $ .44 $ 7.23 $ 7.67 $ (.40) $ (2.03) $ (2.43)
1997 16.45 .46 3.47 3.93 (.43) (.56) (.99)
1996 12.79 .48 3.69 4.17 (.51) -- (.51)
1995 13.54 .33 (.19) .14 (.29) (.60) (.89)
1994 13.61 .36 .24 .60 (.33) (.34) (.67)
1993 11.64 .39 1.89 2.28 (.31) -- (.31)
1992 9.64 .34 1.91 2.25 (.25) -- (.25)
1991 10.03 .28 (.31) (.03) (.29) (.07) (.36)
1990 10.06 .21 .15 .36 (.21) (.18) (.39)
1989 8.86 .15 1.18 1.33 (.13) -- (.13)
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1998 $ 14.74 $ (.04)(F) $ 4.93 $ 4.89 $ -- $ (1.85) $ (1.85)
1997 12.23 .01(F) 3.00 3.01 (.02) (.48) (.50)
1996 10.18 .07(F) 2.08 2.15 (.10) -- (.10)
1995 9.69 .12(F) .48 .60 (.11) -- (.11)
1994(A) 10.00 .06(F) (.34) (.28) (.03) -- (.03)
BALANCED TRUST
-- Primary Class
1998 $ 10.16 $ .21(G) $ 2.58 $ 2.79 $ (.21) $ (.12) $ (.33)
1997(B) 10.00 .09(G) .11 .20 (.04) -- (.04)
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Period
Period Return Net Assets Net Assets Rate Paid(E) (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 24.63 42.44% 1.88% 2.1% 20.6% $.0585 $ 700,535
1997 19.39 24.33% 1.93% 2.6% 38.4% .0528 380,458
1996 16.45 33.23% 1.95% 3.2% 34.7% -- 267,010
1995 12.79 1.09% 1.93% 2.5% 61.9% -- 194,767
1994 13.54 4.57% 1.94% 2.7% 46.6% -- 184,284
1993 13.61 19.88% 1.95%(H) 3.1%(H) 40.5% -- 139,034
1992 11.64 23.59% 2.34% 3.1% 38.4% -- 52,360
1991 9.64 (0.05)% 2.50% 3.1% 62.1% -- 22,822
1990 10.03 3.48% 2.39% 2.0% 39.2% -- 26,815
1989 10.06 15.16% 2.40% 1.6% 25.7% -- 30,102
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1998 $ 17.78 35.18% 1.95%(F) (.28)%(F) 51.4% $.0620 $ 200,326
1997 14.74 24.73% 1.95%(F) .05%(F) 55.7% .0640 104,812
1996 12.23 21.24% 1.95%(F) .69%(F) 43.4% -- 76,100
1995 10.18 6.24% 1.95%(F) 1.21%(F) 30.5% -- 59,985
1994(A) 9.69 (2.86)%(C) 1.95%(D,F) 1.14%(D,F) 21.0%(D) -- 55,022
BALANCED TRUST
-- Primary Class
1998 $ 12.62 27.80% 1.85%(G) 2.08%(G) 34.5% $.0714 $ 47,761
1997(B) 10.16 2.02%(C) 1.85%(D,G) 2.52%(D,G) 5.1%(D) .0622 17,948
</TABLE>
---------------------------------------------------------
(A) FOR THE PERIOD SEPTEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1994.
(B) FOR THE PERIOD OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1997.
(C) NOT ANNUALIZED
(D) ANNUALIZED
(E) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY EACH FUND.
(F) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.95%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY LMFA, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD
SEPTEMBER 1, 1993 TO MARCH 31, 1994 AND FOR THE YEARS ENDED MARCH 31,
1995, 1996, 1997 AND 1998 WOULD HAVE BEEN 2.28%, 2.12%, 2.20%, 2.06%, AND
1.99%, RESPECTIVELY.
(G) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.85%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY LMFA, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD
OCTOBER 1, 1996 TO MARCH 31, 1997 AND FOR THE YEAR ENDED MARCH 31, 1998
WOULD HAVE BEEN 3.03% AND 2.14%, RESPECTIVELY.
(H) NET OF FEES WAIVED IN EXCESS OF AN INDEFINITE VOLUNTARY EXPENSE
LIMITATION OF 1.95%.
6
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of a class of
shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
CUMULATIVE TOTAL RETURN shows the fund's performance over a specific
period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, each Fund's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and the S&P 500, two unmanaged indexes of widely
held common stocks. No adjustment has been made for any income taxes
payable by shareholders.
The investment return and principal value of an investment in each
Fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Returns of each Fund would
have been lower if LMFA and/or Legg Mason had not waived certain fees for
the fiscal years ended March 31, as follows: 1989 through 1998 for Value
Trust; 1986 through 1995 for Total Return Trust; 1986 through 1998 for
Special Investment Trust; 1994 through 1998 for American Leading Companies
and 1997 through 1998 for Balanced Trust.
Performance figures reflect past performance only and are not intended
to and do not indicate future performance. Further information about each
Fund's performance is contained in its Annual Report to Shareholders,
which may be obtained without charge by calling your Legg Mason or
affiliated financial advisor or
Legg Mason's Funds Marketing Department at
800-822-5544.
Although U.S. equity funds have grown significantly in recent years,
the average long-term growth of general equity funds as reported by
Lipper Analytical Services, Inc. over the last 25 years has been 13.2%,
and some years have shown a net decline in value.
Total returns as of March 31, 1998 were as follows:
<TABLE>
<CAPTION>
SPECIAL AMERICAN
TOTAL RETURN INVESTMENT LEADING
VALUE TRUST TRUST TRUST COMPANIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +55.34% +42.44% +42.88% +35.18%
Five Years +241.95% +149.45% +132.70% N/A
Ten Years +480.95% +340.24% +407.76% N/A
Life of Class -- Value Trust(A) +1,917.61%
Life of Class -- Total Return Trust(B) +369.95%
Life of Class -- Special Investment Trust(C) +469.69%
Life of Class -- American Leading Companies(D) +111.00%
Life of Class -- Balanced Trust(E)
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year +55.34% +42.44% +42.88% +35.18%
Five Years +27.88% +20.06% +18.40% N/A
Ten Years +19.24% +15.98% +17.64% N/A
Life of Class -- Value Trust(A) +20.72%
Life of Class -- Total Return Trust(B) +13.33%
Life of Class -- Special Investment Trust(C) +15.25%
Life of Class -- American Leading Companies(D) +17.69%
Life of Class -- Balanced Trust(E)
<CAPTION>
S&P 500
BALANCED VALUE LINE STOCK
TRUST INDEX INDEX
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +27.80% +37.76% +48.00%
Five Years N/A +102.11% +174.73%
Ten Years N/A +188.76% +466.73%
Life of Class -- Value Trust(A) +521.14% +1,507.01%
Life of Class -- Total Return Trust(B) +239.41% +686.53%
Life of Class -- Special Investment Trust(C) +228.64% +642.49%
Life of Class -- American Leading Companies(D) +98.78% +166.32%
Life of Class -- Balanced Trust(E) +30.38% +33.66% +60.18%
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year +27.80% +37.76% +48.00%
Five Years N/A +15.11% +22.40%
Ten Years N/A +11.19% +18.94%
Life of Class -- Value Trust(A) +12.12% +19.00%
Life of Class -- Total Return Trust(B) +10.39% +18.16%
Life of Class -- Special Investment Trust(C) +10.20% +17.78%
Life of Class -- American Leading Companies(D) +16.49% +24.32%
Life of Class -- Balanced Trust(E) +19.36% +22.73% +39.45%
</TABLE>
--------------------
(A) INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
(B) INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
(C) INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
(D) INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
(E) INCEPTION OF BALANCED TRUST -- OCTOBER 1, 1996.
The S&P 500 and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P 500 and Value Line Index figures do not include
brokerage commissions and other costs of investing.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Fund's Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. LMFA believes
that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
LMFA believes that the securities of sound, well-managed companies
that may be temporarily out of favor due to earnings declines or other
adverse developments are likely to provide a greater total return than
securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. LMFA
believes, however, that purchasing securities depressed by temporary
factors will provide investment returns superior to those obtained when
premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
LMFA believes the return on certain debt securities may equal or exceed
the return on equity securities. The Fund may invest in debt securities of
both foreign and domestic issuers of any maturity without regard to
rating, and may invest its assets in such securities without regard to a
percentage limit. LMFA currently anticipates that under normal market
conditions, the Fund will invest no more than 25% of its total assets in
long-term debt securities. Up to 10% of its total assets may be invested
in debt securities not rated investment grade, i.e., not rated at least
BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated by those entities, deemed by LMFA to be of
comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. LMFA attempts to meet its objective by
investing in dividend-paying common stocks, debt securities and securities
convertible into common stocks which, in the opinion of LMFA, offer
potential for attractive total return. The Fund also invests in common
stocks and securities convertible into common stocks which do not pay
current dividends but which, in LMFA's opinion, offer prospects for
capital appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where LMFA believes
the return on certain debt securities may equal or exceed the return on
equity securities. The Fund may invest in debt securities of any maturity
of both foreign and domestic issuers without regard to rating and may
invest its assets in such securities without regard to a percentage limit.
LMFA currently anticipates that under normal market conditions, the Fund
will invest no more than 50% of its total assets in intermediate-term and
long-term debt securities, and no more than 5% of its total assets in debt
8
<PAGE>
securities not rated investment grade, i.e., not rated at least BBB by S&P
or Baa by Moody's or, if unrated by those entities, deemed by LMFA to be
of comparable quality.
SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities, and securities convertible into equity securities, of
companies with market capitalizations of less than $2.5 billion which LMFA
believes have one or more of the following characteristics:
1. The companies generally are not closely followed by, or are out of
favor with, investors, and appear to be undervalued in relation to their
long-term earning power or asset values. A security may be undervalued
because of many factors, including market decline, poor economic
conditions, tax-loss selling, or actual or anticipated developments
affecting the issuer.
2. The companies are experiencing unusual and possibly non-repetitive
developments which, in the opinion of LMFA, may cause the market values of
the securities to increase. Such developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. The companies are involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. No more than 20% of the
Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, LMFA 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, LMFA may invest in larger, more
highly-capitalized companies when circumstances warrant such investments.
In addition, companies whose market capitalizations grow to exceed $2.5
billion after investment by the Fund may continue to be held by the Fund.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
net assets may be invested in debt securities not rated at least BBB by
S&P, or Baa by Moody's, and securities unrated by those entities, deemed
by LMFA to be of comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be in issuers whose long-term debt is rated in one of the
four highest rating categories by S&P or Moody's or, if unrated by S&P or
Moody's, deemed by LMFA to be of comparable quality.
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund
9
<PAGE>
will invest at least 75% of its total assets in a diversified portfolio of
dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. LMFA defines a "Leading Company"
as a company that, in the opinion of LMFA, has attained a major market
share in one or more products or services within its industry(ies), and
possesses the financial strength and management talent to maintain or
increase market share and profit in the future. Such companies are
typically well known as leaders in their respective industries; most are
found in the top half of the S&P 500. Additionally, LMFA's goal is to
invest in companies having what LMFA believes is a reasonable
price/earnings ratio, and it will favor those companies with well
established histories of dividends and dividend growth rates. The Fund may
also invest in companies having capitalizations above or below $2 billion
which LMFA believes show strong potential for future market leadership,
and in companies which LMFA believes, because of corporate restructuring
or other changes, are undervalued based on their potential for future
growth. There is always a risk that LMFA will not properly assess the
potential for an issuer's future growth, or that an issuer will not
realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. Under normal circumstances, the Fund
expects to own a minimum of 35 different securities. The Fund may also
invest in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income. The Fund may invest in when-issued
securities, which may involve additional risks.
During periods when LMFA believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMFA to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities not rated at least Ba by Moody's or BB by S&P or, if unrated by
those entities, deemed by LMFA to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. The Fund will invest in
a combination of equity, debt and money market securities in attempting to
achieve its objective. Under normal conditions, the Fund will invest no
more than 75% of its assets in equity securities. Bartlett & Co.
("Bartlett"), as investment adviser, will emphasize investments in
dividend-paying equity securities that, in the opinion of Bartlett, offer
the potential for long-term growth, and in common stocks or securities
convertible into common stock that do not pay current dividends but offer
prospects for capital appreciation and future income.
The Fund will invest at least 25% of its portfolio in fixed income
securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations, and mortgage-related securities;
certificates of deposit; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by Moody's, S&P or Fitch Investors Services ("Fitch"),
respectively; and repurchase agreements. No more than 5% of the Fund's
total assets may be invested in fixed income or convertible securities not
rated at least BBB or Baa at the time of purchase, or comparable unrated
securities. If an investment grade security purchased by the Fund
subsequently loses
10
<PAGE>
its investment grade rating, Bartlett will determine whether to retain
that security in the Fund's portfolio. The Fund may invest in securities
of any maturity, but, under normal circumstances, expects to maintain its
portfolio of fixed income securities so as to have an average
dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity and
debt securities. This approach attempts to "balance" the potential for
growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and may purchase exchange-traded futures contracts
on stock indices and options thereon. The Fund may use derivatives, such
as options and futures, in its investment activities. No more than 15% of
the Fund's net assets may be invested in illiquid securities. The Fund may
also engage in reverse repurchase agreements.
For the year ended March 31, 1998, the portfolio turnover rate for the
equity portion of the Fund's portfolio was 18.8% and the portfolio
turnover rate for the fixed income portion was 58.1%. The Fund's total
portfolio turnover rate for the year ended March 31, 1998 was 34.5%.
SMALL-CAP VALUE'S investment objective is long-term capital
appreciation. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of small-capitalization
companies, defined as those whose market capitalizations at the time of
investment range between $10 million and the median NYSE market
capitalization. Brandywine selects securities from the universe of stocks
generally traded on the major stock exchanges and in the over-the-counter
market. For purposes of the Fund's investment policies, securities of
small-cap companies purchased by the Fund may still be considered small-
cap securities, even if the company's market cap later comes to exceed the
median market cap of the NYSE. The Fund will invest at least 65% of its
total assets in domestic securities.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
FOR EACH FUND:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in repurchase agreements and
money market instruments, including high-quality short-term debt
securities. A repurchase agreement is an agreement under which either U.S.
government obligations or high-quality liquid debt securities are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for each Fund by a custodian bank as
collateral until resold and will be supplemented by additional collateral
if necessary to maintain a total value equal to or in excess of the value
of the repurchase agreement. Each Fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose
of the collateral securities, which may decline in value in the interim.
The Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust and Total Return Trust) or 15% (for American Leading Companies,
Balanced Trust, Special Investment Trust and Small-Cap Value) of its net
assets would be invested in such agreements and other illiquid
investments.
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its net assets.
For further information concerning securities lending, see the Statement
of Additional Information.
SMALL- AND MID-SIZED COMPANY STOCKS
The advisers for Special Investment Trust and Small-Cap Value believe
that the comparative lack
11
<PAGE>
of attention by investment analysts and institutional investors to small
and mid-sized companies may result in opportunities to purchase the
securities of such companies at attractive prices compared to historical
or market price-earnings ratios, book value, return on equity or long-term
prospects. Each Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of either
Special Investment Trust or Small-Cap Value may not be widely traded, and
that a Fund's position in such securities may be substantial in relation
to the market for such securities. Accordingly, it may be difficult for a
Fund to dispose of such securities at prevailing market prices in order to
meet redemptions. However, as a non-fundamental policy, Special Investment
Trust and Small-Cap Value will not invest more than 15% of their
respective net assets in illiquid securities.
Investments in securities of companies with small market
capitalizations are generally considered to offer greater opportunity for
appreciation but also may involve greater risks than customarily are
associated with more established companies. The securities of smaller
companies may be subject to more abrupt fluctuations in market price than
larger, more established companies. Small companies may have limited
product lines, markets or financial resources, or they may be dependent
upon a limited management group. In addition to exhibiting greater
volatility, small company stocks may, to a degree, fluctuate independently
of larger company stocks, I.E., small company stocks may decline in price
as the prices of large company stocks rise or vice versa.
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Shareholders may suffer a
loss of value if dividends are not paid. The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes in the issuer's creditworthiness than are the prices of debt
securities.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established
in the convertible security's governing instrument.
12
<PAGE>
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, its adviser reviews and
monitors the creditworthiness of each issuer and issue. The adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA") ); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Fannie Mae securities); and (4) solely the
creditworthiness of the issuer (e.g., Freddie Mac securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
STRIPPED SECURITIES
Stripped securities are created by separating bonds into their
principal and interest components and selling each piece separately
(commonly referred to as IOs and POs). Stripped securities are more
volatile than other fixed income securities in their response to changes
in market interest rates. The value of some stripped securities moves in
the same direction as interest rates, further increasing their volatility.
ZERO COUPON BONDS
Zero coupon bonds do not provide for cash interest payments but
instead are issued at a significant discount from face value. Each year, a
holder of such bonds must accrue a portion of the discount as income.
Because each Fund is required to pay out substantially all of its income
each year, including income accrued on zero coupon bonds, a Fund may have
to sell other holdings to raise cash necessary to make the payout. Because
issuers of zero coupon bonds do not make periodic interest payments, their
prices can be very volatile when market interest rates change.
INDEXED SECURITIES
Each Fund may invest up to 5% of its net assets in securities whose
prices are indexed to the prices of securities indexes, currencies or
other financial statistics. Such investments must be consistent with each
Fund's investment objective and policies.
CLOSED-END INVESTMENT COMPANIES
Each Fund may invest in the securities of closed-end investment
companies. Such investments may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities,
and the total return on such investments will be reduced by the operating
expenses and fees of such investment companies, including advisory fees. A
Fund will invest in such funds, when, in the adviser's judgment, the
potential benefits of such investment justify the payment of any
applicable premium or sales charge.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. These risks are intensified when investing in countries
with developing economies and securities markets, also known as "emerging
markets." Moreover, securities of many foreign issuers may be less liquid
and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is
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the possibility of expropriation, confiscatory taxation, withholding taxes
and limitations on the use or removal of funds or other assets.
The Funds may also invest in ADRs, which are securities issued by
banks evidencing their ownership of specific foreign securities. ADRs may
be sponsored or unsponsored; issuers of securities underlying unsponsored
ADRs are not contractually obligated to disclose material information in
the U.S. Accordingly, there may be less information available about such
issuers than there is with respect to domestic companies and issuers of
securities underlying sponsored ADRs. Although ADRs are denominated in
U.S. dollars, the underlying security often is not; thus, the value of the
ADR may be subject to exchange controls and variations in the exchange
rate. The Funds may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank
evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate that Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies will each invest
no more than 25% of its total assets in foreign securities. Bartlett
currently anticipates that Balanced Trust will not invest more than 10% of
its total assets in foreign securities, either directly or through ADRs or
GDRs.
ILLIQUID SECURITIES
Value Trust and Total Return Trust may each invest up to 10% of its
net assets in illiquid securities. American Leading Companies, Balanced
Trust, Special Investment Trust and Small-Cap Value may each invest up to
15% of its net assets in illiquid securities. Illiquid securities are
securities that cannot be expected to be sold within seven days at
approximately the price at which they are valued by the Fund. Due to the
absence of an active trading market, a Fund may have difficulty valuing or
disposing of illiquid securities promptly. Securities whose sale is
legally restricted are often considered illiquid. Foreign securities that
are freely tradable in their country of origin or in their principal
market are not considered restricted securities even if they are not
registered for sale in the U.S.
WHEN-ISSUED SECURITIES
Each Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced
and have the best liquidity in the bond market. When a Fund purchases
securities on a when-issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at
the time of receipt. However, a Fund does not have to pay for the
obligations until they are delivered to it. This is normally 7 to 15 days
later, but could be considerably longer in the case of some
mortgage-backed securities. Use of this practice would have a leveraging
effect on a Fund. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. A Fund may sell the securities subject to a when-issued purchase,
which may result in a gain or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
Each of these Funds can invest in futures and options transactions,
including puts and calls. Because such investments "derive" their value
from the value of the underlying security, index, or interest rate on
which they are based, they are sometimes referred to as "derivative"
securities. Such investments involve risks that are different from those
presented by investing directly in the securities themselves. While
utilization of options, futures contracts and similar instruments may be
advantageous to a Fund, if its adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance
will be worse than if the Fund did not make such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on
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that index could reduce the risks associated with a market decline and
thus provide an alternative to the liquidation of securities positions. A
Fund may sell an interest rate futures contract to offset price changes of
debt securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be limited to the amount of
the premium it received. If stock prices remain the same over time, it is
likely that the Fund will also profit, because it should be able to close
out the option at a lower price. If stock prices fall, the Fund would
expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, when writing call
options the Fund would give up some ability to participate in security
price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the advisers in managing the Funds'
portfolios. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate its hedged position. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete
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discussion of the possible risks involved in transactions in options and
futures contracts is contained in the Statement of Additional Information.
Each Fund's current policy is to limit options and futures transactions to
those described above. The Funds may purchase and write both over-the-
counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
AMERICAN LEADING COMPANIES:
Although American Leading Companies may not invest in futures
transactions, it may to a limited extent sell covered call options on any
security in which it is permitted to invest for the purpose of enhancing
income. American Leading Companies may not invest in any other form of
option transaction.
A call option is "covered" if, at all times the option is outstanding,
the Fund holds the underlying security or a right to obtain that security
at no additional cost. The risks of selling covered call options are
described above.
As a non-fundamental policy, the Fund will not sell a covered call
option if, as a result, the value of the portfolio securities underlying
all outstanding covered call options would exceed 25% of the value of the
equity securities held by the Fund.
FOR EACH FUND:
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract is an obligation to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
foreign currency contract, a Fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration
of the contract. A Fund may enter into these contracts for the purpose of
hedging against risk arising from its investment in securities denominated
in foreign currencies or when it anticipates investing in such securities.
Forward currency contracts involve certain costs and risks, including the
risk that currency movements will not be accurately predicted, causing a
Fund to sustain losses on these contracts.
THE FOLLOWING DISCUSSION OF INVESTMENTS AND RISKS APPLIES ONLY TO BALANCED
TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing
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power. "Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit the Fund's ability to realize the appreciation in
the value of such securities that would otherwise accompany declining
interest rates. An increase in mortgage prepayments could cause the Fund
to incur a loss on a mortgage-related security that was purchased at a
premium. On the other hand, a decrease in the rate of prepayments,
resulting from an increase in market interest rates, among other causes,
may extend the effective maturities of mortgage-related securities,
increasing their sensitivity to changes in market interest rates. In
determining the average maturity of the fixed income portion of the Fund,
Bartlett must apply certain assumptions and projections about the maturity
and prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
Freddie Mac, a corporate instrumentality of the U.S. Government,
issues mortgage participation certificates ("PCs") which represent
interests in mortgages from Freddie Mac's national portfolio. The mortgage
loans in Freddie Mac's portfolio are not government-backed; rather, the
loans are either uninsured with loan-to-value ratios of 80% or less, or
privately insured if the loan-to-value ratio exceeds 80%. Freddie Mac, not
the U.S. Government, guarantees the timely payment of interest and
ultimate collection of principal on Freddie Mac PCs.
Fannie Mae is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a list of
approved seller/servicers, including savings and loan associations,
savings banks, commercial
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banks, credit unions and mortgage bankers. Pass-through certificates
issued by Fannie Mae ("Fannie Mae certificates") are guaranteed as to
timely payment of principal and interest by Fannie Mae, not the U.S.
Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by Freddie
Mac, Fannie Mae, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. Although full payoff of
each class of bonds is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of
an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER-RATED DEBT SECURITIES
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher
current yield than that provided by higher grade issues, but also involve
higher risks. Debt securities rated C by Moody's and S&P are bonds on
which no interest is being paid and which can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
However, debt securities, regardless of their ratings, generally have a
higher priority in the issuer's capital structure than do equity
securities.
Lower-rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
Lower-rated debt securities are also sometimes referred to as "junk
bonds."
The market for lower-rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower-rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on
lower-rated debt securities rose dramatically, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.
The market for lower-rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a
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Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower-rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers. If
securities are rated investment grade by one rating organization and below
investment grade by the other, the adviser may rely on the rating that it
believes is more accurate. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Fund policies, unless described as fundamental, can be changed
by action of its respective Board of Directors.
The fundamental restrictions applicable to each Fund include a
prohibition on investing 25% or more of its total assets in the securities
of issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto).
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason, with an affiliate that has an agreement with Legg
Mason, or with an unaffiliated entity having an agreement with Legg Mason
("Financial Advisor or Service Provider"). Your Financial Advisor or
Service Provider will be pleased to explain the shareholder services
available from the Funds and answer any questions you may have. Documents
available from your Financial Advisor or Service Provider should be
completed if you invest in shares of the Funds through a Retirement Plan.
Investors who are considering establishing a Retirement Plan may wish
to consult their attorneys or tax advisers with respect to individual tax
questions. Your Financial Advisor or Service Provider can make available
to you forms of plans. The option of investing in these plans through
regular payroll deductions may be arranged with Legg Mason and your
employer. Additional information with respect to these plans is available
upon request from a Financial Advisor or Service Provider.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds and investments in a Retirement Plan, is $1,000, and the minimum
investment for each purchase of additional shares is $100, except as noted
below. For those investing through the Funds' Future First Systematic
Investment Plan, payroll deduction plans and plans involving automatic
payment of funds from financial institutions or automatic investment of
dividends from certain
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unit investment trusts, minimum initial and subsequent investments are
lower. Each Fund may change these minimum amount requirements at its
discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. THROUGH A FINANCIAL ADVISOR OR SERVICE PROVIDER
Shares may be purchased through a Financial Advisor or Service
Provider. A Financial Advisor or Service Provider will be pleased to open
an account for you, explain to you the shareholder services available from
the Funds and answer any questions you may have. After you have
established an account, you can order shares from your Financial Advisor
or Service Provider in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Funds of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to transfer funds each month from
your Legg Mason account or from your checking account. Please contact a
Financial Advisor or Service Provider for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through a Financial Advisor
or Service Provider.
Primary Share purchases will be processed at the net asset value next
determined after your Financial Advisor or Service Provider has received
your order; payment must be made within three business days to Legg Mason.
Orders received by your Financial Advisor or Service Provider before the
close of regular trading on the New York Stock Exchange ("Exchange")
(normally 4:00 p.m. Eastern time) ("close of the Exchange") on any day the
Exchange is open will be executed at the net asset value determined as of
the close of the Exchange on that day. Orders received by your Financial
Advisor or Service Provider after the close of the Exchange or on days the
Exchange is closed will be executed at the net asset value determined as
of the close of the Exchange on the next day the Exchange is open. See
"How Net Asset Value is Determined," page 21. Each Fund reserves the right
to reject any order for its shares or to suspend the offering of shares
for a period of time. Some Service Providers may place other conditions on
the purchase of shares. Consult their program literature for further
information.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. Shares may not be held in, or
transferred to, an account with any brokerage firm that does not have an
agreement with Legg Mason. The Funds do not issue share certificates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Financial Advisor or Service Provider an order for redemption of
your shares in person or by telephone. Please have the following
information ready when you call: the name of the Fund, the number of
shares (or dollar amount) to be redeemed and your shareholder account
number. Second, you may send a written request for redemption to: [insert
complete Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476.
Requests for redemption received by your Financial Advisor or Service
Provider before the
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close of the Exchange on any day when the Exchange is open, will be
transmitted to BFDS, transfer agent for the Funds, for redemption at the
net asset value per share determined as of the close of the Exchange on
that day. Requests for redemption received by your Financial Advisor or
Service Provider after the close of the Exchange will be executed at the
net asset value determined as of the close of the Exchange on its next
trading day. A redemption request received by your Financial Advisor or
Service Provider may be treated as a request for repurchase and, if it is
accepted, your shares will be purchased at the net asset value per share
determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your brokerage account
two business days after trade date. The proceeds of your redemption or
repurchase may be more or less than your original cost. If the shares to
be redeemed or repurchased were paid for by check (including certified or
cashier's checks), within 10 business days of the redemption or repurchase
request, the proceeds will not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
Written requests for redemption must be in "good order." A redemption
request will be considered to be received in "good order" only if:
1. You have indicated in writing the number of Primary Shares (or
dollar amount) to be redeemed, the complete Fund name and your shareholder
account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Financial
Advisor or Service Provider.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do not follow reasonable procedures. Telephone redemption privileges
are available automatically to all shareholders unless certificates have
been issued. Shareholders who do not wish to have telephone redemption
privileges should call their Financial Advisor or Service Provider for
further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days to
make an additional investment to avoid having your account closed.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
its adviser, the Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) Some Service Providers may have other procedures
for redemption, either in addition to or instead of those described above.
Consult your Service Provider's literature for more information.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily as
of the close of the
21
<PAGE>
Exchange, on every day that the Exchange is open, by subtracting the
liabilities attributable to Primary Shares from the total assets
attributable to such shares and dividing the result by the number of
Primary Shares outstanding. Securities owned by each Fund for which market
quotations are readily available are valued at current market value. In
the absence of readily available market quotations, securities are valued
at fair value as determined by each Fund's Board of Directors. Where a
security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by
each Fund's adviser to be the primary market. Securities with remaining
maturities of 60 days or less are valued at amortized cost. Each Fund will
value its foreign securities in U.S. dollars on the basis of the
then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Primary Shares out of its
investment company taxable income (which generally consists of net
investment income, any net short-term capital gain and any net gains from
certain foreign currency transactions) attributable to those shares. Value
Trust, Total Return Trust and Balanced Trust declare and pay dividends
from net investment income quarterly; they pay dividends from any net
short-term capital gains and net gains from foreign currency transactions
annually. Special Investment Trust, American Leading Companies and Small-
Cap Value declare and pay dividends from investment company taxable income
following the end of each taxable year. Each Fund also distributes
substantially all of its net capital gain (the excess of net long-term
capital gain over net short-term capital loss) after the end of the
taxable year in which the gain is realized. A second distribution of net
capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Dividends and other distributions, if
any, on Primary Shares held in a Retirement Plan and by shareholders
maintaining a Systematic Withdrawal Plan generally are reinvested in
Primary Shares of the distributing Fund on the payment dates. Other
shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of
the distributing Fund;
2. Receive dividends in cash and other distributions in Primary Shares
of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to
having all dividends and other distributions reinvested in additional
Primary Shares. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of Shares of another Legg Mason
fund. Please contact your Financial Advisor or Service Provider for
additional information about this option.
If no election is made, both dividends and other distributions are
credited to your Fund account in Primary Shares of the distributing Fund
at the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also are credited to your
account at that net asset value. Shareholders electing to receive
dividends and/or other distributions in cash will be sent a check or will
have their Legg Mason account credited after the payment date. You may
elect at any time to change your option by notifying the applicable Fund
in writing at: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. Your election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
22
<PAGE>
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended, so
that it will be relieved of federal income tax on that part of its
investment company taxable income and net capital gain that it distributes
to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Primary Shares) are taxable to its
shareholders (other than Retirement Plans and other tax-deferred or
tax-exempt investors) as ordinary income to the extent of the Fund's
earnings and profits. Distributions of each Fund's net capital gain
(whether paid in cash or reinvested in Primary Shares), when designated as
such, are taxable to those shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Under the
Taxpayer Relief Act of 1997, different maximum tax rates apply to a
noncorporate taxpayer's net capital gain depending on the holding period
of the security and the taxpayer's marginal rate of federal income
tax -- generally, 28% for gain recognized on capital assets held for more
than one year but not more than 18 months and 20% (10% for taxpayers in
the 15% marginal tax bracket) for gain recognized on capital assets held
for more than 18 months. In the case of a regulated investment company
such as a Fund, the relevant holding period is determined by how long the
Fund has held the portfolio security on which the gain was earned, not by
how long you have held your Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. The notice
will tell you what portion of the capital gain falls into each of the
different tax rate categories mentioned above.
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and
certain other noncorporate shareholders who do not provide the Fund with a
certified taxpayer identification number. Each Fund also is required to
withhold 31% of all dividends and capital gain distributions payable to
such shareholders who otherwise are subject to backup withholding.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Primary Shares of any Fund for shares of any other
Legg Mason fund generally will have similar tax consequences. See
"Shareholder Services -- Exchange Privilege." If Fund shares are purchased
within 30 days before or after redeeming at a loss other shares of the
same Fund (regardless of class), all or part of 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 Primary Shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Funds, depending on the laws of your home
state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions; each Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
23
<PAGE>
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital gain
distributions and shares purchased through
the Future First Systematic Investment Plan or through automatic
investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares only through the
Future First Systematic Investment Plan or through automatic investments,
in which case an account statement will be sent quarterly. Reports will be
sent to each Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its respective independent
accountants/auditors.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Financial
Advisor or Service Provider for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a fund on which the same
or higher initial sales charge previously was paid.
There is no charge for the exchange privilege, but each Fund reserves
the right to terminate or limit the exchange privilege of any shareholder
who makes more than four exchanges from that Fund in one calendar year. To
obtain further information concerning the exchange privilege and
prospectuses of other Legg Mason funds, or to make an exchange, please
contact your Financial Advisor or Service Provider.
To effect an exchange by telephone, please call your Financial Advisor
or Service Provider with the information described in "How You Can Redeem
Your Primary Shares," page 20. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders. Some Service
Providers may not offer all of the Legg Mason Funds for exchange.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
MANAGEMENT AGREEMENTS
Each Fund has a management agreement with LMFA which was approved by
the Fund's Board of Directors (each a "Management Agreement"). Under the
Management Agreements, LMFA is obligated to provide the Funds with
investment management and administrative services, and to oversee the
Funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers.
For services under the Management Agreements, LMFA receives a fee from
each Fund, calculated daily and payable monthly, at the following annual
rates of its average daily net assets:
<TABLE>
<S> <C>
American Leading Companies: 0.75%
Balanced Trust: 0.75%
Small-Cap Value: 0.85%
Total Return Trust 0.75%
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
Value Trust and Special
Investment Trust: 1.0% of the first
$100 million of
average net assets;
0.75% of assets
between $100 million
and $1 billion; and
0.65% of assets
exceeding $1
billion.
</TABLE>
Because of fee waivers (see below), American Leading Companies paid a
management fee of 0.71% and Balanced Trust paid a management fee of 0.46%
for the fiscal year ended March 31, 1998.
ADVISORY AGREEMENTS
LMFA has entered into investment advisory agreements with Bartlett and
Brandywine to provide investment advisory services to Balanced Trust and
Small-Cap Value, respectively. These advisers have the responsibility for
making investment decisions and placing orders to buy or sell a particular
security. LMFA provides these services for Value Trust, Special Investment
Trust, Total Return Trust and American Leading Companies Trust under the
Management Agreements.
Under its Advisory Agreement, Bartlett receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 66 2/3%
of the fee received by LMFA, or 0.50% of Balanced Trust's average daily
net assets, adjusted for any fee waivers, as discussed below.
Under its Advisory Agreement, Brandywine receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 58.8% of
the fee received by LMFA, or 0.50% of Small-Cap Value's average daily net
assets, adjusted for any fee waivers.
Legg Mason Capital Management, Inc. ("LMCM") also serves as an
investment adviser to American Leading Companies pursuant to an Investment
Advisory Agreement with LMFA. LMCM may provide the Fund with research and
investment advisory services for which LMFA (not the Fund) may pay LMCM a
fee. Currently, LMCM is not providing any services to the Fund.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent a Fund's
expenses related to Primary Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during that month annual
rates of that Fund's average daily net assets attributable to Primary
Shares as follows:
<TABLE>
<S> <C>
Total Return Trust and
Americal Leading Companies: 1.95%, indefinitely
Balanced Trust: 1.85% until July 31, 1999
Small-Cap Value: 2.00% until July 31, 1999
</TABLE>
These agreements are voluntary and may be terminated by LMFA at any
time. Each Fund pays all its other expenses which are not assumed by LMFA.
PRIMARY SHARES EXPENSE RATIOS
For the fiscal year ended March 31, 1998, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
<TABLE>
<S> <C>
Value Trust 1.73 %
Total Return Trust 1.88 %
Special Investment Trust 1.86 %
American Leading Companies Trust 1.95 %
Balanced Trust 1.85 %
</TABLE>
As of the date of this Prospectus, Small-Cap Value had not yet begun
operations. In addition to management and distribution fees, that Fund,
like the others, will be responsible for interest, 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,
compensation of the independent directors, legal and audit expenses,
insurance expenses, 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 industry
organizations.
25
<PAGE>
LMFA
LMFA acts as adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of approximately
$12 billion as of April 30, 1998. LMFA's address is 100 Light Street,
Baltimore, Maryland 21202.
Like other mutual funds, financial and business organizations around
the world, the Funds could be adversely affected if the computer systems
used by LMFA and other service providers do not properly process and
calculate date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." LMFA is taking
steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer system that it uses and to obtain
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
BARTLETT
Bartlett acts as adviser to individuals, corporations, pension and
profit sharing plans and trust accounts, as well as to four investment
company portfolios. Bartlett's aggregate assets under management totalled
approximately $3.2 billion as of April 30, 1998. Bartlett's address is 36
East Fourth Street, Cincinnati, Ohio 45202.
BRANDYWINE
Brandywine acts as adviser or sub-adviser to individuals, public
funds, corporations, pension and profit sharing plans, Taft-Hartley Plans,
endowments and foundations, as well as to three investment company
portfolios. Brandywine's aggregate assets under management totalled
approximately $8.2 billion as of April 30, 1998. Brandywine's address is
201 North Walnut Street, Wilmington, Delaware 19801.
LMCM
LMCM acts as adviser to private accounts and investment company
portfolios with a value as of April 30, 1998 of approximately $2.9
billion. LMCM's address is 100 Light Street, Baltimore, Maryland 21202.
LMFA, LMCM, Bartlett and Brandywine are wholly owned subsidiaries of
Legg Mason, Inc., a financial services holding company.
PORTFOLIO MANAGEMENT
William H. Miller, III, President of LMFA, co-managed Value Trust from
its inception in 1982 to November 1990, when he assumed primary
responsibility for its day-to-day management. Nancy T. Dennin, Senior Vice
President of LMFA, has primary responsibility for the day-to-day
management of Total Return Trust. Prior to April 1, 1997, Mrs. Dennin and
Mr. Miller were co-managers of Total Return Trust. Mr. Miller has also
been primarily responsible for the day-to-day management of Special
Investment Trust since its inception in 1985. Lisa O. Rapuano is assistant
portfolio manager of Special Investment Trust. Mrs. Rapuano has been the
analyst responsible for the technology, media and telecommunication
sectors, as well as for some special situations outside these sectors,
since joining LMFA in September 1994. From July 1991 to September 1994 she
was an analyst at Franklin Street Partners, a money management firm.
Effective March 9, 1998, David E. Nelson, Senior Vice President of
LMFA, has primary responsibility for the day-to-day management of American
Leading Companies. Previously, Mr. Nelson was the portfolio manager for
the UAM ICM Equity Portfolio since its inception on October 1, 1993. Mr.
Nelson was employed at Investment Counselors of Maryland from 1989-1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced
Trust. Both are senior portfolio managers of Bartlett. Mr. Rabiner has
been employed by Bartlett since 1983 and has served since then as Director
of its Fixed Income Group. Mr. Uible has been employed by Bartlett since
1980. He chairs Bartlett's Equity Investment Group, and is responsible for
Bartlett's equity investment processes. Mr. Rabiner and Mr. Uible are
members of Bartlett's Management Committee and Investment Policy
Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value.
Both are Managing Directors of Brandywine. Mr. Otto is a senior portfolio
manager and has been employed at Brandywine since 1987. Mr. Tonkovich is a
portfolio
26
<PAGE>
manager and analyst and has been employed at Brandywine since 1989.
BROKERAGE
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
THE FUNDS' DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of each Fund's shares pursuant to a separate Underwriting
Agreement with each Fund. Each Underwriting Agreement obligates Legg Mason
to pay certain expenses in connection with the offering of shares,
including any compensation to its financial advisors, the printing and
distribution of prospectuses, statements of additional information and
periodic reports used in connection with the offering to prospective
investors, after the prospectuses, statements of additional information
and reports have been prepared, set in type and mailed to existing
shareholders at the Fund's expense, and for any supplementary sales
literature and advertising costs.
Legg Mason has an agreement with the Funds' transfer agent to assist
it with some of its duties. For this assistance, Legg Mason was paid the
following amounts by the transfer agent for the year ended March 31, 1998:
Value Trust, $439,000; Total Return Trust, $76,000; Special Investment
Trust, $238,000; American Leading Companies, $28,000 and Balanced Trust,
$7,000.
The Board of Directors of each Fund has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). The Plan provides that as
compensation for its ongoing services to investors in Primary Shares and
its activities and expenses related to the sale and distribution of
Primary Shares, Legg Mason receives from each Fund an annual distribution
fee payable from the assets attributable to Primary Shares, of up to:
0.75% of the average daily net assets attributable to Primary Shares of
the Total Return Trust, Special Investment Trust, American Leading
Companies, and Small-Cap Value; 0.70% of the average daily net assets
attributable to Primary Shares of Value Trust and 0.50% of the average
daily net assets attributable to Primary Shares of Balanced Trust; and an
annual service fee equal to 0.25% of the average daily net assets
attributable to Primary Shares of each of the Funds. The distribution fee
and service fee are calculated daily and paid monthly. The fees received
by Legg Mason during any year may be more or less than its cost of
providing distribution and shareholder services for Primary Shares. Legg
Mason has agreed to waive indefinitely distribution fees in any month to
the extent the Total Return Trust's and American Leading Companies'
expenses related to Primary Shares (exclusive of taxes, interest,
brokerage costs and extraordinary expenses) exceed an annual rate of 1.95%
each of Total Return Trust's and American Leading Companies average daily
net assets attributable to Primary Shares. Legg Mason has also agreed to
waive until July 31, 1999 distribution fees in any month to the extent
Balanced Trust's and Small-Cap Value's expenses related to Primary Shares
(exclusive of taxes, interest, brokerage costs and extraordinary expenses)
exceed an annual rate of 1.85% and 2.00% of average daily net assets
attributable to Primary Shares, respectively.
NASD rules limit the amount of annual distribution and service fees
that may be paid by mutual funds and impose a ceiling on the cumulative
distribution fees received. Each Fund's Plan complies with those rules.
Legg Mason may enter into agreements with unaffiliated dealers to sell
Primary Shares of each Fund. Legg Mason pays such dealers up to 90% of the
distribution and shareholder service fees that it receives from a Fund
with respect to shares sold by the dealers.
The President and Treasurer of each Fund are employed by Legg Mason.
DESCRIPTION OF EACH CORPORATION AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and
Investors Trust were established as Maryland corporations on January 20,
1982, May 22, 1985, October 31, 1985 and May 5, 1993, respectively. Value
Trust has authorized capital of 300 million shares of common stock, par
27
<PAGE>
value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special
Investment Trust has authorized capital of 150 million shares of common
stock, par value $0.001 per share. The Articles of Incorporation of
Investors Trust authorize issuance of 500 million shares of par value
$.001 per share of American Leading Companies, 250 million shares of par
value $.001 per share of Balanced Trust and 100 million shares of par
value $.001 per share of Small-Cap Value. Each corporation may issue
additional series of shares. Each Fund currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses and sales charges, which may
affect performance.
Investors may obtain more information concerning the Navigator Class
from their financial advisor or any person making available to them shares
of the Primary Class, or by calling 1-800-822-5544.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). Each Fund will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 100 Light Street,
Baltimore, Maryland 21202, stating the purpose of the proposed meeting and
the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
28
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
EQUITY FUNDS
------------
The Art of Investing
GROWTH
Navigator Class of Value Trust
Navigator Class of American
Leading Companies Trust
GROWTH & INCOME
Navigator Class of Total
Return Trust
Navigator Class of Balanced
Trust
AGGRESSIVE GROWTH
Navigator Class of Special
Investment Trust
Navigator Class of U.S. Small-
Capitalization Value Trust
PROSPECTUS
JUNE 1, 1998
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000 800 (bullet) 822 (bullet) 5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
215 (bullet) 443 (bullet) 7850 800 (bullet) 441 (bullet) 3885
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036-1800
Independent Accountants/Auditors:
Coopers & Lybrand L.L.P.
250 W. Pratt Street
Baltimore, Maryland 21201
Ernst & Young LLP
2001 Market Street
Philadelphia, Pennsylvania 19103
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by any Fund or its distributor. The Prospectus does not
constitute an offering by any Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
[LEGG MASON FUNDS LOGO]
<PAGE>
NAVIGATOR EQUITY FUNDS
PROSPECTUS
JUNE 1, 1998
LEGG MASON VALUE TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON AMERICAN LEADING COMPANIES TRUST
LEGG MASON BALANCED TRUST
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST
Shares of Navigator Value Trust, Navigator Total Return Trust, Navigator
Special Investment Trust, Navigator American Leading Companies, Navigator
Balanced Trust and Navigator U.S. Small-Capitalization Value Trust (collectively
referred to as ("Navigator Shares") represent separate classes ("Navigator
Classes") of common stock in Legg Mason Value Trust, Inc. ("Value Trust"), Legg
Mason Total Return Trust, Inc. ("Total Return Trust"), Legg Mason Special
Investment Trust, Inc. ("Special Investment Trust"), Legg Mason American Leading
Companies Trust ("American Leading Companies"), Legg Mason Balanced Trust
("Balanced Trust") and Legg Mason U.S. Small-Capitalization Value Trust
("Small-Cap Value") (each a "Fund"), respectively.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own monies and monies for which they act
in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with Institutional Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to any qualified retirement plan of Legg Mason, Inc. or
of any of its affiliates. Navigator Shares may not be purchased by individuals
directly, but Institutional Clients may purchase shares for Customer Accounts
maintained for individuals.
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.
Not every Fund listed in this Prospectus is available for purchase in every
jurisdiction. Please consult your Financial Advisor or Service Provider
concerning the availability of a particular Fund.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated June 1, 1998 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed on the
following page).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Navigator Shares are sold and redeemed without any purchase or redemption
charge imposed by the Funds, although Institutional Clients may charge their
Customer Accounts for services provided in connection with the purchase or
redemption of shares. See "How to Purchase and Redeem Shares." Each Fund will
pay management fees to Legg Mason Fund Adviser, Inc., but Navigator Shares pay
no distribution fees.
VALUE TRUST is a diversified, open-end management investment company seeking
long-term growth of capital. Value Trust invests principally in those equity
securities which its investment adviser, Legg Mason Fund Adviser, Inc. ("LMFA"),
believes are undervalued and therefore offer above-average potential for capital
appreciation.
