LEGG MASON INVESTORS TRUST, INC.
AMERICAN LEADING COMPANIES TRUST
Supplement to the Statement of Additional Information dated July 31, 1994
The following information is inserted in the section captioned
"The Fund's Manager" on page 21 of the Statement of Additional
Information:
"The Manager has agreed to waive indefinitely, its fees and to
reimburse the Fund in any month for its expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) in excess of an annual
rate of 1.95% of the Fund's average daily net assets."
March 31, 1995
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The Legg Mason American Leading Companies Trust
Prospectus
Legg Mason American Leading Companies Trust ("Fund"), a diversified,
professionally managed portfolio, is a separate series of Legg Mason
Investors Trust, Inc. ("Trust"), an open-end management investment
company. The Fund seeks long-term capital appreciation and current
income consistent with prudent investment risk. 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. The
Fund's investment adviser, Legg Mason Capital Management, Inc.
("Adviser"), defines a "Leading Company" as a company that, in the
opinion of the Adviser, has attained a major market share in one or more
products or services within its industry(ies), and possesses the
financial strength and management talent to maintain or increase market
share and profit in the future. Such companies are typically well known
as leaders in their respective industries; most are found in the top
half of the Standard & Poor's Composite Index of 500 Stocks ("S&P 500").
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 Adviser believes the
Fund's shares are also appropriate for investment by Individual
Retirement Accounts, Keogh Plans, Simplified Employee Pension Plans and
other qualified retirement plans whose principal investment objective is
long-term growth of capital and current income. Other investors who seek
that objective may also invest in shares of the Fund.
No initial sales charge is payable on purchases, and no redemption
charge is payable on sales, of Fund shares. The Fund will pay management
fees to Legg Mason Fund Adviser, Inc. ("Manager") and distribution fees
to Legg Mason Wood Walker, Incorporated ("Legg Mason") as described on
pages 13-14 of this Prospectus.
This Prospectus sets forth concisely the information about the Fund that
a prospective investor ought to know before investing. It should be
retained for future reference. A Statement of Additional Information
about the Fund dated July 31, 1994 has been filed with the Securities
and Exchange Commission and, as amended or supplemented from time to
time, is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request from Legg Mason
(address and telephone numbers listed below).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: July 31, 1994
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
800 (bullet) 822 (bullet) 5544
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Prospectus Highlights
The Legg Mason American Leading Companies Trust
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus.
Fund's Inception:
September 1, 1993
Net Assets:
Over $56 million as of June 30, 1994
Fund Type:
The Fund is an open-end, diversified management investment
company. You may purchase or redeem shares of the Fund through a
brokerage account with Legg Mason or certain of its affiliates. See
"How You Can Invest in the Fund," page 8, and "How You Can Redeem
Your Fund Shares," page 9.
Investment Objective and Policies:
The Fund's investment objective is
to provide long-term capital appreciation and current income
consistent with prudent investment risk. Under normal circumstances,
the Fund will invest at least 75% of its total assets in the
dividend-paying common stocks of Leading Companies having market
capitalizations of at least $2 billion. Such companies are typically
well known as leaders in their respective industries; most are found
in the top half of the S&P 500.
The Fund may invest up to 25% of its
total assets in debt securities. These securities must be rated A or
above by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P") or, if unrated, determined by the
Adviser to be of comparable quality, except that the Fund may invest
up to 5% of its net assets in convertible securities, which may be
rated as low as BB/Ba or, if unrated, deemed by the Adviser to be of
comparable quality. The prices of debt securities generally fluctuate
inversely with market interest rates. The Fund may sell covered call
options to generate additional income; this practice reduces the
potential for gain on the underlying securities.
The Fund may invest
up to 25% of its total assets in foreign securities. Investment in
foreign securities entails certain additional risks, including risks
arising from currency fluctuation, accounting systems and disclosure
regulations that differ from those in the U. S., trading and
settlement systems that may offer the buyer less protection than in
the U. S., and political and economic changes in foreign countries.
See "Investment Objective and Policies," page 6.
Distributor:
Legg Mason Wood Walker, Incorporated
Manager:
Legg Mason Fund Adviser, Inc.
Investment Adviser:
Legg Mason Capital Management, Inc.