TOTAL RETURN TRUST is a diversified, open-end management investment company
seeking capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, LMFA selects a diversified portfolio
composed of dividend-paying common stocks and securities convertible into common
stock which, in the opinion of LMFA, offer the potential for long-term growth;
common stocks or securities convertible into common stock which do not pay
current dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities. Total Return Trust may write
covered put and call options. Due to Total Return Trust's investment objective,
however, investors should not expect capital appreciation comparable to funds
devoted solely to growth, or income comparable to funds devoted to maximum
current income.
<PAGE>
SPECIAL INVESTMENT TRUST is a diversified, open-end management investment
company seeking capital appreciation. Special Investment Trust invests
principally in equity securities of companies with market capitalizations of
less than $2.5 billion which, in the opinion of LMFA, have one or more of the
following characteristics: they are not closely followed by, or are out of favor
with, investors generally, and LMFA believes they are undervalued in relation to
their long-term earning power or asset values; unusual developments have
occurred which suggest the possibility that the market value of the securities
will increase; or they are involved in actual or anticipated reorganizations or
restructurings under the Bankruptcy Code. Special Investment Trust also invests
in the securities of companies with larger capitalizations which have one or
more of these charac-teristics. Special Investment Trust may invest up to 35% of
its net assets in debt securities rated below investment grade.
AMERICAN LEADING COMPANIES is a professionally managed portfolio seeking
long-term capital appreciation and current income consistent with prudent
investment risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Investors Trust"), a diversified open-end management
investment company. Under normal market conditions, American Leading Companies
will invest at least 75% of its total assets in a diversified portfolio of
dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. LMFA defines a "Leading Company" as a
company that, in the opinion of LMFA, has attained a major market share in one
or more products or services within its industry(ies), and possesses the
financial strength and management talent to maintain or increase market share
and profit in the future. Such companies are typically well known as leaders in
their respective industries; most are found in the top half of the Standard &
Poor's Composite Index of 500 Stocks ("S&P 500").
BALANCED TRUST is a professionally managed portfolio seeking long-term
capital appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. Balanced Trust is a separate
series of the Investors Trust. Under normal conditions, Balanced Trust will
invest no more than 75% of its assets in equity securities. The term "equity
securities" includes, without limitation, common stocks and convertible
securities of domestic issuers, securities of closed-end investment companies
and U.S. dollar-denominated securities of foreign issuers, including American
Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs"). Balanced
Trust will invest at least 25% of its portfolio in fixed income securities.
SMALL-CAP VALUE, a separate series of Investors Trust, is a professionally
managed portfolio seeking long-term capital appreciation. Small-Cap Value
invests principally in equity securities of companies with market
capitalizations ranging between $10 million and the median New York Stock
Exchange ("NYSE") market capitalization. Brandywine Asset Management, Inc.
("Brandywine"), as investment adviser, favors securities it believes to be
undervalued. Brandywine believes that such small company stocks, with the lowest
prices relative to current earnings, provide superior returns over longer
periods of time. Under normal circumstances, Small-Cap Value does not intend to
invest in debt securities, foreign securities, futures or options.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objectives and Policies 6
How To Purchase and Redeem Shares 16
How Shareholder Accounts are
Maintained 18
How Net Asset Value is Determined 18
Dividends and Other Distributions 18
Tax Treatment of Dividends and
Other Distributions 19
Shareholder Services 20
The Funds' Management and Investment Advisers 20
The Funds' Distributor 22
Description of each Corporation
and its Shares 23
Legg Mason Wood Walker, Inc.
100 Light Street, P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000/800 (Bullet) 822 (Bullet) 5544
2
<PAGE>
EXPENSES
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees set
forth below are based on average net assets and annual Fund operating expenses
related to Navigator Shares of Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies for the year ended March 31,
1998. For Balanced Trust and Small-Cap Value, other expenses are based on
estimates for the initial period of operations of each Fund's Navigator Shares.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN SMALL-
VALUE RETURN INVESTMENT LEADING BALANCED CAP
TRUST TRUST TRUST COMPANIES TRUST VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management
fees 0.69% 0.75% 0.74% 0.71%(A) 0.46%(A) 0.55%(A)
12b-1 fees None None None None None None
Other
expenses 0.04% 0.08% 0.06% 0.22% 0.64% 0.45%
-------------------------------------------------------------
Total
operating
expenses 0.73% 0.83% 0.80% 0.93%(A) 1.10%(A) 1.00%(A)
</TABLE>
(A) After fee waivers. LMFA has voluntarily agreed to waive the management fee
to the extent necessary to limit total operating expenses relating to
Navigator Shares (exclusive of taxes, brokerage commissions, interest and
extraordinary expenses) as follows: for Total Return Trust and American
Leading Companies, 0.95% of each Fund's average daily net assets
attributable to Navigator Shares indefinitely; for Balanced Trust, 1.10% of
average daily net assets attributable to Navigator Shares until July 31,
1999 and for Small-Cap Value, 1.00% of average daily net assets attributable
to Navigator Shares until July 31, 1999. In the absence of such waivers, the
management fee, other expenses and total operating expenses relating to
Navigator Shares would have been as follows: for American Leading Companies,
0.75%, 0.22% and 0.97% of average net assets; for Balanced Trust, 0.75%,
0.64% and 1.39% of average net assets; and for Small-Cap Value, 0.85%, 0.45%
and 1.30% of average net assets.
For further information concerning the Funds' expenses, please see "The
Funds' Management and Investment Advisers," page 20.
EXAMPLE
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. The
Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN SMALL-
VALUE RETURN INVESTMENT LEADING BALANCED CAP
TRUST TRUST TRUST COMPANIES TRUST VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 7 $ 8 $ 8 $ 9 $ 11 $10
3 Years $ 23 $ 26 $ 26 $ 30 $ 35 $32
5 Years $ 41 $ 46 $ 44 $ 51 $ 61 N/A
10 Years $ 91 $103 $ 99 $ 114 $134 N/A
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above table and the
assumption in the example of a 5% annual return are required by regulations of
the SEC applicable to all mutual funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A
PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED OR ACTUAL PERFORMANCE OF,
NAVIGATOR SHARES OF THE FUNDS. THE ABOVE TABLE AND EXAMPLE SHOULD NOT BE
CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The actual expenses attributable to 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 LMFA waives
its fees and the extent to which Navigator Shares incur variable expenses, such
as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited
for Value Trust, Total Return Trust and Special Investment Trust by Coopers
& Lybrand L.L.P., independent accountants, and for American Leading
Companies by Ernst & Young LLP, independent auditors. Each Fund's financial
statements for the year ended March 31, 1998 and the report of Coopers &
Lybrand L.L.P. or Ernst & Young LLP thereon are included in their combined
annual reports and are incorporated by reference in the Statement of
Additional Information. The combined annual reports are available to
shareholders without charge by calling your Legg Mason or affiliated
financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544. As of the date of this Prospectus, Small-Cap Value has not
commenced operations and has not issued any annual reports. As of the same
date, the Navigator Class of Balanced Trust has not commenced operations.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Period (Loss) Investments Operations Income Investments Distributions
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 34.30 $.35 $18.55 $18.90 $ (.31) $ (2.32) $ (2.63)
1997 27.08 41 8.75 9.16 (.41) (1.53) (1.94)
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64)
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01)
SPECIAL INVESTMENT TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 27.04 $ -- $11.58 $11.58 $ -- $ (1.50) $ (1.50)
1997 25.26 .02 3.17 3.19 -- (1.41) (1.41)
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64)
1995(B) 19.11 .07 .85 .92 -- -- --
TOTAL RETURN TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 19.53 $.66 $ 7.29 $ 7.95 $ (.58) $ (2.03) $ (2.61)
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12)
1996 12.83 .62 3.72 4.34 (.65) -- (.65)
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23)
AMERICAN LEADING COMPANIES
-- Navigator Class
1998 $ 14.71 $.10(G) $ 4.99 $ 5.09 $ -- $ (1.85) $ (1.85)
1997(F) 13.30 .07(G) 1.94 2.01 (.12) (.48) (.60)
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Period Return Net Assets Net Assets Rate Paid(A) (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 50.57 56.90% .73% .9% 12.9% $.0538 $179,664
1997 34.30 34.97% .77% 1.4% 10.5% .0557 83,752
1996 27.08 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 20.27 8.11%(C) .82%(D) 1.8%(D) 20.1% -- 36,519
SPECIAL INVESTMENT TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 37.12 44.42% .80% --% 29.8% $.0481 $ 63,299
1997 27.04 12.81% .85% .1% 29.2% .0514 41,415
1996 25.26 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 20.03 4.81%(C) .90%(D) 1.0%(D) 27.5% -- 26,123
TOTAL RETURN TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 24.87 43.94% .83% 3.1% 20.6% $.0585 $ 17,792
1997 19.53 25.67% .86% 3.7% 38.4% .0528 10,048
1996 16.52 34.67% .94% 4.2% 34.7% -- 7,058
1995(B) 12.83 2.28%(C) .86%(D,E) 3.6%(D,E) 61.9% -- 4,823
AMERICAN LEADING COMPANIES
-- Navigator Class
1998 $ 17.95 36.68% .93%(G) .74%(G) 51.4% $.0620 $ 82
1997(F) 14.71 15.16%(C) .86%(G,D) .98%(G,D) 55.7% .0640 55
</TABLE>
(A) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY THE FUNDS.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(C) NOT ANNUALIZED
(D) ANNUALIZED
(E) NET OF FEES WAIVED BY LMFA IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF
.95% FROM INCEPTION TO MARCH 31, 1997.
(F) FOR THE PERIOD OCTOBER 4, 1996 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO MARCH 31, 1997.
(G) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 0.95% OF
AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY LMFA, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD
OCTOBER 4, 1996 TO MARCH 31, 1997 AND THE YEAR ENDED MARCH 31, 1998 WOULD
HAVE BEEN 0.97% AND 0.98%, RESPECTIVELY.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time the Funds may quote the TOTAL RETURN of a class of shares
in advertisements or in reports or other communications to shareholders. A
mutual fund's total return is a measurement of the overall change in value of an
investment in the fund, including changes in share price and assuming
reinvestment of dividends and other distributions. CUMULATIVE TOTAL RETURN shows
the fund's performance over a specific period of time. AVERAGE ANNUAL TOTAL
RETURN is the average annual compounded return that would have produced the same
cumulative total return if the fund's performance had been constant over the
entire period. Average annual returns, which differ from actual year-to-year
results, tend to smooth out variations in a fund's returns. For comparison
purposes, each Fund's total return is compared with total returns of the Value
Line Geometric Average, an index of approximately 1,700 stocks ("Value Line
Index"), and the S&P 500, two unmanaged indexes of widely held common stocks. No
adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in each Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns of each Fund would have been lower if the
Manager and/or Legg Mason had not waived certain fees for the fiscal years ended
March 31, as follows: 1989 through 1998 for Value Trust; 1986 through 1995 for
Total Return; 1986 through 1998 for Special Investment; 1994 through 1998 for
American Leading Companies and 1997 through 1998 for Balanced Trust.
Performance figures reflect past performance only and are not intended to
and do not indicate future performance. Further information about each Fund's
performance is contained in its Annual Report to Shareholders, which may be
obtained without charge by calling your Legg Mason or affiliated financial
advisor or Legg Mason's Funds Marketing Department at 800-822-5544.
Although U.S. equity funds have grown significantly in recent years, the
average long-term growth of general equity funds as reported by Lipper
Analytical Services, Inc. over the last 25 years has been 13.2%, and some years
have shown a net decline in value.
Total returns as of March 31, 1998 are shown below.
<TABLE>
<CAPTION>
Total Return Special
Value Trust Trust Investment Trust
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +55.34% +42.44% +42.88%
Five Years +241.95% +149.45% +132.70%
Ten Years +480.95% +340.24% +407.76%
Life of Class -- Value Trust(A) +1,917.61%
Life of Class -- Total Return Trust(B) +369.95%
Life of Class -- Special Investment Trust(C) +469.69%
Life of Class -- American Leading Companies(D)
Life of Class -- Balanced Trust(E)
Navigator Class:
One Year +56.90% +43.94% +44.42%
Life of Class(F) +228.59% +149.17% +121.73%
Life of Class(G) -- -- --
<CAPTION>
American
Leading Balanced Value Line S&P Stock
Companies Trust Index Index
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +35.18% +27.80% +37.76% +48.00%
Five Years N/A N/A +102.11% +174.73%
Ten Years N/A N/A +188.76% +466.73%
Life of Class -- Value Trust(A) +521.14% +1,507.01%
Life of Class -- Total Return Trust(B) +239.41% +686.53%
Life of Class -- Special Investment Trust(C) +228.64% +642.49%
Life of Class -- American Leading Companies(D) +111.00% +98.78% +166.32%
Life of Class -- Balanced Trust(E) +30.38% +33.66% +60.18%
Navigator Class:
One Year +36.68% -- +37.76% +48.00%
Life of Class(F) +57.40% -- +82.11% +160.89%
Life of Class(G) -- -- +33.66% +60.22%
<CAPTION>
Total Return Special
Value Trust Trust Investment Trust
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year +55.34% +42.44% +42.88%
Five Years +27.88% +20.06% +18.40%
Ten Years +19.24% +15.98% +17.64%
Life of Class -- Value Trust(A) +20.72%
Life of Class -- Total Return Trust(B) +13.33%
Life of Class -- Special Investment Trust(C) +15.25%
Life of Class -- American Leading Companies(D)
Life of Class -- Balanced Trust(E)
Navigator Class:
One Year +56.90% +43.94% +44.42%
Life of Class(F) +42.87% +31.50% +26.98%
Life of Class(G) -- -- --
<CAPTION>
American
Leading Balanced Value Line S&P Stock
Companies Trust Index Index
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year +35.18% +27.80% +37.76% +48.00%
Five Years N/A N/A +15.11% +22.40%
Ten Years N/A N/A +11.19% +18.94%
Life of Class -- Value Trust(A) +12.12% +19.00%
Life of Class -- Total Return Trust(B) +10.39% +18.16%
Life of Class -- Special Investment Trust(C) +10.20% +17.78%
Life of Class -- American Leading Companies(D) +17.69% +16.49% +24.32%
Life of Class -- Balanced Trust(E) +19.36% +22.73% +39.45%
Navigator Class:
One Year +36.68% -- +37.76% +48.00%
Life of Class(F) +35.50% -- +22.62% +32.77%
Life of Class(G) -- -- +22.73% +39.48%
</TABLE>
(A) INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
(B) INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
(C) INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
(D) INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
(E) INCEPTION OF BALANCED TRUST -- OCTOBER 1, 1996.
(F) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES
OF VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST) TO MARCH
31, 1998.
(G) FOR THE PERIOD OCTOBER 4, 1996 (COMMENCEMENT OF
SALE OF NAVIGATOR SHARES OF AMERICAN LEADING COMPANIES) TO MARCH 31,
1998.
The S&P 500 and Value Line Index figures assume reinvestment of dividends
paid by their component stocks. Unlike the figures presented for the Funds,
the S&P 500 and Value Line Index figures do not include brokerage commissions
and other costs of investing.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Fund's Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. LMFA believes
that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
LMFA believes that the securities of sound, well-managed companies
that may be temporarily out of favor due to earnings declines or other
adverse developments are likely to provide a greater total return than
securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. LMFA
believes, however, that purchasing securities depressed by temporary
factors will provide investment returns superior to those obtained when
premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
LMFA believes the return on certain debt securities may equal or exceed
the return on equity securities. The Fund may invest in debt securities of
both foreign and domestic issuers of any maturity without regard to
rating, and may invest its assets in such securities without regard to a
percentage limit. LMFA currently anticipates that under normal market
conditions, the Fund will invest no more than 25% of its total assets in
long-term debt securities. Up to 10% of its total assets may be invested
in debt securities not rated investment grade, i.e., not rated at least
BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated by those entities, deemed by LMFA to be of
comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. LMFA attempts to meet its objective by
investing in dividend-paying common stocks, debt securities and securities
convertible into common stocks which, in the opinion of LMFA, offer
potential for attractive total return. The Fund also invests in common
stocks and securities convertible into common stocks which do not pay
current dividends but which, in LMFA's opinion, offer prospects for
capital appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where LMFA believes
the return on certain debt securities may equal or exceed the return on
equity securities. The Fund may invest in debt securities of any maturity
of both foreign and domestic issuers without regard to rating and may
invest its assets in such securities without regard to a percentage limit.
LMFA currently anticipates that under normal market conditions, the Fund
will invest no more than 50% of its total assets in intermediate-term and
long-term debt securities, and no more than 5% of its total assets in debt
securities not rated investment grade, i.e., not rated at least BBB by S&P
or Baa by Moody's or, if unrated by those entities, deemed by LMFA to be
of comparable quality.
6
<PAGE>
SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities, and securities convertible into equity securities, of
companies with market capitalizations of less than $2.5 billion which LMFA
believes have one or more of the following characteristics:
1. The companies generally are not closely followed by, or are out of
favor with, investors, and appear to be undervalued in relation to their
long-term earning power or asset values. A security may be undervalued
because of many factors, including market decline, poor economic
conditions, tax-loss selling, or actual or anticipated developments
affecting the issuer.
2. The companies are experiencing unusual and possibly non-repetitive
developments which, in the opinion of LMFA, may cause the market values of
the securities to increase. Such developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. The companies are involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. No more than 20% of the
Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, LMFA 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, LMFA may invest in larger, more
highly-capitalized companies when circumstances warrant such investments.
In addition, companies whose market capitalizations grow to exceed $2.5
billion after investment by the Fund may continue to be held by the Fund.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
net assets may be invested in debt securities not rated at least BBB by
S&P, or Baa by Moody's, and securities unrated by those entities, deemed
by LMFA to be of comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be in issuers whose long-term debt is rated in one of the
four highest rating categories by S&P or Moody's or, if unrated by S&P or
Moody's, deemed by LMFA to be of comparable quality.
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMFA
defines a "Leading Company" as a company that, in the opinion of LMFA, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMFA's goal is to invest in companies having what LMFA believes is a
reasonable price/earnings ratio, and it
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will favor those companies with well established histories of dividends
and dividend growth rates. The Fund may also invest in companies having
capitalizations above or below $2 billion which LMFA believes show strong
potential for future market leadership, and in companies which LMFA
believes, because of corporate restructuring or other changes, are
undervalued based on their potential for future growth. There is always a
risk that LMFA will not properly assess the potential for an issuer's
future growth, or that an issuer will not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. The Fund's portfolio turnover rate is not
expected to exceed 100%. Under normal circumstances, the Fund expects to
own a minimum of 35 different securities. The Fund may also invest in
common stocks and securities convertible into common stocks which do not
pay current dividends but which offer prospects for capital appreciation
and future income. The Fund may invest in when-issued securities, which
may involve additional risks.
During periods when LMFA believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMFA to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities not rated at least Ba by Moody's or BB by S&P or, if unrated by
those entities, deemed by LMFA to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. The Fund will invest in
a combination of equity, debt and money market securities in attempting to
achieve its objective. Under normal conditions, the Fund will invest no
more than 75% of its assets in equity securities. Bartlett & Co.
("Bartlett"), as investment adviser, will emphasize investments in
dividend-paying equity securities that, in the opinion of Bartlett, offer
the potential for long-term growth, and in common stocks or securities
convertible into common stock that do not pay current dividends but offer
prospects for capital appreciation and future income.
The Fund will invest at least 25% of its portfolio in fixed income
securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations and mortgage-related securities;
certificates of deposit; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by Moody's, S&P or Fitch Investors Services ("Fitch"),
respectively; and repurchase agreements. No more than 5% of the Fund's
total assets may be invested in fixed income or convertible securities not
rated at least BBB or Baa at the time of purchase, or comparable unrated
securities. If an investment grade security purchased by the Fund
subsequently loses its investment grade rating, Bartlett will determine
whether to retain that security in the Fund's portfolio. The Fund may
invest in securities of any maturity, but, under normal circumstances,
expects to maintain its portfolio of fixed income securities so as to have
an average dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity and
debt securities. This approach attempts to "balance" the potential for
growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
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<PAGE>
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and may purchase exchange-traded futures contracts
on stock indices and options thereon. The Fund may use derivatives, such
as options and futures, in its investment activities. No more than 15% of
the Fund's net assets may be invested in illiquid securities. The Fund may
also engage in reverse repurchase agreements.
For the year ended March 31, 1998, the portfolio turnover rate for the
equity portion of the Fund's portfolio was 18.8% and the portfolio
turnover rate for the fixed income portion was 58.1%. The Fund's total
portfolio turnover rate for the year ended March 31, 1998 was 34.5%.
SMALL-CAP VALUE'S investment objective is long-term capital
appreciation. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of small-capitalization
companies, defined as those whose market capitalizations at the time of
investment range between $10 million and the median NYSE market
capitalization. Brandywine selects securities from the universe of stocks
generally traded on the major stock exchanges and in the over-the-counter
market. For purposes of the Fund's investment policies, securities of
small-cap companies purchased by the Fund may still be considered small-
cap securities, even if the company's market cap later comes to exceed the
median market cap of the NYSE. The Fund will invest at least 65% of its
total assets in domestic securities.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
FOR EACH FUND:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in repurchase agreements and
money market instruments, including high-quality short-term debt
securities. A repurchase agreement is an agreement under which either U.S.
government obligations or high-quality liquid debt securities are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for each Fund by a custodian bank as
collateral until resold and will be supplemented by additional collateral
if necessary to maintain a total value equal to or in excess of the value
of the repurchase agreement. Each Fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose
of the collateral securities, which may decline in value in the interim.
The Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust and Total Return Trust) or 15% (for American Leading Companies,
Balanced Trust, Special Investment Trust and Small-Cap Value) of its net
assets would be invested in such agreements and other illiquid
investments.
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its net assets.
For further information concerning securities lending, see the Statement
of Additional Information.
SMALL- AND MID-SIZED COMPANY STOCKS
The advisers for Special Investment Trust and Small-Cap Value believe
that the comparative lack of attention by investment analysts and
institutional investors to small and mid-sized companies may result in
opportunities to purchase the securities of such companies at attractive
prices compared to historical or market price-earnings ratios, book value,
return on equity or long-term prospects. Each Fund's policy of investing
primarily in the securities of smaller companies differs from the
investment approach of many other mutual funds, and investment in such
securities involves special risks. Among other things, the prices of
securities of small and mid-sized companies generally are more volatile
than those of larger companies; the securities of smaller companies
generally are less liquid; and smaller companies generally are more likely
to be adversely affected by poor economic or market conditions.
It is anticipated that some of the portfolio securities of either
Special Investment Trust or Small-Cap Value may not be widely traded, and
that a Fund's position in such securities may be substantial in relation
to the market for such securities. Accordingly, it may be difficult for a
Fund to dispose of such securities at prevailing market prices in order to
meet redemptions. However, as a non-fundamental policy, Special Investment
Trust and Small-Cap Value will not invest more than 15% of their
respective net assets in illiquid securities.
Investments in securities of companies with small market
capitalizations are generally considered to offer greater opportunity for
appreciation
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<PAGE>
but also may involve greater risks than customarily are associated with
more established companies. The securities of smaller companies may be
subject to more abrupt fluctuations in market price than larger, more
established companies. Small companies may have limited product lines,
markets or financial resources, or they may be dependent upon a limited
management group. In addition to exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks, I.E., small company stocks may decline in price as the prices of
large company stocks rise or vice versa.
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Shareholders may suffer a
loss of value if dividends are not paid. The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes in the issuer's creditworthiness than are the prices of debt
securities.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established
in the convertible security's governing instrument.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, its adviser reviews and
monitors the creditworthiness of each issuer and issue. The adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA")); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Fannie Mae securities); and (4) solely the
creditworthiness of the issuer (e.g., Freddie Mac securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
STRIPPED SECURITIES
Stripped securities are created by separating bonds into their
principal and interest components and selling each piece separately
(commonly referred to as IOs and POs). Stripped securities are more
volatile than other fixed income securities in their response to changes
in market interest rates. The value of some stripped securities moves in
the
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same direction as interest rates, further increasing their volatility.
ZERO COUPON BONDS
Zero coupon bonds do not provide for cash interest payments but
instead are issued at a significant discount from face value. Each year, a
holder of such bonds must accrue a portion of the discount as income.
Because each Fund is required to pay out substantially all of its income
each year, including income accrued on zero coupon bonds, a Fund may have
to sell other holdings to raise cash necessary to make the payout. Because
issuers of zero coupon bonds do not make periodic interest payments, their
prices can be very volatile when market interest rates change.
INDEXED SECURITIES
Each Fund may invest up to 5% of its net assets in securities whose
prices are indexed to the prices of securities indexes, currencies or
other financial statistics. Such investments must be consistent with each
Fund's investment objective and policies.
CLOSED-END INVESTMENT COMPANIES
Each Fund may invest in the securities of closed-end investment
companies. Such investments may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities,
and the total return on such investments will be reduced by the operating
expenses and fees of such investment companies, including advisory fees. A
Fund will invest in such funds, when, in the adviser's judgment, the
potential benefits of such investment justify the payment of any
applicable premium or sales charge.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. These risks are intensified when investing in countries
with developing economies and securities markets also known as "emerging
markets." Moreover, securities of many foreign issuers may be less liquid
and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation, confiscatory taxation, withholding taxes and
limitations on the use or removal of funds or other assets.
The Funds may also invest in ADRs, which are securities issued by
banks evidencing their ownership of specific foreign securities. ADRs may
be sponsored or unsponsored; issuers of securities underlying unsponsored
ADRs are not contractually obligated to disclose material information in
the U.S. Accordingly, there may be less information available about such
issuers than there is with respect to domestic companies and issuers of
securities underlying sponsored ADRs. Although ADRs are denominated in
U.S. dollars, the underlying security often is not; thus, the value of the
ADR may be subject to exchange controls and variations in the exchange
rate. The Funds may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank
evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate that Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies will each invest
no more than 25% of its total assets in foreign securities. Bartlett
currently anticipates that Balanced Trust will not invest more than 10% of
its total assets in foreign securities, either directly or through ADRs or
GDRs.
ILLIQUID SECURITIES
Value Trust and Total Return Trust may each invest up to 10% of its
net assets in illiquid securities. American Leading Companies, Balanced
Trust, Special Investment Trust and Small-Cap Value may each invest up to
15% of its net assets in illiquid securities. Illiquid securities are
securities that cannot be expected to be sold within seven days at
approximately the price at which they are valued by the Fund. Due to the
absence of an active trading market, a Fund may have difficulty valuing or
disposing of illiquid securities promptly. Securities whose sale is
legally restricted are often considered illiquid. Foreign securities that
are freely tradable in their country of origin or in their principal
market are not considered restricted securities even if they are not
registered for sale in the U.S.
WHEN-ISSUED SECURITIES
Each Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced
and
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<PAGE>
have the best liquidity in the bond market. When a Fund purchases
securities on a when-issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at
the time of receipt. However, a Fund does not have to pay for the
obligations until they are delivered to it. This is normally 7 to 15 days
later, but could be considerably longer in the case of some
mortgage-backed securities. Use of this practice would have a leveraging
effect on a Fund. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. A Fund may sell the securities subject to a when-issued purchase,
which may result in a gain or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
Each of these Funds can invest in futures and options transactions,
including puts and calls. Because such investments "derive" their value
from the value of the underlying security, index, or interest rate on
which they are based, they are sometimes referred to as "derivative"
securities. Such investments involve risks that are different from those
presented by investing directly in the securities themselves. While
utilization of options, futures contracts and similar instruments may be
advantageous to a Fund, if its adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance
will be worse than if the Fund did not make such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. A Fund
may sell an interest rate futures contract to offset price changes of debt
securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be limited to the amount of
the premium it received. If stock prices remain the same over time, it is
likely that the Fund will also profit, because it should be able to close
out the option at a lower price. If stock prices fall, the Fund would
expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
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<PAGE>
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, when writing call
options the Fund would give up some ability to participate in security
price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the advisers in managing the Funds'
portfolios. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate hedged positions. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
AMERICAN LEADING COMPANIES:
Although American Leading Companies may not invest in futures
transactions, it may to a limited extent sell covered call options on any
security in which it is permitted to invest for the purpose of enhancing
income. American Leading Companies may not invest in any other form of
option transaction.
A call option is "covered" if, at all times the option is outstanding,
the Fund holds the underlying security or a right to obtain that security
at no additional cost. The risks of selling covered call options are
described above.
As a non-fundamental policy, the Fund will not sell a covered call
option if, as a result, the value of the portfolio securities underlying
all outstanding covered call options would exceed 25% of the value of the
equity securities held by the Fund.
FOR EACH FUND:
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract is an obligation to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
foreign currency contract, a Fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration
of the contract. A Fund may enter into these contracts for the purpose of
hedging against risk arising from its investment in securities denominated
in foreign currencies or when it anticipates investing in such securities.
Forward currency contracts involve certain costs and risks, including the
risk that currency movements will not be accurately predicted, causing a
Fund to sustain losses on these contracts.
THE FOLLOWING DISCUSSION OF INVESTMENTS AND RISKS APPLIES ONLY TO BALANCED
TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to
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<PAGE>
finance various privately operated facilities, including certain pollution
control facilities, convention or trade show facilities, and airport, mass
transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit the Fund's ability to realize the appreciation in
the value of such securities that would otherwise accompany declining
interest rates. An increase in mortgage prepayments could cause the Fund
to incur a loss on a mortgage-related security that was purchased at a
premium. On the other hand, a decrease in the rate of prepayments,
resulting from an increase in market interest rates, among other causes,
may extend the effective maturities of mortgage-related securities,
increasing their sensitivity to changes in market interest rates. In
determining the average maturity of the fixed income portion of the Fund,
Bartlett must apply certain assumptions and projections about the maturity
and prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
14
<PAGE>
fluctuate in response to changes in interest rate levels.
Freddie Mac, a corporate instrumentality of the U.S. Government,
issues mortgage participation certificates ("PCs") which represent
interests in mortgages from Freddie Mac's national portfolio. The mortgage
loans in Freddie Mac's portfolio are not government-backed; rather, the
loans are either uninsured with loan-to-value ratios of 80% or less, or
privately insured if the loan-to-value ratio exceeds 80%. Freddie Mac, not
the U.S. Government, guarantees the timely payment of interest and
ultimate collection of principal on Freddie Mac PCs.
Fannie Mae is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a list of
approved seller/servicers, including savings and loan associations,
savings banks, commercial banks, credit unions and mortgage bankers. Pass-
through certificates issued by Fannie Mae ("Fannie Mae certificates") are
guaranteed as to timely payment of principal and interest by Fannie Mae,
not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by Freddie
Mac, Fannie Mae, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. Although full payoff of
each class of bonds is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of
an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER-RATED DEBT SECURITIES
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher
current yield than that provided by higher grade issues, but also involve
higher risks. Debt securities rated C by Moody's and S&P are bonds on
which no interest is being paid and which can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
However, debt securities, regardless of their ratings, generally have a
higher priority in the issuer's capital structure than do equity
securities.
Lower-rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
Lower-rated debt securities are also sometimes referred to as "junk
bonds."
The market for lower-rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower-rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on
lower-rated debt securities rose dramatically, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or
15
<PAGE>
default. There can be no assurance that such declines will not recur.
The market for lower-rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower-rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers. If
securities are rated investment grade by one rating organization and below
investment grade by the other, the adviser may rely on the rating that it
believes is more accurate. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Fund policies, unless described as fundamental, can be changed
by action of its respective Board of Directors.
The fundamental restrictions applicable to each Fund include a
prohibition on investing 25% or more of its total assets in the securities
of issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto).
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutions. Such Institutional Clients may receive payments from the
Funds' distributor for account servicing, and may receive payments from
their customers for other services performed. Investors otherwise eligible
to purchase Navigator Shares can purchase them from Legg Mason without
receiving or paying for such other services.
Institutional Clients purchasing or holding Navigator Shares on behalf
of their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to a Fund on a timely basis.
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may 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 ("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 18.
Certain institutions that have agreements with Legg Mason or the Funds
may be authorized to accept purchase and redemption orders on their
16
<PAGE>
behalf. In that case, a Fund will be deemed to have received your purchase
or redemption order when the authorized institution accepts the order, and
your order will receive the next price calculated after the order has been
accepted by the institution. You should consult with your institution to
determine the time by which it must receive your order for you to purchase
or redeem Fund shares at that day's price. It is the institution's
responsibility to transmit your order to the Fund in a timely fashion.
Each Fund reserves the right to reject any order for its shares or 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 any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in a 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
financial advisor at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
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. See page
16 for information on pricing of redemptions made through certain
institutions having agreements with Legg Mason or the Funds.
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 respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. 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 10 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.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the adviser, that Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.)
Each Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges should call their financial advisor for further instructions.
17
<PAGE>
Because of the relatively high cost of maintaining small accounts, a
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
the investor. However, the Funds will not redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in an account, the investor will be
notified that the account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having the
account closed. Each Institutional Client may establish its own minimum
account size for investors using its services.
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. Shares may not be held in, or transferred to, an
account with any brokerage firm that does not have an agreement with Legg
Mason or Fairfield. The Funds do not issue share certificates.
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.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Navigator Shares out of its
investment company taxable income (which generally consists of net
investment income, any net short-term capital gain and net gains from
certain foreign currency transactions) attributable to those shares. Value
Trust, Total Return Trust and Balanced Trust declare and pay dividends
from net investment income quarterly; they pay dividends from any net
short-term capital gains and net gains from foreign currency transactions
annually. Special Investment Trust, American Leading Companies and
Small-Cap Value declare and pay dividends from investment company taxable
income following the end of each taxable year. Each Fund also distributes
substantially all of its net capital gain (the excess of net long-term
capital gain over net short-term capital loss) after the end of the
taxable year in which the gain is realized. A second distribution of net
capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Navigator Shares held by qualified
retirement plans generally receive dividends and other distributions in
additional shares. Other shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to
having all dividends and other distributions reinvested in additional
Navigator Shares. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of
18
<PAGE>
another Navigator fund. Please contact a financial advisor for additional
information about this option.
If no election is made, both dividends and other distributions are
credited to the Institutional Client's account in Navigator Shares of the
distributing Fund at the net asset value of the shares determined as of
the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also are
credited to your account at that net asset value. If an investor elects to
receive dividends and/or other distributions in cash, a check will be
sent. Investors purchasing through Fairfield may elect at any time to
change the distribution option by notifying the applicable Fund in writing
at: [insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Code"), so that it will be relieved of federal income tax on that part
of its investment company taxable income and net capital gain that it
distributes to its shareholders.
Dividends from a Fund's investment company taxable income (whether
paid in cash or reinvested in Navigator Shares) are taxable to their
shareholders (other than qualified retirement plans and other tax-exempt
investors) as ordinary income to the extent of that Fund's earnings and
profits. Distributions of a Fund's net capital gain (whether paid in cash
or reinvested in Navigator 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. Under the Taxpayer Relief Act of 1997,
different maximum tax rates apply to a noncorporate taxpayer's net capital
gain depending on the holding period of the security and the taxpayer's
marginal rate of federal income tax -- generally, 28% for gain recognized
on capital assets held for more than one year but not more than 18 months
and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain
recognized on capital assets held for more than 18 months. In the case of
a regulated investment company such as a Fund, the relevant holding period
is determined by how long the Fund has held the portfolio security on
which the gain was earned, not by how long you have held your Fund shares.
Each 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 notice
will tell you what portion of the capital gain falls into each of the
different tax rate categories mentioned above.
A redemption of Navigator 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 Navigator Shares of any Fund for shares of any
other Navigator fund generally will have similar tax consequences. See
"Shareholder Services -- Exchange Privilege," below. If Fund shares are
purchased within 30 days before or after redeeming at a loss other shares
of the same Fund (regardless of class), all or part of 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 Navigator Shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, an investor may also be subject to state, local or
foreign taxes on distributions from the Funds, depending on the laws of
its home state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions; each Fund's annual notice
to shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
19
<PAGE>
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Every shareholder of record will receive a confirmation of each new
share transaction with a
Fund. In addition, Legg Mason clients will receive a monthly statement,
which will also show the total number of shares being held in safekeeping
by the Funds' transfer agent for the account of the shareholder.
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or other distributions) 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 by the
transfer agent. 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.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual reports for the
Funds will contain financial statements audited by their respective
independent accountants/auditors.
Shareholder inquiries should be addressed to "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or "[insert complete Fund name], c/o Fairfield Group, Inc.,
200 Gibraltar Road, Horsham, Pennsylvania 19044."
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for the
corresponding class of shares of any of the Legg Mason Funds, the Legg
Mason Cash Reserve Trust, the Navigator Money Market Fund, Inc. and the
Navigator Tax-Free Money Market Fund, Inc., provided the shares to be
acquired are eligible for sale under applicable state securities laws.
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 financial
advisor. To effect an exchange by telephone, please call your financial
advisor with the information described in the section "How to Purchase and
Redeem Shares," page 16. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders. Some
Institutional Clients may not offer all of the Navigator Funds for
exchange.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
MANAGEMENT AGREEMENTS
Each Fund has a management agreement with LMFA which was approved by
the Fund's Board of Directors (each a "Management Agreement"). Under the
Management Agreements, LMFA is obligated to provide the Funds with
investment management and administrative services, and to oversee the
Funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers.
For services under the Management Agreements, LMFA receives a fee from
each Fund, calculated daily and payable monthly, at the following annual
rate:
<TABLE>
<S> <C>
American Leading Companies: 0.75%
Balanced Trust: 0.75%
Small-Cap Value: 0.85%
Total Return Trust 0.75%
Value Trust
and Special Investment 1.0% for the first $100
Trust: million of average net
assets; 0.75%
for assets between
$100 million and
$1 billion; and 0.65%
for assets exceeding $1 0
billion.
</TABLE>
Because of fee waivers (see below), American Leading Companies paid a
management fee of 0.71% and Balanced Trust paid a management fee of 0.46%
for the fiscal year ended March 31, 1998.
ADVISORY AGREEMENTS
LMFA has entered into investment advisory agreements with Bartlett and
Brandywine to provide investment advisory services to Balanced Trust and
Small-Cap Value, respectively. These
20
<PAGE>
advisers have the responsibility for making investment decisions and
placing orders to buy or sell a particular security. LMFA provides these
services for Value Trust, Special Investment Trust, Total Return Trust and
American Leading Companies Trust under the Management Agreements.
Under its Advisory Agreement, Bartlett receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 66 2/3%
of the fee received by LMFA, or 0.50% of Balanced Trust's average daily
net assets, adjusted for any fee waivers, as discussed below.
Under its Advisory Agreement, Brandywine receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 58.8% of
the fee received by LMFA, or 0.50% of Small-Cap Value's average daily net
assets, adjusted for any fee waivers.
Legg Mason Capital Management, Inc. ("LMCM") also serves as an
investment adviser to American Leading Companies pursuant to an Investment
Advisory Agreement with LMFA, which was approved by Investors Trust's
Board of Directors. LMCM may provide the Fund with research and investment
advisory services for which LMFA (not the Fund) may pay LMCM a fee.
Currently, LMCM is not providing any services to the Fund.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent a Fund's
expenses related to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during that month annual
rates of that Fund's average daily net assets attributable to Navigator
Shares as follows:
<TABLE>
<S> <C>
Total Return Trust and
American Leading Companies: 0.95%, indefinitely
Balanced Trust: 1.10% until July 31, 1999
Small-Cap Value: 1.00% until July 31, 1999
</TABLE>
These agreements are voluntary and may be terminated by LMFA at any
time. Each Fund pays all its other expenses which are not assumed by LMFA.
NAVIGATOR SHARES EXPENSE RATIOS
For the fiscal year ended March 31, 1998, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
<TABLE>
<S> <C>
Value Trust 0.73 %
Total Return Trust 0.83 %
Special Investment Trust 0.80 %
American Leading Companies Trust 0.93 %
</TABLE>
As of the date of this Prospectus, the Navigator Class of Balanced
Trust has not commenced operations.
As of the date of this Prospectus, Small-Cap Value had not yet begun
operations. In addition to management and distribution fees, that Fund,
like the others, will be responsible for interest, 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,
compensation of the independent directors, legal and audit expenses,
insurance expenses, 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 industry
organizations.
LMFA
LMFA acts as adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of approximately
$12 billion as of April 30, 1998. LMFA's address is 100 Light Street,
Baltimore, Maryland 21202.
Like other mutual funds, financial and business organizations around
the world, the Funds could be adversely affected if the computer systems
used by LMFA and other service providers do not properly process and
calculate date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." LMFA is taking
steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer system that it uses and to obtain
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
BARTLETT
Bartlett acts as adviser to individuals, corporations, pension and
profit sharing plans and trust accounts, as well as to four investment
company
21
<PAGE>
portfolios. Bartlett's aggregate assets under management totalled
approximately $3.2 billion as of April 30, 1998. Bartlett's address is 36
East Fourth Street, Cincinnati, Ohio 45202.
BRANDYWINE
Brandywine acts as adviser or sub-adviser to individuals, public
funds, corporations, pension and profit sharing plans, Taft-Hartley Plans,
endowments and foundations, as well as to three investment company
portfolios. Brandywine's aggregate assets under management totalled
approximately $8.2 billion as of April 30, 1998.
Brandywine's address is 201 North Walnut Street, Wilmington, Delaware
19801.
LMCM
LMCM acts as investment adviser to private accounts and investment
company portfolios with a value as of April 30, 1998 of approximately $2.9
billion. LMCM's address is 100 Light Street, Baltimore, Maryland 21202.
LMFA, LMCM, Bartlett and Brandywine are wholly owned subsidiaries of
Legg Mason, Inc., a financial services holding company.
PORTFOLIO MANAGEMENT
William H. Miller, III, President of LMFA, co-managed Value Trust from
its inception in 1982 to November 1990, when he assumed primary
responsibility for its day-to-day management. Nancy T. Dennin, Senior Vice
President of LMFA, has primary responsibility for the day-to-day
management of Total Return Trust. Prior to April 1, 1997, Mrs. Dennin and
Mr. Miller were co-managers of Total Return Trust. Mr. Miller has also
been primarily responsible for the day-to-day management of Special
Investment Trust since its inception in 1985. Lisa O. Rapuano is assistant
portfolio manager of Special Investment Trust. Mrs. Rapuano has been the
analyst responsible for the technology, media and telecommunication
sectors, as well as for some special situations outside these sectors,
since joining LMFA in September 1994. From July 1991 to September 1994 she
was an analyst at Franklin Street Partners, a money management firm.
Effective March 9, 1998, David E. Nelson, Senior Vice President of
LMFA, has primary responsibility for the day-to-day management of American
Leading Companies. Previously, Mr. Nelson was the portfolio manager for
the UAM ICM Equity Portfolio since its inception on October 1, 1993. Mr.
Nelson was employed at Investment Counselors of Maryland from 1989-1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced
Trust. Both are senior portfolio managers of Bartlett. Mr. Rabiner has
been employed by Bartlett since 1983 and has served since then as Director
of its Fixed Income Group. Mr. Uible has been employed by Bartlett since
1980. He chairs Bartlett's Equity Investment Group, and is responsible for
Bartlett's equity investment processes. Mr. Rabiner and Mr. Uible are
members of Bartlett's Management Committee and Investment Policy
Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value.
Both are Managing Directors of Brandywine. Mr. Otto is a senior portfolio
manager and has been employed at Brandywine since 1987. Mr. Tonkovich is a
portfolio manager and analyst and has been employed at Brandywine since
1989.
BROKERAGE
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
THE FUNDS' DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of each Fund's shares pursuant to a separate Underwriting
Agreement with each Fund. Each Underwriting Agreement obligates Legg Mason
to pay certain expenses in connection with the offering of shares,
including any compensation to its financial advisors, the printing and
distribution of prospectuses, statements of additional information and
periodic reports used in connection with the offering to prospective
investors, after the prospectuses, statements of additional information
and reports have been prepared, set in type and mailed to existing
shareholders at the Fund's expense, and for any supplementary sales
literature and advertising costs. Legg Mason also assists BFDS with
certain of its duties as transfer agent; for the year ended March 31,
1998, Legg Mason received from BFDS $439,000, $76,000, $238,000, $28,000
and $7,000 for performing such services in connection with Value Trust,
Total Return Trust, Special Investment Trust, American Leading Companies
and Balanced Trust, respectively.
Fairfield, a wholly owned subsidiary of Legg Mason, Inc., is a
registered broker-dealer with principal offices located at 200 Gibraltar
Road,
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Horsham, Pennsylvania 19044. Fairfield may sell Navigator Shares pursuant
to a Dealer Agreement with the Funds' Distributor, Legg Mason. Legg Mason
and LMFA may make payments out of their own assets to Fairfield or others
to support the distribution of Navigator Shares and shareholder servicing.
The President and Treasurer of each Fund are employed by Legg Mason.
DESCRIPTION OF EACH CORPORATION AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and
Investors Trust were established as Maryland corporations on January 20,
1982, May 22, 1985, October 31, 1985 and May 5, 1993, respectively. Value
Trust has authorized capital of 300 million shares of common stock, par
value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special
Investment Trust has authorized capital of 150 million shares of common
stock, par value $0.001 per share. The Articles of Incorporation of
Investors Trust authorize issuance of 500 million shares of par value
$.001 per share of American Leading Companies, 250 million shares of par
value $.001 per share of Balanced Trust and 100 million shares of par
value $.001 per share of Small-Cap Value. Each corporation may issue
additional series of shares. Each Fund currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses and sales charges, which may
affect performance.
Investors may obtain more information concerning the Primary Class
from their financial advisor or by calling 1-800-822-5544.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of each Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of each Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the Investment
Company Act of 1940 requires a shareholder vote on certain matters
(including the election of directors, approval of an advisory contract,
and approval of a plan of distribution pursuant to Rule 12b-1). Each Fund
will call a special meeting of the shareholders at the request of 10% or
more of the shares entitled to vote; shareholders wishing to call such a
meeting should submit a written request to the Fund at 100 Light Street,
Baltimore, Maryland 21202, stating the purpose of the proposed meeting and
the matters to be acted upon. The address of BFDS is P.O. Box 953, Boston,
Massachusetts 02103.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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<PAGE>
LEGG MASON EQUITY FUNDS
LEGG MASON VALUE TRUST, INC. LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON TOTAL RETURN TRUST, INC. LEGG MASON AMERICAN LEADING
LEGG MASON SPECIAL INVESTMENT TRUST, INC. COMPANIES TRUST
LEGG MASON BALANCED TRUST
LEGG MASON U.S. SMALL-CAPITALIZATION
VALUE TRUST
PRIMARY SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
JUNE 1, 1998
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for Primary Shares or for Navigator
Shares (both dated June 1, 1998), as appropriate, which have been filed with the
Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Funds' distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason"), at (410) 539-0000.
The LEGG MASON VALUE TRUST, INC. ("Value Trust") is a mutual fund
seeking long-term growth of capital. Value Trust invests principally in those
equity securities which its investment adviser, Legg Mason Fund Adviser, Inc.