Transfer and Shareholders' Servicing Agent:
Boston Financial Data Services
Exchange Privileges:
All funds in the Legg Mason Family of Funds
registered in your state. See "Exchange Privilege," page 12.
Dividends:
Declared and paid quarterly. See "Dividends and Other
Distributions," page 10.
Reinvestment:
All dividends and other distributions are automatically
reinvested in Fund shares unless cash payments are requested.
Initial Purchase:
$1,000 minimum
Subsequent Purchases:
$100 minimum, generally. See "How You Can Invest
in the Fund," page 8.
Purchase Methods:
Send bank/personal check or wire federal funds.
Public Offering Price Per Share:
Net asset value
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Fund Expenses
The purpose of the following table is to assist
an investor in understanding the various costs and expenses that an
investor in the Fund will bear directly or indirectly. The expenses
and fees set forth in the table are based on estimated Fund operating
expenses for the current fiscal year adjusted for current expense and
fee waiver levels.
Shareholder Transaction Expenses
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
Annual Fund Operating Expenses
(as a percentage of average net assets; after waiver)
Management fees (after waiver) (1) 0.75%
12b-1 fees (after waiver) (1) 0.67%
Other expenses (estimated) (after reimbursement) (1) 0.53%
Total operating expenses (after waivers and
reimbursement of expenses) (1) 1.95%
(1) Pursuant to a voluntary expense limitation, the Manager and
Legg Mason have agreed to waive the management and 12b-1 fees and
assume certain other expenses to the extent necessary to limit total
operating expenses (exclusive of taxes, brokerage commissions,
interest and extraordinary expenses) to 1.95% of the Fund's average
daily net assets through March 31, 1995. See "The Fund's Management
and Investment Adviser," page 13. The table assumes that the waiver
will be in effect through March 31, 1995. If the waiver were not in
effect at all during the coming year, the Fund's management fee,
12b-1 fee, other expenses and total operating expenses,
respectively, would be 0.75%, 1.00%, 0.53% and 2.28% of average net
assets.
Hypothetical Example of Effect of Fund Expenses
The following example illustrates the expenses that you would pay
on a $1,000 investment over various time periods assuming (1) a 5%
annual rate of return and (2) full redemption at the end of each
time period. As noted in the table at left, the Fund charges no
redemption fees of any kind.
1 Year 3 Years
$20 $61
This example assumes that the percentage amounts listed under
"Annual Fund Operating Expenses" remain the same over the time
periods shown and that all dividends and other distributions are
reinvested in additional Fund shares. If the waiver is not extended
beyond March 31, 1995, the expense figures in the example will be
higher.
The above tables and the assumption in the example of a 5% annual
return are required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all mutual funds. THE ASSUMED 5%
ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT, THE
FUND'S PROJECTED OR ACTUAL PERFORMANCE. THE ABOVE TABLES SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund's actual
expenses will depend upon, among other things, the level of average
net assets, the levels of sales and redemptions of shares, the
extent to which the Manager and Legg Mason waive their fees and
reimburse Fund expenses and the extent to which the Fund incurs
variable expenses, such as transfer agency costs.
Because the Fund pays a 12b-1 fee, long-term shareholders 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 Fund expenses, see "The Fund's Management and Investment
Adviser," page 13.
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Financial Highlights
The financial highlights for the period September 1, 1993
(commencement of operations) to March 31, 1994 have been derived
from financial statements which have been audited by Ernst & Young,
independent auditors. The Fund's financial statements for the period
September 1, 1993 (commencement of operations) to March 31, 1994 and
the report of Ernst & Young thereon are included in the Fund's
annual report and are incorporated by reference in the Statement of
Additional Information which is available to shareholders by calling
your Legg Mason or affiliated investment executive or Legg Mason's
Funds Marketing Department at 800-822-5544.
September 1, 1993(dagger)
to
March 31, 1994
Per Share Operating Performance:
Net asset value, beginning of period $10.00
________
Net investment income 0.059(double dagger)
Net realized and unrealized loss
on investments (0.344)
________
Total from investment operations (0.285)
________
Distributions to shareholders from net
investment income (0.025)
________
Net asset value, end of period $9.69
_______
_______
Total return (2.86)%**
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses 1.95%(doubledagger)*
Net investment income 1.14%*
Portfolio turnover rate 21.0%*
Net assets, end of period (in thousands) $55,022
(dagger)Commencement of operations.