("LMFA"), believes are undervalued and therefore offer above-average potential
for capital appreciation.
The LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
mutual fund seeking capital appreciation and current income in order to achieve
an attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, LMFA selects a diversified portfolio,
composed of dividend-paying common stocks and securities convertible into common
stock which, in the opinion of LMFA, offer the potential for long-term growth;
common stocks or securities convertible into common stock which do not pay
current dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities.
The LEGG MASON SPECIAL INVESTMENT TRUST, INC. ("Special Investment
Trust") is a mutual fund seeking capital appreciation. Special Investment Trust
invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of LMFA, have
one or more of the following characteristics: they are not closely followed by,
or are out of favor with, investors generally, and LMFA believes they are
undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the market
value of the securities will increase; or they are involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code. Special
Investment Trust may also invest in the securities of companies with larger
capitalizations which have one or more of these characteristics.
The LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies"), a diversified, professionally managed portfolio, is a separate
series of Legg Mason Investors Trust, Inc., an open-end investment company
("Investors Trust"). American Leading Companies seeks long-term capital
<PAGE>
appreciation and current income consistent with prudent investment risk.
American Leading Companies normally will seek to achieve its investment
objective by investing not less than 75% of its total assets in the
dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. LMFA defines a "Leading Company" as a
company that, in the opinion of LMFA, has attained a major market share in one
or more products or services within its industry(ies), and possesses the
financial strength and management talent to maintain or increase market share
and profit in the future. Such companies typically are well known as leaders in
their respective industries; most are found in the top half of the Standard &
Poor's Composite Index of 500 Stocks ("S&P 500").
The LEGG MASON BALANCED TRUST ("Balanced Trust"), a diversified,
professionally managed portfolio, is a separate series of Investors Trust.
Balanced Trust seeks long-term capital appreciation and current income in order
to achieve an attractive total investment return consistent with reasonable
risk. Under normal conditions, Balanced Trust will invest no more than 75% of
its assets in equity securities. The term "equity securities" includes, without
limitation, common stocks and convertible securities of domestic issuers,
securities of closed-end investment companies and U.S. dollar-denominated
securities of foreign issuers, including American Depositary Receipts ("ADRs")
and Global Depositary Receipts ("GDRs"). Balanced Trust will invest at least 25%
of its portfolio in fixed income securities.
The LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST ("Small-Cap
Value"), a diversified, professionally managed portfolio, is a separate series
of Investors Trust. Small-Cap Value seeks long-term capital appreciation.
Small-Cap Value invests principally in equity securities of companies with
market capitalizations ranging between $10 million and the median New York Stock
Exchange ("NYSE") market capitalization. Brandywine Asset Management, Inc.
("Brandywine"), as investment adviser, favors securities it believes to be
undervalued. Brandywine believes that small company stocks, with the lowest
prices relative to current earnings, provide superior returns over longer
periods of time.
Shares of Navigator Value Trust, Navigator Total Return Trust,
Navigator Special Investment Trust, Navigator American Leading Companies,
Navigator Balanced Trust and Navigator Small-Cap Value (collectively referred to
as "Navigator Shares") represent interests in Value Trust, Total Return Trust,
Special Investment Trust, American Leading Companies, Balanced Trust and
Small-Cap Value, respectively, that are currently offered for sale only to
institutional clients of the Fairfield Group, Inc. ("Fairfield") for investment
of their own monies and monies for which they act in a fiduciary capacity, to
clients of Legg Mason Trust Company ("Trust Company") for which Trust Company
exercises discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and accounts
of the customers with Institutional Clients ("Customers") are referred to
collectively as "Customer Accounts"), to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to any
qualified retirement plans of Legg Mason, Inc. or of any of its affiliates. The
Navigator Class of Shares may not be purchased by individuals directly, but
Institutional Clients may purchase shares for Customer Accounts maintained for
individuals.
The Primary Class of shares of Value Trust, Total Return Trust, Special
Investment Trust, American Leading Companies, Balanced Trust and Small-Cap Value
(collectively referred to as "Primary Shares") is offered for sale to all other
investors and may be purchased directly by individuals.
Navigator and Primary Shares of Value Trust, Total Return Trust,
Special Investment Trust, American Leading Companies, Balanced Trust and
Small-Cap Value (each a "Fund") are sold and redeemed without any purchase or
redemption charge, although institutions may charge their Customer Accounts for
services provided in connection with the purchase or redemption of Navigator
Shares. Each Fund pays management fees to LMFA. Primary Shares pay a 12b-1
distribution fee, but Navigator Shares pay no distribution fees. See "The Funds'
Distributor."
LEGG MASON WOOD WALKER,
INCORPORATED
-----------------------------
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Fund described in the
Prospectus, each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of its shareholders. Value Trust, Total
Return Trust and Special Investment Trust each may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes, in an aggregate amount not to exceed 10% of
the value of the total assets of the respective Fund at the time of borrowing;
provided that borrowings, including reverse repurchase agreements, in excess of
5% of such value will be only from banks (although not a fundamental policy
subject to shareholder approval, each Fund will not purchase securities if
borrowings, including reverse purchase agreements, exceed 5% of its total
assets);
2. With respect to 75% of total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, or its agencies and instrumentalities, or purchase more
than 10% of the voting securities of any one issuer;
3. Purchase securities on "margin", except for short-term credits
necessary for clearance of portfolio transactions and except that each Fund may
make margin deposits in connection with the use of futures contracts and options
on futures contracts;
4. Invest 25% or more of its total assets (taken at market value) in
any one industry;
5. Purchase or sell commodities and commodity contracts, but this
limitation shall not prevent each Fund from purchasing or selling options and
futures contracts;
6. Underwrite the securities of other issuers, except insofar as each
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and except to the
extent that the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;
8. Purchase or sell real estate, except that each Fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein (as a
non-fundamental policy changeable without a shareholder vote, each Fund will not
purchase or sell interests in real estate limited partnerships);
9. Make short sales of securities or maintain a short position, except
that each Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box;" or
10. Issue senior securities, except as permitted under the Investment
Company Act of 1940 ("1940 Act").
American Leading Companies, Balanced Trust and Small-Cap Value each may
not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to
exceed 5% of the value of its total assets at the time of
borrowings. (Although not a fundamental policy subject to
shareholder approval, the Fund will repay any money borrowed before
any portfolio securities are purchased);
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2. Issue senior securities, except as permitted under the 1940 Act;
3. Engage in the business of underwriting the securities of other
issuers except insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of a portfolio security;
4. Buy or hold any real estate; provided, however, that instruments
secured by real estate or interests therein are not subject to this limitation;
5. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
6. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies, interest rate and currency
futures contracts, options on currencies, securities, and securities indexes and
options on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing limitations may be changed with respect to a Fund by "the
vote of a majority of the outstanding voting securities" of that Fund, a term
defined in the 1940 Act to mean the vote (a) of 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present, or (b) of more than 50%
of the outstanding voting securities of the Fund, whichever is less.
American Leading Companies, Balanced Trust and Small-Cap Value:
The following are some of the non-fundamental limitations which
American Leading Companies, Balanced Trust and Small-Cap Value currently
observe. Each Fund may not:
1. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of permitted currency futures contracts and
options on currency futures contracts; or
2. Make short sales of securities or maintain a short position, except
that the Fund may sell short "against the box". This limit does not apply to
short sales and short positions in connection with its use of options, futures
contracts and options on futures contracts (No Fund intends to make short sales
in excess of 5% of its net assets during the coming year).
In addition, as a non-fundamental limitation, American Leading
Companies may not purchase or sell interest rate and currency futures contracts,
options on currencies, securities, and securities indexes and options on
interest rate and currency futures contracts, provided, however, that the Fund
may sell covered call options on securities and may purchase options to the
extent necessary to close out its position in one or more call options.
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<PAGE>
Except as otherwise stated, if a fundamental or non-fundamental
percentage limitation set forth above is complied with at the time an investment
is made, a later increase or decrease in percentage resulting from a change in
value of portfolio securities, in the net asset value of a Fund, or in the
number of securities an issuer has outstanding, will not be considered to be
outside the limitation.
Unless otherwise stated, the investment policies and limitations
contained in this Statement of Additional Information are not fundamental, and
can be changed without shareholder approval.
THE FOLLOWING INFORMATION APPLIES TO EACH FUND UNLESS OTHERWISE STATED:
Foreign Securities
The costs associated with investment in foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, are higher than
those associated with investment in domestic issuers. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause a Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result in losses to a Fund due to subsequent declines in value of the portfolio
security or, if a Fund has entered into a contract to sell the security, could
result in liability to the purchaser.
Since each Fund may invest in securities denominated in currencies
other than the U.S. dollar and since each Fund may hold foreign currencies, a
Fund may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rates between such currencies and the U.S. dollar.
Changes in the currency exchange rates may influence the value of each Fund's
shares, and also may affect the value of dividends and interest earned by that
Fund and gains and losses realized by that Fund. Exchange rates are determined
by the forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other factors.
In addition to purchasing foreign securities, each Fund may
invest in ADRs. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the domestic market. Usually issued by a
U.S. bank or trust company, ADRs are receipts that demonstrate ownership of
the underlying securities. For purposes of each Fund's investment policies
and limitations, ADRs are considered to have the same classification as the
securities underlying them. Each Fund may also invest in GDRs, which are
receipts, often denominated in U.S. dollars, issued by either a U.S. or
non-U.S. bank evidencing its ownership of the underlying foreign
securities.
Illiquid Securities
Value Trust and Total Return Trust each may invest up to 10% of its net
assets in illiquid securities. American Leading Companies, Balanced Trust,
Special Investment Trust and Small-Cap Value each may invest up to 15% of its
net assets in illiquid securities. For this purpose, "illiquid securities" are
those that cannot be disposed of within seven days for approximately the price
at which the Fund values the security. Illiquid securities include repurchase
agreements with terms of greater than seven days and restricted securities other
than those the adviser to a Fund has determined are liquid pursuant to
guidelines established by each Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the Securities
Act of 1933, or pursuant to an exemption from registration. A Fund may be
required to pay part or all of the costs of such registration, and a
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<PAGE>
considerable period may elapse between the time a decision is made to sell a
restricted security and the time the registration statement becomes effective.
Judgment plays a greater role in valuing illiquid securities than those for
which a more active market exists.
SEC regulations permit the sale of certain restricted securities to
qualified institutional buyers. The investment adviser to each Fund, acting
pursuant to guidelines established by such Fund's Board of Directors, may
determine that certain restricted securities qualified for trading on this newly
developing market are liquid. If the market does not develop as anticipated,
restricted securities in each Fund's portfolio may adversely affect that Fund's
liquidity.
Debt Securities
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's ("S&P") represent the opinions of those agencies. Such ratings are
relative and subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. A description of the ratings assigned
to corporate debt obligations by Moody's and S&P is included in Appendix A.
In addition to ratings assigned to individual bond issues, each adviser
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which a Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial conditions of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of principal and interest.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by each Fund's adviser to determine, to
the extent possible, that the planned investment is sound.
If a security rated A or above at the time of purchase by American
Leading Companies is subsequently downgraded to a rating below A, LMFA will
consider that fact in determining whether to dispose of the security, but will
dispose of it if necessary to insure that no more than 5% of net assets are
invested in debt securities rated below A. If one rating agency has rated a
security A or better and another agency has rated it below A, LMFA may rely on
the higher rating in determining to purchase or retain the security on behalf of
American Leading Companies. Bonds rated A may be given a "+" or "-" by the
rating agency. The Fund considers bonds denominated A, A+ or A- to be included
in the rating A.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stream
of income with generally higher yields than those of common stocks of the same
or similar issuers, but lower than the yield of non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a corporation's
capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of
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<PAGE>
other securities of comparable maturity and quality that do not have a
conversion privilege and (2) its worth, at market value, if converted into the
underlying common stock. The price of a convertible security often reflects
variations in the price of the underlying common stock in a way that
non-convertible debt does not. A convertible security may be subject to
redemption at the option of the issuer at a price established in the convertible
security's governing instrument, which may be less than the ultimate conversion
value.
Many convertible securities are rated below investment grade or, if
unrated, are considered of comparable quality. American Leading Companies does
not intend to purchase any convertible securities rated below BB by S&P or below
Ba by Moody's or, if unrated, deemed by LMFA to be of comparable quality.
Moody's describes securities rated Ba as having "speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class."
If an investment grade security purchased by Value Trust, Total Return
Trust or Special Investment Trust is subsequently given a rating below
investment grade, LMFA will consider that fact in determining whether to retain
that security in that Fund's portfolio, but is not required to dispose of it.
When-Issued Securities
Each Fund may enter into commitments to purchase securities on a
when-issued basis. When a Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of the purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until they
are delivered to it. This is normally seven to 15 days later, but could be
longer. Use of this practice would have a leveraging effect on the Fund.
American Leading Companies does not currently expect that its
commitment to purchase when-issued securities will at any time exceed, in the
aggregate, 5% of its net assets.
To meet its payment obligation under a when-issued commitment, a Fund
will establish a segregated account with its custodian and maintain cash or
appropriate liquid securities, in an amount at least equal in value to that
Fund's commitments to purchase when-issued securities.
A Fund may sell the securities underlying a when-issued purchase, which
may result in capital gains or losses.
Covered Call Options
Each Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, a Fund might write covered call options on
securities generally when the adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by a Fund declines, the amount of such decline will be offset wholly or in part
by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. A Fund would give up the ability to sell the portfolio securities
used to cover the call option while the call option was outstanding. In
addition, a Fund could lose the ability to participate in an increase in the
value of such securities above the exercise price
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of the call option because such an increase would likely be offset by an
increase in the cost of closing out the call option.
If a Fund desires to close out its obligation under a call option it
has sold, it will have to purchase an offsetting option. The value of an option
position will reflect, among other things, the current market price of the
underlying security, futures contract or currency, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, and general market
conditions. Accordingly, when the price of the security rises toward the strike
price of the option, the cost of offsetting the option will negate to some
extent the benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy depends
upon the adviser's ability to forecast the direction of price fluctuations in
the underlying market or market sector.
Each Fund may write exchange-traded options. The ability to establish
and close out positions on the exchange is subject to the maintenance of a
liquid secondary market. Although a Fund intends to write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. With respect to options written by a
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, because the Fund must maintain a covered
position with respect to any call option it writes on a security, the Fund may
not sell the underlying security during the period it is obligated under such
option. This requirement may impair the Fund's ability to sell a portfolio
security or make an investment at a time when such a sale or investment might be
advantageous.
A Fund will not enter into an options position that exposes it to an
obligation to another party unless it owns an offsetting ("covering") position
in securities or other options. A Fund will comply with guidelines established
by the SEC with respect to coverage of these strategies by mutual funds, and, if
the guidelines so require, will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian in the amount prescribed,
as marked-to-market daily. Securities positions used for cover and securities
held in a segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
Indexed Securities
Indexed securities are securities whose prices are indexed to the
prices of securities indexes, currencies or other financial statistics. Indexed
securities typically are debt securities or deposits whose value at maturity
and/or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities fluctuates (either directly or
inversely, depending upon the instrument) with the performance of the index,
security, currency or other instrument to which they are indexed and may also be
influenced by interest rate changes in the U.S. and abroad. At the same time,
indexed securities are subject to the credit risks associated with the issuer of
the security, and their value may substantially decline if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations and certain U.S. government agencies. The U.S.
Treasury recently issued securities whose principal value is indexed to the
Consumer Price Index (also known as "Treasury Inflation-Protection Securities").
The Funds will only purchase indexed securities of issuers which its adviser
determines present minimal credit risks and will monitor the issuer's
creditworthiness during the time the indexed security is held. The adviser will
use its judgment in determining whether indexed securities should be treated as
short-term instruments,
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bonds, stock or as a separate asset class for purposes of each Fund's investment
allocations, depending on the individual characteristics of the securities. Each
Fund currently does not intend to invest more than 5% of its net assets in
indexed securities. Indexed securities may fluctuate according to a multiple of
changes in the underlying instrument and, in that respect, have a leverage-like
effect on a Fund.
The following information applies to Balanced Trust:
Mortgage-Related Securities
Mortgage-related securities represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide monthly
payments of interest, and in most instances, principal to the investor. The
mortgagor's monthly payments to his/her lending institution are "passed-through"
to investors such as the Fund. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are backed by various forms of credit,
insurance and collateral. They may not extend to the full amount of the pool.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The majority of mortgage-related securities currently available are
issued by governmental or government-related organizations formed to increase
the availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is the Government National Mortgage Association
("GNMA"). GNMA certificates ("GNMAs") are interests in pools of loans insured by
the Federal Housing Administration or by the Farmer's Home Administration
("FHA"), or guaranteed by the Veterans Administration ("VA"). Fannie Mae and
Freddie Mac each issue pass-through securities which are guaranteed as to
principal and interest by Fannie Mae and Freddie Mac, respectively.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments, as well as
with market interest rates. For example, GNMAs tend to have a longer average
life than Freddie Mac participation certificates ("PCs") because there is a
tendency for the conventional and privately-insured mortgages underlying Freddie
Mac PCs to repay at faster rates than the FHA and VA loans underlying GNMAs. In
addition, the term of a security may be shortened by unscheduled or early
payments of principal and interest on the underlying mortgages. The occurrence
of mortgage pre-payments is affected by various factors, including the level of
interest rates, general economic conditions, the location and age of the
mortgaged property and other social and demographic conditions.
In determining the dollar-weighted average maturity of the fixed income
portion of the portfolio, Bartlett & Co. ("Bartlett"), investment adviser to
Balanced Trust, will follow industry practice in assigning an average life to
the mortgage-related securities of the Fund unless the interest rate on the
mortgages underlying such securities is such that Bartlett believes a different
prepayment rate is likely. For example, where a GNMA has a high interest rate
relative to the market, that GNMA is likely to have a shorter
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overall maturity than a GNMA with a market rate coupon. Moreover, Bartlett may
deem it appropriate to change the projected average life for a Fund's
mortgage-related security as a result of fluctuations in market interest rates
and other factors.
Quoted yields on mortgage-related securities are typically based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
average life yield. Reinvestment of the prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Fund. The compounding effect from the reinvestments of monthly payments received
by the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
Like other debt securities, the value of mortgage-related securities
will tend to rise when interest rates fall, and fall when rates rise. The value
of mortgage-related securities may also change because of changes in the
market's perception of the creditworthiness of the organization that issued or
guaranteed them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
Municipal Obligations
The municipal obligations in which the Fund may invest include
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities, such as fire and sanitation
vehicles, telecommunications equipment and other capital assets. Rather than
holding such obligations directly, the Fund may purchase a participation
interest in a municipal lease obligation from a bank or other third party. A
participation interest gives the Fund a specified, undivided pro-rata interest
in the total amount of the obligation.
Municipal lease obligations have risks distinct from those associated
with general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt. These
may include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "non-appropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
In determining the liquidity of a municipal lease obligation, Bartlett
will distinguish between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond or other investment structure using a municipal lease-purchase
agreement as its base. While the former may present special liquidity issues,
the latter are based on a well established method of securing payment of a
municipal obligation. The Fund's investment in municipal lease obligations and
participation interests therein will be treated as illiquid unless Bartlett
determines, pursuant to guidelines established by the Board of Directors, that
the security could be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the security.
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Code, and laws that may be enacted
by Congress or state legislatures extending the time for payment of
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principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power or ability of issuers to meet their
obligations for the payment of interest and principal on their municipal
obligations may be materially and adversely affected.
The United States Supreme Court has held that Congress may subject the
interest on municipal obligations to federal income tax. It can be expected
that, as in the past, proposals will be introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Proposals also may be introduced in state
legislatures which could affect the state tax treatment of the Fund's
distributions. If any such proposals were enacted, the availability of municipal
obligations for investment by the Fund and the value of its assets could be
materially and adversely affected.
The following information applies to Value Trust, Total Return Trust, Special
Investment Trust, Balanced Trust and Small-Cap Value:
Futures Contracts
Each Fund may from time to time purchase or sell futures contracts. In
the purchase of a futures contract, the purchaser agrees to buy a specified
underlying instrument at a specified future date. In the sale of a futures
contract, the seller agrees to sell the underlying instrument at a specified
future date. The price at which the purchase or sale will take place is fixed at
the time the contract is entered into. Some currently available contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on indexes of securities such as S&P 500. Futures contracts can be held
until their delivery dates, or can be closed out before then, if a liquid
secondary market is available. A futures contract is closed out by entering into
an opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery date as
a contract the party had sold) at the current price as determined on the futures
exchange.
As the purchaser or seller of a futures contract, a Fund would not be
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, the Fund would be required to deposit
with its custodian, in the name of the futures broker (known as a futures
commission merchant, or "FCM"), a percentage of the contract's value. This
amount, which is known as initial margin, generally equals 10% or less of the
value of the futures contract. Unlike margin in securities transactions, initial
margin on futures contracts does not involve borrowing to finance the futures
transactions. Rather, initial margin is in the nature of a good faith deposit or
performance bond, and would be returned to that Fund when the futures position
is terminated, after all contractual obligations have been satisfied. Initial
margin may be maintained either in cash or appropriate liquid securities.
The value of a futures contract tends to increase and decrease with the
value of the underlying instrument. The purchase of a futures contract will tend
to increase exposure to positive and negative price fluctuations in the
underlying instrument in the same manner as if the underlying instrument had
been purchased directly. By contrast, the sale of a futures contract will tend
to offset both positive and negative market price changes.
As the contract's value fluctuates, payments known as variation margin
or maintenance margin are made to or received from the FCM. If the contract's
value moves against the Fund, (i.e., the Fund's futures position declines in
value), the Fund may be required to make payments to the FCM, and, conversely,
the Fund may be entitled to receive payments from the FCM if the value of the
Fund's futures position increases. This process is known as "marking-to-market"
and takes place on a daily basis. Variation margin does not involve borrowing to
finance the futures transactions, but rather represents a
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daily settlement of the Fund's obligations to or from a clearing organization.
Options on Securities, Indexed Securities and Futures Contracts
PURCHASING PUT OR CALL OPTIONS By purchasing a put (or call) option, a
Fund obtains the right (but not the obligation) to sell (or buy) the underlying
instrument at a fixed strike price. The option's underlying instrument may be a
specific security, an indexed security or a futures contract. The option may
give the Fund the right to sell (or buy) only on the option's expiration date,
or may be exercisable at any time up to and including that date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium).
A Fund may terminate its position in an option it has purchased by
allowing the option to expire, closing it out in the secondary market at its
current price, if a liquid secondary market exists, or by exercising it. If the
option is allowed to expire, the Fund will lose the entire premium paid.
WRITING PUT OR CALL OPTIONS By writing a put (or call) option, a Fund
takes the opposite side of the transaction from the option's purchaser (or
seller). In return for receipt of the premium, the Fund assumes the obligation
to pay the strike price for the option's underlying instrument (or to sell or
deliver the option's underlying instrument) if the other party to the option
chooses to exercise it. When writing an option on a futures contract, a Fund
will be required to make margin payments to an FCM as described above for
futures contracts.
Before exercise, a Fund may seek to terminate its position in an option
it has written by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
Over-the-counter and Exchange-traded Options
Each Fund may purchase and write both over-the-counter ("OTC") and
exchange-traded options. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between a Fund and its
contra-party with no clearing organization guarantee. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make/take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC market.
Exchange markets for options on debt securities exist, but the ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market.
Value Trust and Total Return Trust each may invest up to 10% and
Special Investment Trust, Balanced Trust and Small-Cap Value may invest up to
15% of its assets in illiquid securities. The term "illiquid securities"
includes purchased OTC options. Assets used as cover for OTC options written by
the Fund also will be deemed illiquid securities, unless the OTC options are
sold to qualified dealers who agree that the Fund may repurchase any OTC options
it writes for a maximum price to be calculated by a formula set forth in the
option agreement. The cover for an OTC option subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.
Cover for Options and Futures Strategies
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No Fund will use leverage in its hedging strategies involving options
and futures contracts. Each Fund will hold securities, options or futures
positions whose values are expected to offset ("cover") its obligations under
the transactions. No Fund will enter into hedging strategies involving options
and futures contracts that expose the Fund to an obligation to another party
unless it owns either (i) an offsetting ("covered") position in securities,
options or futures contracts or (ii) has cash, receivables and liquid debt
securities with a value sufficient at all times to cover its potential
obligations. Each Fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by mutual funds and, if the guidelines
so require, will set aside cash and/or appropriate liquid securities in a
segregated account with its custodian in the amount prescribed. Securities,
options or futures contracts used for cover and securities held in a segregated
account cannot be sold or closed out while the strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of a Fund's assets
could impede the portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
Risks of Futures and Related Options Trading
Successful use of futures contracts and related options depends upon
the ability of the adviser to assess movements in the direction of overall
securities and interest rates, which requires different skills and techniques
than assessing the value of individual securities. Moreover, futures contracts
relate not to the current price level of the underlying instrument, but to the
anticipated price level at some point in the future; trading of stock index
futures may not reflect the trading of the securities that are used to formulate
the index or even actual fluctuations in the index itself. There is, in
addition, the risk that movements in the price of the futures contract will not
correlate with the movements in the prices of the securities being hedged. Price
distortions in the marketplace, such as result from increased participation by
speculators in the futures market, may also impair the correlation between
movements in the prices of futures contracts and movements in the prices of the
hedged securities. If the price of the futures contract moves less than the
price of securities that are subject to the hedge, the hedge will not be fully
effective; however, if the price of the securities being hedged has moved in an
unfavorable direction, a Fund normally would be in a better position than if it
had not hedged at all. If the price of securities being hedged has moved in a
favorable direction, this advantage may be partially offset by losses on the
futures position.
Options have a limited life and thus can be disposed of only within a
specific time period. Positions in futures contracts may be closed out only on
an exchange or board of trade that provides a secondary market for such futures
contracts. Although each Fund intends to purchase and sell futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market, there is no assurance that such a market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures position and, in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase which, in the event of adverse price movements, could be lost.
Sellers of options on futures contracts must post initial margin and are subject
to additional margin calls that could be substantial in the event of adverse
price movements. In addition, a Fund's activities in the futures markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price of a
futures contract or related option is permitted to change in a single day. If
the price of a contract moves to the limit for several consecutive days, a Fund
may be unable during that time to close its position in that contract and may
have to continue making payments of variation margin. A Fund may also be unable
to dispose of securities or other instruments being used as "cover" during such
a period.
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Risks of Options Trading
The success of each Fund's option strategies depends on many factors,
the most significant of which is the adviser's ability to assess movements in
the overall securities and interest rate markets.
The exercise price of the options may be below, equal to or above the
current market value of the underlying securities or indexes. Purchased options
that expire unexercised have no value. Unless an option purchased by a Fund is
exercised or unless a closing transaction is effected with respect to that
position, the Fund will realize a loss in the amount of the premium paid and any
transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although each
Fund intends to purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any specific
time. Closing transactions with respect to OTC options may be effected only by
negotiating directly with the other party to the option contract. Although each
Fund will enter into OTC options with dealers capable of entering into closing
transactions with the Fund, there can be no assurance that a Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
In the event of insolvency of the contra-party, a Fund may be unable to
liquidate or exercise an OTC option, and could suffer a loss of its premium.
Also, the contra-party, although solvent, may refuse to enter into closing
transactions with respect to certain options, with the result that a Fund would
have to exercise those options which it has purchased in order to realize any
profit. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to that Fund. For example,
because each Fund must maintain a covered position with respect to any call
option it writes on a security or index, a Fund may not sell the underlying
security or currency (or invest any cash, government securities or short-term
debt securities used to cover an index option) during the period it is obligated
under the option. This requirement may impair a Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Options on indexes are settled exclusively in cash. If a Fund writes a
call option on an index, the Fund will not know in advance the difference, if
any, between the closing value of the index on the exercise date and the
exercise price of the call option itself, and thus will not know the amount of
cash payable upon settlement. In addition, a holder of an index option who
exercises it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change.
Each Fund's activities in the options markets may result in higher
portfolio turnover rates and additional brokerage costs.
Additional Limitations on Futures and Options
As a non-fundamental policy, each Fund will write a put or call on a
security only if (a) the security underlying the put or call is permitted by the
investment policies of that Fund, and (b) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined as of the
date the options are sold does not exceed 25% of that Fund's net assets.
Under regulations adopted by the Commodity Futures Trading Commission
("CFTC"), futures contracts and related options may be used by each Fund (a) for
hedging purposes, without quantitative limits, and (b) for other purposes to the
extent that the amount of margin deposit on all such non-hedging futures
contacts owned by the Fund, together with the amount of premiums paid by that
Fund on all such non-hedging options held on futures contracts, does not exceed
5% of the market value of that Fund's net
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assets.
The foregoing limitations, as well as those set forth in the prospectus
regarding each Fund's use of futures and related options transactions, do not
apply to options attached to, or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options, such as rights, certain debt securities and indexed
securities.
The above limitations on each Fund's investments in futures contracts
and options may be changed as regulatory agencies permit. However, each Fund
will not modify the above limitations to increase its permissible futures and
options activities without supplying additional information, as appropriate, in
a current Prospectus or Statement of Additional Information.
Forward Currency Contracts
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. No Fund will speculate with
forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect to
specific transactions. For example, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. A Fund will thereby be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between the
date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
Each Fund also may use forward currency contracts in connection with
portfolio positions to lock-in the U.S. dollar value of those positions or to
shift the Fund's exposure to foreign currency fluctuations from one country to
another. For example, when the adviser believes that the currency of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another currency, it may enter into a forward currency contract to
sell the amount of the former foreign currency approximating the value of some
or all of a Fund's securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
At or before the maturity date of a forward currency contract requiring
a Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward currency contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Fund would
realize a gain or loss as a result of entering into such an offsetting forward
currency contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and the offsetting contract.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future value
of such securities in a foreign currency will change as a consequence of market
movements in the value of those securities between the date the forward currency
contract is entered into and the date it matures. Accordingly, it may be
necessary for a Fund to
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purchase additional foreign currency on the spot (i.e., cash) market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency the Fund is obligated to deliver under the
forward contract and the decision is made to sell the security and make delivery
of the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency a Fund is
obligated to deliver under the forward contract. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. Forward currency contracts
involve the risk that anticipated currency movements will not be accurately
predicted, causing a Fund to sustain losses on these contracts and transaction
costs. Each Fund may enter into forward contracts or maintain a net exposure to
such contracts only if (1) the consummation of the contracts would not obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency or (2)
the Fund maintains cash, U.S. government securities or other appropriate liquid
securities in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contract.
The cost to a Fund of engaging in forward currency contracts varies
with factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. Each Fund will deal only with banks, broker/dealers or other financial
institutions which the adviser deems to be of high quality and to present
minimum credit risk. The use of forward currency contracts does not eliminate
fluctuations in the prices of the underlying securities each Fund owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
For each Fund:
Portfolio Lending
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized institutional
borrowers of securities, provided that cash or equivalent collateral, equal to
at least 100% of the market value of the securities loaned, is continuously
maintained by the borrower with the Fund. During the time portfolio securities
are on loan, the borrower will pay the Fund an amount equivalent to any
dividends or interest paid on such securities, and the Fund may invest the cash
collateral and earn income, or it may receive an agreed upon amount of interest
income from the borrower who has delivered equivalent collateral. These loans
are subject to termination at the option of the Fund or the borrower. Each Fund
may pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. Each Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment. The risks of securities lending are similar to those of repurchase
agreements. Each Fund presently does not intend to lend more than 5% of its
portfolio securities at any given time.
15
<PAGE>
Repurchase Agreements
Repurchase agreements are usually for periods of one week or less, but
may be for longer periods. The Funds will not enter into repurchase agreements
of more than seven days' duration if more than 15% of net assets (with respect
to American Leading Companies, Balanced Trust, Special Investment Trust and
Small-Cap Value) or more than 10% of net assets (with respect to Value Trust and
Total Return Trust) would be invested in such agreements and other illiquid
investments. To the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, a Fund might
suffer a loss. If bankruptcy proceedings are commenced with respect to the
seller of the security, realization upon the collateral by a Fund could be
delayed or limited. However, each Fund has adopted standards for the parties
with whom it may enter into repurchase agreements, including monitoring by each
Fund's adviser of the creditworthiness of such parties which the Fund's Board of
Directors believes are reasonably designed to assure that each party presents no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase agreement.
When a Fund enters into a repurchase agreement, it will obtain as
collateral from the other party securities equal in value to 102% of the amount
of the repurchase agreement (or 100%, if the securities obtained are U.S.
Treasury bills, notes or bonds). Such securities will be held by a custodian
bank or an approved securities depository or book-entry system.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting each Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information and for information
regarding any federal, state or local taxes that might be applicable to them.
General
Each Fund (which is treated as a separate corporation for federal
income tax purposes) intends to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"). In
order to do so, each Fund must distribute annually to its shareholders at least
90% of its investment company taxable income (generally, net investment income
plus any net short-term capital gain and any net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. For each Fund, these requirements include the
following: (1) at least 90% of 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) 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 that
Fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (3) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in the securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
16
<PAGE>
Dividends and interest received by each Fund, and gains realized
thereby, may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the total return on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.
Dividends and Other Distributions
Dividends and other distributions declared by a Fund in December of any
year and payable to its shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if the distributions are paid by the Fund during the following
January. Accordingly, those distributions will be taxed to shareholders for the
year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
for any Fund may not exceed the aggregate dividends received by that Fund for
the taxable year from domestic corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the federal alternative minimum tax.
Distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss) made by each Fund do not qualify for the
dividends-received deduction.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Passive Foreign Investment Companies
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (i.e., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which a Fund is a U.S. shareholder -- that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund would be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which probably would have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Each Fund may elect to "mark-to-mark" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value
17
<PAGE>
of the stock over a Fund's adjusted basis therein as of the end of that year.
Pursuant to the election, a Fund also will be allowed to deduct (as an ordinary,
not capital, loss) the excess, if any, of its adjusted basis in PFIC stock over
the fair market value thereof as of the taxable yearend, but only to the extent
of any net mark-to-market gains with respect to that stock included in income by
the Fund for prior taxable years. A Fund's adjusted basis in each PFIC's stock
subject to the election will be adjusted to reflect the amounts of income
included and deductions taken thereunder. Regulations proposed in 1992 would
provide a similar election with respect to the stock of certain PFICs.
Options, Futures, Forward Currency Contracts and Foreign Currencies
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses each
Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations) --
and gains from options derived by American Leading Companies, or from options,
futures and forward currency contracts derived by each other Fund, with respect
to its business of investing in securities or foreign currencies -- will qualify
as permissible income under the Income Requirement.
Certain futures and foreign currency contracts in which a Fund may
invest will be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts held by a Fund at the end of each taxable year other
than contracts with respect to which the Fund has made a "mixed straddle"
election, must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value), with the result that unrealized gains or
losses will be treated as though they were realized. Sixty percent of any net
gain or loss recognized on these deemed sales, and sixty percent of any net
realized gain or loss on section 1256 contracts actually sold by the Fund during
the year, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss. That 60% portion will
qualify for the reduced maximum tax rates on noncorporate taxpayers' net capital
gain enacted by the Taxpayer Relief Act of 1997 -- 20% (10% for taxpayers in the
15% marginal tax bracket) for gain recognized on capital assets held for more
than 18 months -- instead of the 28% rate in effect before that legislation,
which now applies to gain recognized on capital assets held for more than one
year but not more than 18 months. Section 1256 contracts also may be marked-to
market for purposes of the Excise Tax.
When a covered call option written (sold) by a Fund expires, the Fund
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a Fund terminates its obligations under
such an option by entering into a closing transaction, the Fund realizes a
short-term capital gain (or loss), depending on whether the cost of the closing
transaction is less than (or exceeds) the premium received when the option was
written. When a covered call option written by a Fund is exercised, the Fund is
treated as having sold the underlying security, producing long-term or
short-term capital gain or loss, depending on the holding period of the
underlying security and whether the sum of the option price received upon the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the underlying security.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures
18
<PAGE>
contracts in which a Fund may invest. Section 1092 defines a "straddle" as
offsetting positions with respect to personal property; for these purposes,
options and futures contracts are personal property. Under section 1092, any
loss from the disposition of a position in a straddle generally may be deducted
only to the extent the loss exceeds the unrealized gain on the offsetting
position(s) of the straddle; in addition, these rules may apply to postpone the
recognition of loss that otherwise would be recognized under the mark-to-market
rules discussed above. The regulations under section 1092 also provides certain
"wash sale" rules, which apply to transactions where a position is sold at a
loss and a new offsetting position is acquired within a prescribed period, and
"short sale" rules applicable to straddles. If a Fund makes certain elections,
the amount, character, and timing of recognition of gains and losses from the
affected straddle positions would be determined under rules that vary according
to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to the Funds of
straddle transactions are not entirely clear.
If a Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by a
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason, certain of its
affiliates and unaffiliated entities having an agreement with Legg Mason.
Navigator Shares are currently offered for sale only to Institutional Clients,
to qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million, and to any qualified retirement plan of Legg
Mason, Inc. or of any of its affiliates. Navigator Shares may not be purchased
by individuals directly, but Institutional Clients may purchase shares for
Customer Accounts maintained for individuals. Primary Shares are available to
all other investors.
Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy Primary Shares through the Future First Systematic
Investment Plan. Under this plan you may arrange for automatic monthly
investments in Primary Shares of $50 or more by authorizing Boston Financial
Data Services ("BFDS"), each Fund's transfer agent, to transfer funds each month
from your Legg Mason account or from your checking account to be used to buy
Primary Shares at the per share net asset value determined on the day the funds
are sent from your bank. You will receive a quarterly account statement. You may
terminate the Future First Systematic Investment Plan at any time without charge
or penalty. Forms to enroll in the Future First Systematic Investment Plan are
available from any Legg Mason or affiliated office.
Investors in Primary Shares may also buy Primary Shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of a Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
19
<PAGE>
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn on, the
investor may be subject to extra charges in order to cover collection costs.
These charges may be deducted from the investor's shareholder account.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more,
you may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan for
Employees ("SIMPLE") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value per share
determined as of the close of regular trading of the New York Stock Exchange
("Exchange") (normally 4:00 p.m., eastern time) ("close of the Exchange") on the
first day of each month. If the Exchange is not open for business on that day,
the shares will be redeemed at the per share net asset value determined as of
the close of regular trading of the Exchange on the preceding business day. The
check for the withdrawal payment will usually be mailed to you on the next
business day following redemption. If you elect to participate in the Systematic
Withdrawal Plan, dividends and other distributions on all Primary Shares in your
account must be automatically reinvested in Primary Shares. You may terminate
the Systematic Withdrawal Plan at any time without charge or penalty. Each Fund,
its transfer agent, and Legg Mason also reserve the right to modify or terminate
the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan, because
you may incur tax liabilities in connection with such purchases and withdrawals.
No Fund will knowingly accept purchase orders from you for additional shares if
you maintain a Systematic Withdrawal Plan unless your purchase is equal to at
least one year's scheduled withdrawals. In addition, if you maintain a
Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
Other Information Regarding Redemption
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, by a Fund or its
distributor except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in markets
the Fund normally utilizes is restricted, or an emergency, as defined by rules
and regulations of the SEC, exists, making disposal of the Fund's investments or
determination of its net asset value not reasonably practicable, or (iii) for
such other periods as the SEC by regulation or order may permit for protection
of each Fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the
20
<PAGE>
suspension is lifted.
Each Fund reserves the right, under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part in securities valued in
the same way as they would be valued for purposes of computing the Fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
will be subject to fluctuation in the market price of those securities until
they are sold. Each Fund does not redeem "in kind" under normal circumstances,
but would do so where the adviser determines that it would be in the best
interests of the Fund's shareholders as a whole.
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily for each Class as
of the close of the Exchange, on every day the Exchange is open, by dividing the
value of the total assets attributable to that Class, less liabilities
attributable to that Class, by the number of shares of that Class outstanding.
Pricing will not be done on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Presidents' Day,
Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. As described in the Prospectuses, securities
for which market quotations are readily available are valued at current market
value. Securities traded on an exchange or the NASDAQ Stock Market securities
are normally valued at last sale prices. Other over-the-counter securities, and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), are valued at the mean of latest closing bid and
asked prices. Securities with remaining maturities of 60 days or less are valued
at amortized cost. Securities and other assets quoted in foreign currencies will
be valued in U.S. dollars based on the currency exchange rates prevailing at the
time of the valuation. All other securities are valued at fair value as
determined by or under the direction of the appropriate Fund's Board of
Directors. Premiums received on the sale of call options are included in the net
asset value of each Class, and the current market value of options sold by a
Fund will be subtracted from net assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in each Fund at commencement of
operations of each class of Fund shares. The tables assume that all dividends
and other distributions are reinvested in each respective Fund. They include the
effect of all charges and fees applicable to the respective class of shares the
Fund has paid. (There are no fees for investing or reinvesting in the Funds
imposed by the Funds, and there are no redemption fees.) They do not include the
effect of any income tax that an investor would have to pay on distributions.
Performance data is only historical, and is not intended to indicate any Fund's
future performance.
VALUE TRUST:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through Reinvestment
Reinvestment of Capital Gain of Income Dividends
Fiscal Year Distributions Total Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
1983* $16,160 $ 241 $ 16,401
1984 18,870 555 19,425
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
1985 23,583 1,100 24,683
1986 32,556 1,954 34,510
1987 35,503 2,421 37,924
1988 32,268 2,461 34,729
1989 37,650 3,459 41,109
1990 39,891 4,399 44,290
1991 37,701 5,313 43,014
1992 44,210 7,204 51,414
1993 50,184 8,819 59,003
1994 52,789 9,548 62,337
1995 57,817 10,610 68,427
1996 82,356 14,870 97,226
1997 110,379 19,502 129,881
1998 172,947 28,814 201,761
- ---- ------- ------ -------
</TABLE>
* April 16, 1982 (commencement of operations) to March 31, 1983.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through Reinvestment
Reinvestment of Capital Gain of Income
Fiscal Year Distributions Dividends Total Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
1995* $10,805 $ 6 $10,811
1996 15,249 268 15,517
1997 20,323 619 20,942
1998 31,713 1,146 32,859
------ ----- ------
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1998 would have been $100,180, and the investor would
have received a total of $24,717 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1998 would have
been $26,951, and the investor would have received a total of $3,314 in
distributions. If the Adviser had not waived certain fees in the 1983-1998
fiscal years, returns would have been lower.
TOTAL RETURN TRUST:
22
<PAGE>
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Shares Value of Shares
Obtained Through Reinvestment of Acquired Through Reinvestment
Fiscal Year Capital Gain Distributions of Income Dividends Total Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
1986* $10,780 - $10,780
1987 11,673 $ 211 11,884
1988 10,295 380 10,675
1989 11,690 603 12,293
1990 11,875 846 12,721
1991 11,499 1,216 12,715
1992 13,885 1,830 15,715
1993 16,234 2,605 18,839
1994 16,637 3,064 19,701
1995 16,593 3,482 20,075
1996 21,342 5,194 26,536
1997 26,102 6,890 32,992
1998 37,430 9,565 46,995
------ ----- ------
</TABLE>
* November 21, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through Reinvestment
Reinvestment of Capital Gain of Income
Fiscal Year Distributions Dividends Total Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
1995* $10,203 $ 160 $10,363
1996 13,106 668 13,774
1997 15,989 1,321 17,310
1998 22,606 2,311 24,917
------ ----- ------
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1998 would have been $24,630, and the investor would
have received a total of $8,751 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1998 would have
been $19,460, and the investor would have received a total of $3,609 in
distributions. If the Adviser had not waived certain fees in the 1986-
23
<PAGE>
1995 fiscal years, returns would have been lower.
SPECIAL INVESTMENT TRUST:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Shares Value of Shares
Obtained Through Reinvestment of Capital Acquired Through Reinvestment
Fiscal Year Gain Distributions of Income Dividends Total Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
1986* $11,530 - $11,530
1987 13,051 $ 23 13,074
1988 11,107 113 11,220
1989 12,982 144 13,126
1990 14,890 253 15,143
1991 17,777 615 18,392
1992 21,249 905 22,154
1993 23,528 953 24,481
1994 28,511 1,197 29,708
1995 26,707 1,108 27,815
1996 34,291 1,442 35,733
1997 38,345 1,526 39,871
1998 54,898 2,070 56,968
------ ----- ------
</TABLE>
* December 30, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus
Shares Obtained Through Value of Shares
Reinvestment of Capital Gain Acquired Through Reinvestment
Fiscal Year Distributions of Income Dividends Total Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
1995* $10,481 - $10,481
1996 13,489 $121 13,610
1997 15,224 129 15,353
1998 21,996 177 22,173
------ --- ------
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1998 would have been
24
<PAGE>
$36,020, and the investor would have received a total of $7,987 in
distributions. With respect to Navigator Shares, if the investor had not
reinvested dividends and other distributions, the total value of the
hypothetical investment as of March 31, 1998 would have been $19,424, and the
investor would have received a total of $1,858 in distributions. If the Adviser
had not waived certain fees in the 1986-1998 fiscal years, returns would have
been lower.
AMERICAN LEADING COMPANIES:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Shares
Value of Original Shares Plus Shares Acquired Through
Obtained Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- ------------------------------------------------------------------------------------------------------------
<S> <C>
1994* $ 9,690 $ 24 $ 9,714
1995 10,180 140 10,320
1996 12,230 283 12,513
1997 15,242 366 15,608
1998 20,658 442 21,100
------ --- ------
</TABLE>
* September 1, 1993 (commencement of operations) to March 31, 1994.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- ------------------------------------------------------------------------------------------------------------
<S> <C>
1997* $11,428 $ 88 $11,516
1998 15,632 108 15,740
------ --- ------
</TABLE>
* October 10, 1996 (commencement of operations) to March 31, 1997.
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, 1998 would have been $17,780, and the investor would
have received a total of $2,577 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1998 would have
been $13,496, and the investor would have received a total of $1,831 in
distributions. If the Adviser had not waived certain fees in the 1994-1998
fiscal years, returns would have been lower.
BALANCED TRUST:
PRIMARY SHARES
25
<PAGE>
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- ------------------------------------------------------------------------------------------------------------
<S> <C>
1997* $10,160 $ 42 $10,202
1998 12,749 289 13,038
------ --- ------
</TABLE>
* October 1, 1996 (commencement of operations) to March 31, 1997.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1998 would have
been $12,620, and the investor would have received a total of $373 in
distributions. If the Adviser had not waived certain fees in the fiscal years
ended March 31, 1997 and 1998, returns would have been lower.
The table above is based only on Primary Shares of Balanced Trust. As
of the date of this Statement of Additional Information, Navigator Shares of
Balanced Trust have no performance history of their own.
As of the date of this Statement of Additional Information, Small-Cap
Value has no operating history.