(double dagger)Net of fees waived pursuant to a voluntary expense
limitation of 1.95% of average daily net assets.
*Determined on an annualized basis.
**Not annualized.
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Performance Information
From time to time the Fund may quote its total return in
advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the
overall change in value, including changes in share price and
assuming reinvestment of dividends and capital gain distributions,
of an investment in the fund. Cumulative total return shows the
fund's performance over a specific period of time. Average annual
total return is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance
had been constant over the entire period. Average annual returns,
which differ from actual year-by-year results, tend to smooth out
variations in a fund's return. No adjustment has been made for any
income taxes payable by shareholders. The total return would have
been lower if the Manager had not waived certain fees for the period
September 1, 1993 (commencement of operations) to March 31, 1994.
Total return as of March 31, 1994 was as follows:
Cumulative
Total Return
Life of Fund(dagger) $(minus)2.86%
(dagger) Fund's inception---September 1, 1993.
The return shown is based on historical results and is not a
prediction or guarantee of future results. Investment return and
share price will fluctuate, and the value of your shares, when
redeemed, may be worth more or less than their original cost. Further
information about the Fund's performance is contained in the Annual
Report to Shareholders, which may be obtained without charge by
calling your Legg Mason or affiliated investment executive or Legg
Mason's Funds Marketing Department at 800-822-5544.
5
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Investment Objective and Policies
The Fund's 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. The investment objective may not be changed
without shareholder approval. There can be no assurance that the
Fund's investment objective will be achieved.
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. The Adviser defines a "Leading Company" as a
company that, in the opinion of the Adviser, has attained a major
market share in one or more products or services within its
industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the
future. Such companies are typically well known as leaders in their
respective industries; most are found in the top half of the S&P
500. Additionally, the Adviser's goal is to purchase companies
having what the Adviser 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 the Adviser believes show strong potential for future market
leadership, and in companies which the Adviser believes, because of
corporate restructuring or other changes, are undervalued based on
their potential for future growth. There is always a risk that the
Adviser will not properly assess the potential for an issuer's
future growth, or that an issuer will not realize that potential.
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" companies, 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 polices will 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.
Foreign Securities
The Fund may invest in foreign issuers that meet the above
criteria, either directly or through the purchase of American
Depositary Receipts (ADRs). ADRs are certificates issued by American
banks representing shares of a foreign company held by the bank.
ADRs are denominated in U.S. dollars and can be traded in the
domestic securities markets; many are exchange-listed.
Investment in foreign securities, whether directly or through
ADRs, presents certain risks, which the Adviser will consider
carefully in selecting such securities. These include the risks
resulting from fluctuations in currency exchange rates, revaluation
of currencies, future political and economic developments in the
issuer's country, reduced availability of public information
concerning issuers, and the fact that most foreign issuers
(including some whose shares are represented by ADRs) are not
subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements
comparable to those applicable to domestic issuers. In addition,
with respect to certain foreign countries, there is the possibility
of expropriation and confiscatory taxation. Direct purchasers of
foreign securities may also be subject to limitations on the use or
removal of funds or other assets.
Securities of many foreign issuers are less liquid and their prices
more volatile than those of comparable domestic issuers. Foreign
securities
6
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traded abroad may be subject to settlement
delays. Transactions on foreign securities exchanges are usually
subject to mark-ups or commissions higher than negotiated
commissions on U.S. transactions, although the Fund will endeavor to
obtain the best net results in effecting transactions. There is less
government supervision and regulation of exchanges and brokers in
many foreign countries than in the U.S. Additional costs associated
with an investment in foreign securities will include higher
custodial fees than apply to domestic custodial arrangements and
transactions costs of foreign currency conversions. The Fund may not
invest more than 25% of its total assets in foreign securities,
either directly or through ADRs.
Debt 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, during periods
when the Adviser believes the return on certain debt securities may
equal or exceed the return on equity securities. The Fund may invest
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 the Adviser to be
of comparable quality. The prices of debt securities fluctuate in
response to perceptions of the issuer's creditworthiness, and also
tend to vary inversely with market interest rates. The longer the
time to maturity the greater are such variations.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment
grade or, if unrated, are considered comparable to securities rated
below investment grade. The Fund does not intend to invest in
convertible securities rated below Ba by Moody's or BB by S&P or, if
unrated, deemed by the Adviser to be of comparable quality.