Total Return Calculations
Average annual total return quotes used in each Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
separately for each Class according to the following formula:
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 each Fund may compare the performance of a Class of
Shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all dividends. It takes no account of the costs of investing or the tax
consequences of distributions. The Funds invest in many securities that are not
included in the S&P 500.
Each Fund may also cite rankings and ratings, and compare the return of
a Class with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. Each Fund may also refer in
such materials to mutual fund performance rankings, ratings, comparisons with
funds having similar
26
<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.
Each Fund may compare the investment return of a Class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on many certificates
of deposit, which remains at a specified rate for a specified period of time,
the return of each Class of Shares will vary.
Fund advertisements may reference the history of the distributor and
its affiliates, the education and experience of the portfolio manager, and the
fact that the portfolio manager engages in value investing. With value
investing, the Adviser invests in those securities it believes to be undervalued
in relation to the long-term earning power or asset value of their issuers.
Securities may be undervalued because of many factors, including market decline,
poor economic conditions, tax-loss selling, or actual or anticipated unfavorable
developments affecting the issuer of the security. The Adviser believes that the
securities of sound, well-managed companies that may be temporarily out of favor
due to earnings declines or other adverse developments are likely to provide a
greater total return than securities with prices that appear to reflect
anticipated favorable developments and that are therefore subject to correction
should any unfavorable developments occur.
In advertising, each Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Fund may use other recognized
sources as they become available.
Each Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
Each Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
Each Fund may also include in advertising biographical information on
key investment and managerial personnel.
Each Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through periods of low price levels.
Each Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $71.0 billion as of March 31,
1998.
27
<PAGE>
In advertising, each Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
Lipper Analytical Services, Inc., an independent rating service which
measures the performance of most U.S. mutual funds, reported that Value Trust's
total return of Primary Shares ranked 63 among 1800 general equity funds it
measured during the one year ended April 30, 1998. For the five years ended
April 30, 1998, Value Trust's total return ranked 2 among 677 equity funds and
for the ten years ended April 30, 1998, Value Trust's total return ranked 32
among 359 general equity funds. Of course, there can be no assurance that
results similar to those achieved by Value Trust in the past will be realized in
future periods. Rankings may have been different if the adviser had not waived
certain fees during the periods in question.
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of such plans until the
income is distributed to them. Primary Share investors who are considering
establishing an IRA, SEP, SIMPLE or other qualified retirement plan should
consult their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in these plans with respect to Primary Shares
through regular payroll deductions may be arranged with a Legg Mason or
affiliated financial advisor and your employer. Additional information with
respect to these plans is available upon request from Financial Advisor or
Service Provider.
Traditional IRA. Certain Primary Share investors may obtain tax
advantages by establishing IRAs. Specifically, except as noted below, if neither
you nor your spouse is an active participant in a qualified employer or
government retirement plan, or if either you or your spouse is an active
participant and your adjusted gross income does not exceed a certain level, then
each of you may deduct cash contributions made to an IRA in an amount for each
taxable year not exceeding the lesser of 100% of your earned income or $2,000. A
married investor who is not an active participant in such a plan and files a
joint income tax return with his or her spouse (and their combined adjusted
gross income does not exceed $150,000) is not affected by the spouse's active
participant status. In addition, if your spouse is not employed and you file a
joint return, you may establish a separate IRA for your spouse and contribute up
to a total of $4,000 to the two IRAs, provided that the contribution to either
does not exceed $2,000. If your employer's plan qualifies as a SARSEP, permits
voluntary contributions and meets certain other requirements, you may make
voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your Fund shares are then not immediately taxable to
you or the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability, where the distribution is rolled over
into another qualified plan or certain other situations.
Roth IRA. A shareholder whose adjusted gross income (or combined
adjusted gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax
28
<PAGE>
year to a Roth IRA. In addition, for a shareholder whose adjusted gross income
does not exceed $100,000 (or is not married filing a separate return), certain
distributions from traditional IRAs may be rolled over to a Roth IRA and any of
the shareholder's traditional IRAs may be converted to a Roth IRA; these
rollover distributions and conversions are, however, subject to federal income
tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
Education IRA. Although not technically for retirement savings, an
Education IRA provides a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than the maximum amount allowable under
current law (currently $500) may be contributed for any year to Education IRAs
for the same beneficiary. Contributions are not deductible and may not be made
after the beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or transferred to an Education IRA of a qualified
family member).
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
Savings Incentive Match Plan for Employees - SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan instead may establish a SIMPLE either as separate IRAs
or as part of a Code section 401(k) plan. A SIMPLE, which is not subject to the
complicated nondiscrimination rules that generally apply to qualified retirement
plans, will allow certain employees to make elective contributions of up to
$6,000 per year and will require the employer to make either matching
contributions up to 3% of each such employee's salary or a 2% nonelective
contribution.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding at the
rate of 10% (depending on the type and amount of the distribution), unless the
recipient elects not to have any withholding apply. Primary Share investors
should consult their plan administrator or tax advisor for further information.
THE FUNDS' DIRECTORS AND OFFICERS
Each Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and directors of the
Funds and their principal occupations during the past five years are set forth
below. An asterisk (*) indicates officers and/or directors who are "interested
persons" of the Funds as defined by the 1940 Act. The business address of each
officer and director is 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
29
<PAGE>
RAYMOND A. MASON* [9/28/36], Chairman of the Board and Director of
Value Trust, Total Return Trust and Special Investment Trust; Chairman of the
Board and President of Legg Mason, Inc. (financial services holding company);
Director of Environmental Elements Corporation (manufacturer of pollution
control equipment); Officer and/or Director of various other affiliates of Legg
Mason.
JOHN F. CURLEY, JR.* [7/24/39], President and Director of Value Trust,
Total Return Trust and Special Investment Trust; Chairman of the Board and
Director of Investors Trust; Retired Vice Chairman and Director of Legg Mason,
Inc. and Legg Mason Wood Walker, Incorporated; Chairman of the Board and
Director of three Legg Mason funds; Chairman of the Board, President and Trustee
of one Legg Mason fund; Chairman of the Board and Trustee of one Legg Mason
fund. Formerly: Director of Legg Mason Fund Adviser, Inc. and Western Asset
Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], Director of each Fund; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS Industries,
Inc. (diversified holding company whose subsidiaries are engaged in the
manufacture and sale of decorative paper products, business forms, and
specialty metal packaging); Director of PECO Energy Company (formerly
Philadelphia Electric Company); Director/Trustee of five other Legg Mason
funds. Formerly: Senior Vice President and Chief Financial Officer of
Philadelphia Electric Company (now PECO Energy Company); Executive Vice
President and Treasurer, Girard Bank, and Vice President of its parent holding
company, the Girard Company; and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH [12/27/25], Director of each Fund; 14201 Laurel Park
Drive, Suite 104, Laurel, Maryland. Real Estate Developer and Investor;
President and Director of Resource Enterprises, Inc. (real estate brokerage);
Chairman of Resource Realty LLC (management of retail and office space); Partner
in Greater Laurel Health Park Ltd. Partnership (real estate investment and
development); Director/Trustee of five other Legg Mason funds.
ARNOLD L. LEHMAN [7/18/44], Director of each Fund; Director of the
Brooklyn Museum of Art; Director/Trustee of five other Legg Mason funds.
Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], Director of each Fund; 400 Seventh
Street NW, Washington, DC. Chief Executive Officer of the Marrow Foundation.
Director/Trustee of five other Legg Mason funds. Formerly: Executive Director
of the Baltimore International Festival (January 1991 - March 1993); and
Senior Assistant to the President of The Johns Hopkins University (1986-1991).
T. A. RODGERS [10/22/34], Director of each Fund; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director/Trustee of five other Legg Mason funds. Formerly:
Director and Vice President of Corporate Development, Polk Audio, Inc.
(manufacturer of audio components).
EDWARD A. TABER, III* [8/25/43], Director of each Fund; President of
the Trust; Senior Executive Vice President of Legg Mason, Inc. and Legg
Mason Wood Walker, Inc.; Vice Chairman and Director of Legg Mason Fund
Adviser, Inc.; President and/or Director/Trustee of four Legg Mason funds.
Formerly: Executive Vice President of T. Rowe Price-Fleming International,
Inc. (1986-1992) and Director of the Taxable Fixed Income Division at T. Rowe
Price Associates, Inc. (1973-1992).
The executive officers of the Funds, other than those who also serve as
directors, are:
MARIE K. KARPINSKI* [1/1/49], Vice President and Treasurer of each
Fund; Treasurer of the Adviser; Vice President and Treasurer of six other Legg
Mason funds; Vice President of Legg Mason.
KATHI D. BAIR* [12/15/64], Secretary or Assistant Treasurer of each
30
<PAGE>
Fund; Secretary/Assistant Treasurer of various other Legg Mason
funds.
SUSAN L. SILVA* [3/29/67], Assistant Secretary of each Fund; Assistant
Secretary of one other Legg Mason fund; employee of Legg Mason since January
1994.
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Haugh, Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of a Fund who are "interested persons"
of the Fund receive no salary or fees from the Fund. Each Director of a Fund who
is not an interested person of the Fund ("Independent Directors") receives an
annual retainer and a per meeting fee based on the average net assets of each
Fund at December 31, of the previous year.
On May 1, 1998, the directors and officers of each Fund beneficially
owned in the aggregate less than 1% of that Fund's outstanding shares.
On May 1, 1998, the Legg Mason Profit Sharing Plan and Trust, 7 East
Redwood Street, Baltimore, MD 21202 owned of record and beneficially the
following percentages of the outstanding shares of the Navigator Classes:
Navigator Class of Value Trust 61.98%
Navigator Class of Total Return Trust 99.09%
Navigator Class of Special Investment Trust 99.21%
On May 1, 1998, Wood County Trust Co, 181 2nd Street South, Wisconsin
Rapids, WI 54494, owned of record and beneficially 8.14% of the outstanding
shares of the Navigator Class of Value Trust. As of the same date, State Street
Bank & Trust Company, Trustee for the NCR Savings Plan, One Enterprise Drive,
North Quincy, MA, owned of record and beneficially 7.98% of the outstanding
shares of the Navigator Class of Value Trust.
As of the same date, SMICO & CO, P.O. Box 307, Smith Center, Kansas
66967, owned of record and beneficially 100% of the outstanding shares of the
Navigator Class of American Leading Companies.
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31, 1998.
None of the Legg Mason funds has any retirement plan for its directors.
COMPENSATION TABLE
31
<PAGE>
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
AGGREGATE AGGREGATE COMPENSATION AGGREGATE FROM EACH FUND
NAME OF PERSON COMPENSATION FROM COMPENSATION FROM SPECIAL COMPENSATION AND FUND COMPLEX
AND POSITION VALUE TRUST* FROM TOTAL INVESTMENT TRUST* FROM INVESTORS PAID TO
RETURN TRUST* TRUST* DIRECTORS**
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Raymond A. Mason-
Chairman of the
Board
and Director None None None None None
- ----------------------------------------------------------------------------------------------------------------
John F.
Curley, Jr. -
President and
Director None None None None None
- ----------------------------------------------------------------------------------------------------------------
Edward A.
Taber, III -
Director None None None None None
- ----------------------------------------------------------------------------------------------------------------
Richard G. $3,600 $2,400 $2,700 $2,400 $29,400
Gilmore -
Director
- ----------------------------------------------------------------------------------------------------------------
Charles F. Haugh - $3,600 $2,400 $2,700 $2,400 $29,400
Director
- ----------------------------------------------------------------------------------------------------------------
Arnold L. Lehman - $3,600 $2,400 $2,700 $2,400 $29,400
Director
- ----------------------------------------------------------------------------------------------------------------
Jill E. McGovern - $3,600 $2,400 $2,700 $2,400 $29,400
Director
- ----------------------------------------------------------------------------------------------------------------
T. A. Rodgers- $3,600 $2,400 $2,700 $2,400 $29,400
Director
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents fees paid to each director during the fiscal year ended
March 31, 1998.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1997. There are nine open-end
investment companies in the Legg Mason Complex (with a total of
seventeen funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA, a Maryland Corporation, is located at 100 Light Street,
Baltimore, Maryland 21202. LMFA is a wholly owned subsidiary of Legg Mason,
Inc., which is also the parent of Legg Mason, Bartlett and
32
<PAGE>
Legg Mason Capital Management, Inc. ("LMCM"). LMFA serves as manager and
investment adviser to Value Trust, Total Return Trust, Special Investment Trust
and American Leading Companies and as manager to Balanced Trust and Small-Cap
Value under separate Management Agreements with each Fund ("Management
Agreement"). The Management Agreement for Value Trust originally became
effective as of April 19, 1982 and was last approved by the shareholders of
Value Trust on July 20, 1984. The Management Agreement for Total Return Trust
originally became effective as of August 5, 1985 and was last approved by the
shareholders of Total Return Trust on July 17, 1986. The Management Agreement
for Special Investment Trust originally became effective as of December 10, 1985
and was last approved by the shareholders of Special Investment Trust on July
17, 1986. The Management Agreement for American Leading Companies originally
became effective as of August 2, 1993. The Management Agreement for Balanced
Trust became effective on July 31, 1996. The Management Agreement for Small-Cap
Value became effective on February 13, 1998.
The Management Agreements for each Fund (other than Small-Cap Value)
were most recently approved by each Fund's Board of Directors, including a
majority of the directors who are not "interested persons" of the Fund or LMFA,
on November 7, 1997. The Management Agreement for Small-Cap Value was approved
by the Fund's Board of Directors, including a majority of the directors who are
not "interested persons" of the Fund, Brandywine, or LMFA, on February 13, 1998.
Each Management Agreement provides that, subject to overall direction
by the Fund's Board of Directors, LMFA manages or oversees the investment and
other affairs of each Fund. LMFA is responsible for managing each Fund
consistent with the Fund's investment objective and policies described in its
Prospectuses and this Statement of Additional Information. LMFA also is
obligated to (a) furnish the Fund with office space and executive and other
personnel necessary for the operation of each Fund; (b) supervise all aspects of
each Fund's operations; (c) bear the expense of certain informational and
purchase and redemption services to each Fund's shareholders; (d) arrange, but
not pay for, the periodic updating of prospectuses, proxy material, tax returns
and reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to each Fund's officers and directors. In addition, LMFA paid
Value Trust's, Total Return Trust's and Special Investment Trust's
organizational expenses and has agreed to reimburse Value Trust and Special
Investment Trust for auditing fees and compensation of those Funds' independent
directors. LMFA and its affiliates pay all compensation of directors and
officers of each Fund who are officers, directors or employees of LMFA. Each
Fund pays all of its expenses which are not expressly assumed by LMFA. These
expenses include, among others, interest expense, taxes, brokerage fees and
commissions, expenses of preparing and printing prospectuses, proxy statements
and reports to shareholders and of distributing them to existing shareholders,
custodian charges, transfer agency fees, distribution fees to Legg Mason, each
Fund's distributor, compensation of the independent directors, legal and audit
expenses, insurance expense, shareholder meetings, proxy solicitations, expenses
of registering and qualifying Fund shares for sale under federal and state law,
governmental fees and expenses incurred in connection with membership in
investment company organizations. Each Fund also is liable for such nonrecurring
expenses as may arise, including litigation to which the Fund may be a party.
Each Fund may also have an obligation to indemnify its directors and officers
with respect to litigation.
LMFA receives for its services to each Fund a management fee,
calculated daily and payable monthly. LMFA receives from Value Trust and Special
Investment Trust a management fee at an annual rate of 1% of the average daily
net assets of that Fund for the first $100 million of average daily net assets,
0.75% of average daily net assets between $100 million and $1 billion, and 0.65%
of average daily net assets exceeding $1 billion. LMFA receives from Total
Return Trust a management fee at an annual rate of 0.75% of the average daily
net assets of that Fund. LMFA receives from American Leading Companies a
management fee at an annual rate of 0.75% of the average daily net assets of
that Fund. LMFA receives from Balanced Trust a management fee at an annual rate
of 0.75% of the average daily net assets of that Fund. LMFA receives from
Small-Cap Value a management fee at an annual rate of 0.85% of the average daily
net assets of that Fund. LMFA has agreed to waive its fees for Total Return
Trust, American Leading Companies, Balanced Trust and Small-Cap Value for
expenses related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of the
33
<PAGE>
following amounts: for Total Return Trust and American Leading Companies, 1.95%
of average net assets attributable to Primary Shares indefinitely; for Balanced
Trust, 1.85% of average net assets attributable to Primary Shares until July 31,
1999; and for Small-Cap Value, 2.00% of average net assets attributable to
Primary Shares until July 31, 1999. LMFA has agreed to waive its fees for Total
Return Trust, American Leading Companies, Balanced Trust and Small-Cap Value for
expenses related to Navigator Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) in excess of the following amounts: for Total Return
Trust and American Leading Companies, 0.95% of average net assets attributable
to Navigator Shares indefinitely; for Balanced Trust, 1.10% of average net
assets attributable to Navigator Shares until July 31, 1999; and for Small-Cap
Value, 1.00% of average net assets attributable to Navigator Shares until July
31, 1999.
For the fiscal years ended March 31, 1998, 1997 and 1996, management
fees of $24,282,523, $13,199,924 and $9,588,819, respectively were received from
Value Trust; $4,031,818, $2,404,297 and $1,768,271, respectively, were received
from Total Return Trust; and $9,875,632, $7,272,943 and $5,696,555,
respectively, were received from Special Investment Trust.
For the fiscal years ended March 31, 1998, 1997 and 1996, LMFA received
management fees of $1,190,729 (prior to fees waived of $69,496), $643,329 (prior
to fees waived of $94,059) and $515,120 (prior to fees waived of $170,819),
respectively, from American Leading Companies.
For the period October 1, 1996 (commencement of operations) to March
31, 1997, all management fees were waived by LMFA for Balanced Trust. For the
fiscal year ended March 31, 1998, the LMFA received management fees of
$215,415(prior to fees waived of $83,278). Under each Advisory Agreement or
(with respect to Balanced Trust and Small-Cap Value) Management Agreement, each
Fund has the non-exclusive right to use the name "Legg Mason" until that
Agreement is terminated, or until the right is withdrawn in writing by LMFA.
LMCM, 100 Light Street, Baltimore, MD 21202, an affiliate of Legg
Mason, also serves as an investment adviser to American Leading Companies
pursuant to an Investment Advisory Agreement dated August 2, 1993, between LMCM
and LMFA ("Advisory Agreement"). The Advisory Agreement was most recently
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" (as that term is defined in the 1940 Act) of
Investors Trust, LMFA or LMCM, on November 7, 1997. The Advisory Agreement was
approved by Legg Mason Fund Adviser, Inc., as the Fund's sole shareholder, on
August 2, 1993.
Under the Advisory Agreement, LMCM may provide the Fund with research
and investment advisory services for which LMFA (not the Fund) may pay a fee.
Currently, LMCM is not providing any services to the Fund.
For the fiscal years ended March 31, 1998, 1997 and 1996, LMFA paid
$610,704, $219,733 and $137,720, respectively, to LMCM on behalf of the Fund for
such services.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, an affiliate
of Legg Mason, serves as investment adviser to Balanced Trust pursuant to an
Investment Advisory Agreement dated July 31, 1996, between Bartlett and LMFA
("Advisory Agreement"). The Advisory Agreement was most recently approved by the
Board of Directors, including a majority of the directors who are not
"interested persons" (as that term is defined in the 1940 Act) of the Trust,
Bartlett or LMFA, on November 7, 1997. The Advisory Agreement was
approved by Legg Mason Fund Adviser, Inc., as the Fund's sole shareholder, on
July 31, 1996.
Under the Advisory Agreement, Bartlett is responsible, subject to the
general supervision of LMFA and the Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
Bartlett's services to the Fund, LMFA (not the Fund) pays Bartlett a fee,
computed daily and
34
<PAGE>
payable monthly, at an annual rate equal to 662/3% of the fee received by the
Manager from the Fund, net of any waivers by LMFA.
For the period October 1, 1996 (commencement of operations) to March
31, 1997, Bartlett waived its advisory fees on behalf of Balanced Trust. For the
fiscal year ended March 31, 1998, Bartlett received $88,092 in advisory fees.
Brandywine Asset Management, Inc. ("Brandywine"), 201 North Walnut
Street, Wilmington, Delaware, an affiliate of Legg Mason, serves as investment
adviser to Small-Cap Value pursuant to an Investment Advisory Agreement dated
May 1, 1998, between Brandywine and LMFA ("Advisory Agreement"). The
Advisory Agreement was approved by Legg Mason Fund Adviser, Inc., as the Fund's
sole shareholder, on May 29, 1998.
Under the Advisory Agreement, Brandywine is responsible, subject to the
general supervision of LMFA and Investors Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
Brandywine's services to the Fund, LMFA (not the Fund) pays Brandywine a fee,
computed daily and payable monthly, at an annual rate equal to 0.50% of the
Fund's average daily net assets or 58.8% of the fee received by LMFA from the
Fund, net of any waivers by LMFA.
Under each Advisory Agreement and (with respect to Balanced Trust and
Small-Cap Value) Management Agreement, LMFA/LMCM/Bartlett/Brandywine will not be
liable for any error of judgment or mistake of law or for any loss by a Fund in
connection with the performance of the Advisory Agreement or Management
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations or duties under the
respective Agreement.
Each Advisory Agreement and (with respect to Balanced Trust and
Small-Cap Value) Management Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of the respective Fund's
Board of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by LMFA/LMCM/Bartlett/Brandywine, on not less than 60 days'
notice to the other party to the Agreement, and may be terminated immediately
upon the mutual written consent of all parties to the Agreement.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, each Corporation and LMFA have adopted policies that
restrict securities trading in the personal accounts of portfolio managers and
others who normally come into advance possession of information on portfolio
transactions. These policies comply, in all material respects, with the
recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the fiscal years ended March 31, 1998 and 1997, the
portfolio turnover rates for Value Trust were 12.9% and 10.5%, respectively; the
portfolio turnover rates for Total Return Trust were 20.6% and 38.4%,
respectively; the portfolio turnover rates for Special Investment Trust were
29.8% and 29.2%, respectively; and the portfolio turnover rates for American
Leading Companies were 51.4% and 55.7%, respectively. For the fiscal year ended
March 31, 1998 and the period October 1, 1996 (commencement of operations) to
March 31, 1997, the portfolio turnover rates for Balanced Trust were 34.5% and
5.1% (annualized), respectively.
Under the Advisory Agreement with each Fund, each Fund's adviser is
responsible for the execution of the Fund's portfolio transactions and must seek
the most favorable price and execution for
35
<PAGE>
such transactions, subject to the possible payment, as described below, of
higher brokerage commissions to brokers who provide research and analysis. Each
Fund may not always pay the lowest commission or spread available. Rather, in
placing orders for a Fund each Fund's adviser also takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below), and any
risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, each
Fund's adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to each Fund's adviser for its use, may
place orders with brokers who provide supplemental investment and market
research and securities and economic analysis and may pay to these brokers a
higher brokerage commission than may be charged by other brokers. Such services
include, without limitation, advice as to the value of securities; the
advisability of investing in, purchasing, or selling securities; advice as to
the availability of securities or of purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Such research and analysis may be useful to each Fund's adviser in connection
with services to clients other than the Fund whose brokerage generated the
service. LMFA's/Bartlett's/Brandywine's fee is not reduced by reason of its
receiving such brokerage and research services.
From time to time each Fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. Commissions
paid to Legg Mason will not exceed "usual and customary brokerage commissions."
Rule 17e-1 under the 1940 Act defines "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the over-the-counter
market, each Fund generally deals with responsible primary market-makers unless
a more favorable execution can otherwise be obtained.
For the fiscal years ended March 31, 1998, 1997 and 1996, Legg Mason
received $3,120, $0 and $0 from Value Trust, $1,134, $0 and $0 from Total Return
Trust, and $0, $0 and $16,563, respectively, from Special Investment Trust.
Value Trust paid total brokerage commissions of $1,360,133, $693,443 and
$347,670, respectively; Total Return Trust paid total brokerage commissions of
$477,779, $386,786 and $235,364, respectively; and Special Investment Trust paid
total brokerage commissions of $1,333,903, $1,066,917 and $698,545,
respectively, during the fiscal years ended March 31, 1998, 1997 and 1996.
For the fiscal years ended March 31, 1998, 1997 and 1996, American
Leading Companies paid total brokerage commissions of $203,625, $120,631 and
$61,067, respectively. Legg Mason received no brokerage commissions from
American Leading Companies for the same periods.
For the fiscal year ended March 31, 1998, Balanced Trust paid total
brokerage commissions of $34,738. For the period October 1, 1996 (commencement
of operations) to March 31, 1997, Balanced Trust paid total brokerage
commissions of $23,144. Legg Mason received no brokerage commissions from
Balanced Trust for the same periods.
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. Each Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. These procedures, among other things, limit
each Fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so that: a Fund together with all other registered investment
companies having the same adviser, may not purchase more than 25% of the
principal amount of the offering of such class . In addition, a Fund may not
purchase securities during the existence of an underwriting if Legg Mason is the
36
<PAGE>
sole underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from executing transactions on an exchange for its affiliates, such as the
Funds, unless the affiliate expressly consents by written contract. Each Fund's
Advisory Agreement expressly provides such consent.
Among the broker-dealers regularly used by each respective Fund during
the fiscal year ended March 31, 1998, Value Trust at that date owned shares of
the following parent companies: 1,654,000 shares of The Bear Stearns Companies,
Inc. at a market value of $84,961,000; Total Return Trust at that date owned
shares of the following parent companies: 397,000 shares of The Bear Stearns
Companies, Inc. at a market value of $20,382,000; Special Investment Trust at
that date owned shares of the following parent companies: 551,000 shares of The
Bear Stearns Companies, Inc. at a market value of $28,320,000. American Leading
Companies and Balanced Trust held no shares of their regular
broker-dealers.
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by LMFA, Bartlett or Brandywine. However, the
same security may be held in the portfolios of more than one fund or account.
When two or more accounts simultaneously engage in the purchase or sale of the
same security, the prices and amounts will be equitably allocated to each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large-volume transactions may
produce better executions and prices.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to a
separate Underwriting Agreement with each Fund. The Underwriting Agreement
obligates Legg Mason to promote the sale of Fund shares and to pay certain
expenses in connection with its distribution efforts, including expenses for the
printing and distribution of prospectuses and periodic reports used in
connection with the offering to prospective investors (after the prospectuses
and reports have been prepared, set in type and mailed to existing shareholders
at the Fund's expense), and for supplementary sales literature and advertising
costs.
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.
Legg Mason and LMFA may make payments out of their own assets to Fairfield or
others to support the distribution of Navigator Shares and shareholder
servicing.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits the Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. Under the Plans, the aggregate
fees may not exceed an annual rate of each Fund's average daily net assets
attributable to Primary Shares as follows: 1.00% for Total Return Trust, Special
Investment Trust, American Leading Companies and Small-Cap Value; 0.75% for
Balanced Trust and 0.95% for Value Trust. Distribution activities for which such
payments may be made include, but are not limited to, compensation to persons
who engage in or support distribution and redemption of Shares, printing of
prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses, all with respect to Primary Shares only.
The Plans were most recently approved by the shareholders of Value
Trust on July 20, 1984 and on July 17, 1986 for both the Total Return Trust and
Special Investment Trust. The Plans were approved by Legg Mason Fund Adviser,
Inc., as sole shareholder of: American Leading Companies, on August 2, 1993 and
Balanced Trust, on October 7, 1996. The Plans of Value Trust, Total Return Trust
and Special Investment Trust were
37
<PAGE>
amended, effective July 1, 1993, to make clear that, of the aggregate 1.00% fees
with respect to Total Return Trust and Special Investment Trust, 0.75% is paid
for distribution services and 0.25% is paid for ongoing services to
shareholders; and with respect to Value Trust, 0.70% is paid for distribution
services and 0.25% is paid for ongoing services to shareholders. The amendments
also specify that each Fund may not pay more in cumulative distribution fees
than 6.25% of total new gross assets attributable to Primary Shares, plus
interest, as specified in the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ("NASD"). Legg Mason may pay all or a portion of the
fee to its financial advisors. Continuation of the Plans was most recently
approved on November 7, 1997 by the Board of Directors of each respective Fund
including a majority of the directors who are not "interested persons" of each
Fund as that term is defined in the 1940 Act and who have no direct or indirect
financial interest in the operation of the Plan or the Underwriting Agreement
("12b-1 Directors").
With respect to Primary Shares, Legg Mason has also agreed to waive its
fees for Total Return Trust, American Leading Companies, Balanced Trust and
Small-Cap Value as described under "The Funds' Investment Adviser/Manager."
In approving the establishment or continuation of each Plan, in
accordance with the requirements of Rule 12b-1, the directors determined that
there was a reasonable likelihood that each Plan would benefit the respective
Fund and its Primary Class shareholders. The directors considered, among other
things, the extent to which the potential benefits of the Plan to the Fund's
Primary Class shareholders could offset the costs of the Plan; the likelihood
that the Plan would succeed in producing such potential benefits; the merits of
certain possible alternatives to the Plan; and the extent to which the retention
of assets and additional sales of each Fund's Primary Shares would be likely to
maintain or increase the amount of compensation paid by that Fund to the
Adviser/Manager.
In considering the costs of the Plans, the directors gave particular
attention to the fact that any payments made by a Fund to Legg Mason under the
Plan would increase the Fund's level of expenses in the amount of such payments.
Further, the directors recognized that the Adviser/Manager would earn greater
management fees if a Fund's assets were increased, because such fees are
calculated as a percentage of a Fund's assets and thus would increase if net
assets increase. The directors further recognized that there can be no assurance
that any of the potential benefits described below would be achieved if the
Plans were implemented.
Among the potential benefits of the Plans, the directors noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
each Fund's Primary Shares and to maintain and enhance the level of services
they provide to each Fund's Primary Class shareholders. These efforts, in turn,
could lead to increased sales and reduced redemptions, eventually enabling each
Fund to achieve economies of scale and lower per share operating expenses. Any
reduction in such expenses would serve to offset, at least in part, the
additional expenses incurred by each Fund in connection with its Plan.
Furthermore, the investment management of each Fund could be enhanced, as net
inflows of cash from new sales might enable its portfolio manager to take
advantage of attractive investment opportunities, and reduced redemptions could
eliminate the potential need to liquidate attractive securities positions in
order to raise the funds necessary to meet the redemption requests.
Each Plan will continue in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. Each Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting Primary Shares. Any change in a Plan that would materially increase the
distribution cost to a Fund requires shareholder approval; otherwise the Plan
may be amended by the directors, including a majority of the 12b-1 Directors, as
previously described.
38
<PAGE>
In accordance with Rule 12b-1, each Plan provides that Legg Mason will
submit to the Fund's Board of Directors, and the directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
For the fiscal years ended March 31, 1998, 1997 and 1996, Value Trust
paid Legg Mason $32,477,903, $16,863,796 and $11,760,195, respectively in
distribution and service fees under the Plan, from assets attributable to
Primary Shares. For the same fiscal years, Total Return Trust paid Legg Mason
$5,232,873, $3,120,818 and $2,297,095, respectively; Special Investment Trust
paid Legg Mason $12,733,789, $8,965,838 and $6,955,948, respectively; and
American Leading Companies paid Legg Mason $1,587,015, $857,522 and $686,826,
respectively, in fees under the Plan. For the fiscal year ended March 31, 1998,
Balanced Trust paid Legg Mason $215,415 in fees under the Plan and for the
period October 1, 1996 (commencement of operations) to March 31, 1997, Balanced
Trust paid distribution and service fees of $45,587 (prior to fees waived of
$26,398).
During the year ended March 31, 1998, Legg Mason incurred the following
expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
Special American
Total Return Investment Leading Balanced
Value Trust Trust Trust Companies Trust
------------------------------------------------------------------------------------
<S> <C>
Compensation to sales
personnel $19,139,000 $2,961,000 $7,447,000 $892,000 $115,000
Advertising $265,000 $35,000 $35,000 $29,000 $54,000
Printing and mailing of
prospectuses to
prospective
shareholders $455,000 $142,000 $144,000 $126,000 $200,000
Other $5,817,000 $1,294,000 $3,443,000 $706,000 $418,000
------------------------------------------------------------------------------------
Total expenses $25,676,000 $4,432,000 $11,069,000 $1,753,000 $787,000
====================================================================================
</TABLE>
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
Shares.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of each Fund's assets. Boston Financial
Data Services, P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent, and administrator of various shareholder services.
Legg Mason assists BFDS with certain of its duties as transfer agent and
receives compensation from BFDS for its services. Shareholders who request an
historical transcript of their account will be charged a fee based upon the
number of years researched. Each Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative costs.
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036, serves as counsel to each Fund.
39
<PAGE>
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
Coopers & Lybrand L.L.P., 250 W. Pratt Street, Baltimore, MD 21201,,
has been selected by the Directors to serve as independent accountants for Value
Trust, Total Return Trust and Special Investment Trust. Ernst & Young LLP, 2001
Market Street, Philadelphia, PA 19103, has been selected by the Directors to
serve as independent auditors for Investors Trust.
FINANCIAL STATEMENTS
The Statement of Net Assets as of March 31, 1998; the Statements of
Operations for the year ended March 31, 1998; the Statements of Changes in Net
Assets for the years ended March 31, 1998 and 1997; the Financial Highlights for
all periods; the Notes to Financial Statements and the Report of the Independent
Accountants, each with respect to Value Trust, Total Return Trust and Special
Investment Trust, are included in the combined annual report for the year ended
March 31, 1998, and are hereby incorporated by reference in this Statement of
Additional Information.
The Statement of Net Assets as of March 31, 1998; the Statements of
Operations for the year ended March 31, 1998; the Statements of Changes in Net
Assets for the years ended March 31, 1998 and 1997; the Financial Highlights for
all periods; the Notes to Financial Statements and the Report of Independent
Auditors, each with respect to American Leading Companies and Balanced Trust,
are included in the combined annual report for the year ended March 31, 1998,
and are hereby incorporated by reference in this Statement of Additional
Information.
40
<PAGE>
Appendix A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
AAA-This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
41
<PAGE>
AA -Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D-Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
42
<PAGE>
TABLE OF CONTENTS
PAGE
Additional Information About
Investment Limitations and Policies
Additional Tax Information
Additional Purchase and Redemption
Information
Valuation of Fund Shares
Performance Information
Tax-Deferred Retirement Plans - Primary Shares
The Funds' Directors and Officers
The Funds' Investment Adviser/Manager
Portfolio Transactions and Brokerage
The Funds' Distributor
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent
The Funds' Legal Counsel
The Funds' Independent Accountants/Auditors
Financial Statements
Appendix A
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any Fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by the
Funds or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
LEGG MASON WOOD WALKER, INCORPORATED
- --------------------------------------------------------------------------------
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
Legg Mason Special Investment Trust, Inc.
<TABLE>
<S><C>
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, 1998 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 Incorporation (3)
(b) Articles of Amendment (dated April 24, 1992) (3)
(c) Articles Supplementary (dated August 1, 1994) (3)
(d) Articles Supplementary (dated August 8, 1997) - filed herewith
(2) (a) By-Laws as Amended and Restated (3)
(b) Amendment to By-Laws (effective February 19, 1992) (3)
(c) Amendment to By-Laws (effective May 9, 1997) (3)
(3) Voting Trust Agreement - none
(4) Specimen Security -- not applicable
(5) (a) Investment Advisory and Management Agreement (3)
(6) (a) Amended Underwriting Agreement(1)
(b) Dealer Agreement with respect to Navigator Shares(1)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement (3)
(a) Addendum dated February 9, 1988 (3)
(b) Addendum dated February 25, 1988 (3)
(c) Addendum dated August 12, 1988 (3)
(d) Addendum dated May 25, 1996 (3)
(9) (a) Transfer Agency and Service Agreement (3)
(b) Credit Agreement (4)
(10) Opinion of Counsel (3)
(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 capital (3)
(14) (a) Prototype IRA Plan(2)
(b) Prototype Corporate Simplified Employee
Pension Plan(2)
(c) Prototype SIMPLE Plan(2)
(15) (a) Amended Plan pursuant to Rule 12b-1(1)
(16) Schedule for Computation of Performance Quotations -- filed herewith
(17) Financial Data Schedule -- filed herewith
(18) Plan Pursuant to Rule 18f-3 -- none
</TABLE>
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 15 to the initial Registration Statement, SEC File No.
33-1271, filed July 31, 1996.
(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 35 to the Registration Statement of Legg Mason Cash Reserve
Trust, SEC File No. 2-62218, filed December 31, 1997.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 17 to the Registration Statement, SEC File No. 33-1271, filed
July 31, 1997.
(4) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 13 to the Registration Statement of Legg Mason Global Trust,
Inc., SEC File No. 33-56672, filed April 30, 1998.
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 May 20, 1998)
- -------------- ------------------
Shares of Capital Stock
($.001 par value)
Legg Mason Special Investment Trust, Inc. - 93,753
Primary Shares
Navigator Special Investment Trust 12
Item 27. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part C of Post-Effective
Amendment No. 16 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
seventeen open-end investment companies or portfolios.
Information as to the officers and directors of Fund Adviser
is included in its Form ADV filed on August 11, 1997 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
<PAGE>
principal underwriter, Legg Mason Wood Walker, Incorporated ("LMWW").
(c)
Positions and Position and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ------------------ ------------------ ------------
Raymond A. Mason Chairman of the Chairman of the
Board Board and Director
John F. Curley, Jr. Retired Vice Chairman President and Director
of the Board
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice Director
President and
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
<PAGE>
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
Joseph Sullivan Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
<PAGE>
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Seth J. Lehr Senior Vice None
1735 Market St President
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
<PAGE>
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
<PAGE>
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an affiliated
person of the Registrant or an affiliated person of such an affiliated
person.
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. certifies that it meets all the requirements for effectiveness of
this Post-Effective Amendment No. 18 to its Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Baltimore and State of Maryland, on the 28th day
of May, 1998.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
by:/s/ Marie K. Karpinski
______________________
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 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 28, 1998
____________________________ and Director
Raymond A. Mason
/s/ John F. Curley, Jr. President and Director May 28, 1998
____________________________
John F. Curley, Jr.
/s/ Edward A. Taber, III Director May 28, 1998
____________________________
Edward A. Taber, III
/s/ Richard G. Gilmore * Director May 28, 1998
____________________________
Richard G. Gilmore
/s/ Charles F. Haugh * Director May 28, 1998
____________________________
Charles F. Haugh
/s/ Arnold L. Lehman * Director May 28, 1998
____________________________
Arnold L. Lehman
/s/ Jill E. McGovern * Director May 28, 1998
____________________________
Jill E. McGovern
/s/ T. A. Rodgers * Director May 28, 1998
____________________________
T. A. Rodgers
/s/ Marie K. Karpinski Vice President May 28, 1998
____________________________ and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 8, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of the following investment companies:
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, KATHI D. BAIR, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and
lawful attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, any Registration
Statements on Form N-1A, all Pre-Effective Amendments to any Registration
Statements of the Funds, any and all subsequent Post-Effective Amendments to
said Registration Statements, any supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933 and the Investment Company Act of 1940, all
related requirements of the Securities and Exchange Commission and all
requirements of appropriate states and territories. I hereby ratify and confirm
all that said attorney-in-fact or their substitutes may do or cause to be done
by virtue hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
- --------- ----
/s/Richard G. Gilmore May 8, 1998
__________________________
Richard G. Gilmore
/s/T.A. Rodgers May 8, 1998
__________________________
T. A. Rodgers
/s/Charles F. Haugh May 8, 1998
__________________________
Charles F. Haugh
/s/Arnold L. Lehman May 8, 1998
__________________________
Arnold L. Lehman
/s/Jill E. McGovern May 8, 1998
__________________________
Jill E. McGovern
/s/Edward A. Taber, III May 8, 1998
__________________________
Edward A. Taber, III
/s/Edmund J. Cashman, Jr. May 8, 1998
__________________________
Edmund J. Cashman, Jr.
/s/John F. Curley, Jr. May 8, 1998
__________________________
John F. Curley, Jr.
/s/Raymond A. Mason May 8, 1998
__________________________
Raymond A. Mason
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
FIRST: The Board of Directors of Legg Mason Special Investment Trust,
Inc., a Maryland Corporation ("Corporation") organized on October 31, 1985, has,
by action on August 8, 1997, increased the aggregate number of shares of capital
stock that the Corporation has authority to issue from one hundred million
(100,000,000) to one hundred and fifty million (150,000,000) shares. Fifty
million (50,000,000) shares of capital stock that the Corporation previously was
authorized to issue, whether or not outstanding, have been designated as Class A
shares. Fifty million (50,000,000) shares of capital stock that the Corporation
previously was authorized to issue, whether or not outstanding, have been
designated as Class Y shares.
The additional fifty million (50,000,000) shares of capital stock that
the Corporation is newly authorized to issue have been classified by the
Corporation's Board of Directors, pursuant to a power contained in the
Corporation's charter, as Class A shares, increasing the total number of shares
of capital stock classified as Class A shares from fifty million (50,000,000) to
one hundred million (100,000,000) shares. The additional shares will have all
the preferences, rights, powers, restrictions, limitations, terms and conditions
as the existing Class A shares.
The par value of the shares of capital stock of each class of the
Corporation remains one tenth of one cent ($0.001) per share. Immediately before
the increase in the aggregate number of authorized shares described herein, the
aggregate par value of all of the authorized shares was one hundred thousand
(100,000) dollars; as increased, the aggregate par value of all of the shares is
one hundred and fifty thousand (150,000) dollars. Immediately before the
increase in the aggregate number of authorized shares described herein, the
aggregate par value of all authorized Class A shares was fifty thousand (50,000)
dollars; as increased, the aggregate par value of all of the Class A shares is
one hundred thousand (100,000) dollars. Immediately before the increase in the
aggregate number of authorized shares described herein, the aggregate par value
of all authorized Class Y shares was fifty thousand (50,000) dollars; after the
increase in the aggregate number of authorized shares, the aggregate par value
of Class Y shares remains fifty thousand (50,000)
<PAGE>
dollars.
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the Corporation
has authority to issue has been increased by the Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned President of Legg Mason Special
Investment Trust, Inc. hereby executes these Articles Supplementary on behalf of
the Corporation, and hereby acknowledges these Articles Supplementary to be the
act of the Corporation and further states under the penalties for perjury that,
to the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: August 8, 1997 /s/ John F. Curley, Jr.
________________________
John F. Curley, Jr.
President
Attest: /s/ Kathi D. Bair
___________________
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 8th day of August, 1997.
/s/ Melody McFaddin
_____________________
Notary Public
Melody McFaddin, Notary Public
Carroll County
State of Maryland
My Commission Expires Jan. 1, 2001
2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Legg Mason Special Investment Trust, Inc.:
We consent to the incorporation by reference in this Post-Effective
Amendement No. 18 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 24, 1998 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, 1998, which is incorporated by reference in the
Registration Statement. We also consent to the reference to our firm under the
captions "Financial Highlights" in the Prospectuses and "The Funds' Independent
Accountants/Auditors" in the Statement of Additional Information.
/s/Coopers & Lybrand, L.L.P.
____________________________
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
May 28, 1998
LEGG MASON SPECIAL INVESTMENT TRUST, INC. - PRIMARY SHARES
----------------------------------------------------------
March 31, 1997 - March 31, 1998 (one year)
- -------------------------------
Cumulative Total Return
- -----------------------
ERV = (36.02 x 1.5815830) - (26.55 x 1.501715) x 1000 + 1000 = 1428.84
----------------------------------------
(26.55 x 1.501715)
P = 1000
C = 1428.84 - 1 = .428840 = 42.88%
------- -----
1000
Average Annual Return: Same
- ---------------------
March 31, 1993 - March 31, 1998 (five years)
- -------------------------------
Cumulative Total Return
- -----------------------
ERV = (36.02 X 1.5815830) - (17.91 x 1.3669180) x 1000 + 1000 = 2327.00
--------------------------------------------
(17.91 x 1.3669180)
P = 1000
C = 2327.00 - 1 = 1.327006 = 132.70%
------- ------
1000
Average Annual Return:
- ---------------------
1
-
5
(1.327006 + 1) - 1 = 18.40%
-----
March 31, 1988 - March 31, 1998 (ten years)
- -------------------------------
Cumulative Total Return:
- -----------------------
ERV = (36.02 x 1.5815830) - (10.13 x 1.1075710) x 1000 + 1000 = 5077.55
-----------------------------------------
(10.13 x 1.1075710)
P = 1000
C = 5077.55 - 1 = 4.077555 = 407.76%
------- ------
1000
Average Annual Return:
- ---------------------
1/10
(4.077555 + 1) - 1 = 17.64%
-----
<PAGE>
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
NAVIGATOR SPECIAL INVESTMENT TRUST
March 31, 1997 - March 31, 1998 (one year)
- -------------------------------
Cumulative Total Return
- -----------------------
ERV = (37.12 x .5973460) - (27.04 x .567796) x 1000 + 1000 = 1444.22
---------------------------------------
(27.04 x .567796)
P = 1000
C = 1444.22 - 1 = .444225 = 44.42%
------- -----
1000
Average Annual Return: Same
- ---------------------
December 1, 1994 - March 31, 1997 (life of class)
- ---------------------------------
Cumulative Total Return:
- -----------------------
ERV = (37.12 x .5973460) - (19.11 x .523286) x 1000 + 1000 = 2217.34
--------------------------------------
(19.11 x .523286)
P = 1000
C = 2217.34 - 1 = 1.217349 = 121.73%
------- ------
1000
Average Annual Return:
- ---------------------
1/3.334246
(1.217349 + 1) - 1 = 26.98%
-----
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000781880
<NAME> LEGG MASON SPECIAL INV. TRUST, INC.--PRIMARY SHRS
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<NET-CHANGE-FROM-OPS> 448,704
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 55,315
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,850
<NUMBER-OF-SHARES-REDEEMED> (8,297)
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<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> (3)
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<PER-SHARE-NAV-BEGIN> 26.55
<PER-SHARE-NII> (.31)
<PER-SHARE-GAIN-APPREC> 11.28
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.50)
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> 1.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 18,163
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<OTHER-ITEMS-LIABILITIES> 4,170
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 931,656
<SHARES-COMMON-STOCK> 1,705
<SHARES-COMMON-PRIOR> 1,531
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<INTEREST-INCOME> 2,263
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<NET-CHANGE-FROM-OPS> 448,704
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,378
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 587
<NUMBER-OF-SHARES-REDEEMED> (494)
<SHARES-REINVESTED> 81
<NET-CHANGE-IN-ASSETS> 629,536
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 50,048
<OVERDISTRIB-NII-PRIOR> (3)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,875
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24,194
<AVERAGE-NET-ASSETS> 53,724
<PER-SHARE-NAV-BEGIN> 27.04
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 11.58
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<PER-SHARE-DISTRIBUTIONS> (1.50)
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