When cash is temporarily available, or for temporary defensive
purposes, the Fund may invest without limit in high-quality
short-term debt securities and money market instruments, including
repurchase agreements. A repurchase agreement is an agreement under
which either U.S. government obligations or high-quality debt
securities are acquired from a securities dealer or bank subject to
resale at an agreed-upon price and date. The securities are held for
the Fund by State Street Bank and Trust Company ("State Street"),
the Fund's custodian, as collateral until resold and will be
supplemented by additional collateral if necessary to maintain a
total value equal to or in excess of the value of the repurchase
agreement. The Fund bears a risk that the other party to a
repurchase agreement will default on its obligations and the Fund
will be delayed or prevented from exercising its right to dispose of
the collateral securities, which may decline in value in the
interim. The Fund will enter into repurchase agreements only with
financial institutions determined by the Adviser to present minimal
risk of default during the term of the agreement, based on
guidelines established by the Fund's Board of Directors.
Covered Call Options
The Fund may sell covered call options on any security in which it
is permitted to invest for the purpose of enhancing income. A call
option gives the purchaser the right to purchase the underlying
security from the Fund at a specified price (the "strike price")
during a specified period. A call option is "covered" if, at all
times the option is outstanding, the Fund holds the underlying
security or a right to obtain that security at no additional cost.
The Fund may purchase a call option for the purpose of closing out a
short position in an option.
The use of options involves certain risks. These risks include:
(1) the fact that use of these instruments can reduce the
opportunity for gain; (2) dependence on the Adviser's ability to
predict movements in the prices of individual securities,
fluctuations in the general securities markets or in market sectors;
(3) imperfect correlation between movements in the price of options
and movements in the price of the underlying securities; (4) the
possible lack of a liquid secondary market for a particular option
at any particular time; (5) the possibility that the use of cover
involving a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption
requests or other short-term obligations; and (6) the possible need
to defer closing out positions in these instruments in order to
avoid adverse tax consequences. There can be no assurance that the
use of options by the Fund will be successful. As a non-
7
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fundamental policy, the Fund will not sell a covered call option if, as
a result, the value of the portfolio securities underlying all
outstanding covered call options would exceed 25% of the value of the
equity securities held by the Fund. See the Statement of Additional
Information for a more detailed discussion of options strategies.
Other Investment Restrictions
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of 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).
The Fund has adopted certain other fundamental investment
limitations that, like its investment objective, can be changed only
by a vote of Fund shareholders. These investment limitations are set
forth in the Statement of Additional Information under "Additional
Information About Investment Limitations and Policies." Except as
expressly stated otherwise, the investment policies and limitations
contained in this prospectus are not fundamental and can be changed
without a shareholder vote.
How You Can Invest in the Fund
You may purchase shares of the Fund through a brokerage account
with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason (Legg Mason is a wholly owned subsidiary of Legg
Mason, Inc., a financial services holding company). Your Legg Mason
or affiliated investment executive will be pleased to explain the
shareholder services available from the Fund and answer any
questions you may have. Documents available from your Legg Mason or
affiliated investment executive should be completed if you invest in
shares of the Fund through an Individual Retirement Account ("IRA"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), Simplified
Employee Pension Plan ("SEP") or other qualified retirement plan.
The minimum initial investment in the Fund for each account,
including investments made by exchange from other Legg Mason funds,
is $1,000, and the minimum investment for each purchase of
additional shares is $100, except as noted below. Initial
investments in an IRA account established on behalf of a non-working
spouse of a shareholder who has an IRA invested in the Fund require
a minimum amount of only $250. Subsequent investments in an IRA or
similar plan require a minimum amount of $100. In addition, once an
account is established, the minimum amount for subsequent
investments will be waived if an investment in an IRA or similar
plan will bring the account to the maximum amount permitted under
the Internal Revenue Code of 1986, as amended ("Code"). For those
investing through the Fund's Future First Systematic Investment
Plan, payroll deduction plans and plans involving automatic payment
of funds from financial institutions or automatic investment of
dividends from certain unit investment trusts, minimum initial and
subsequent investments are lower. The Fund reserves the right to
change these minimum amount requirements at its discretion.
Fund shares purchased on behalf of an IRA, Keogh Plan, SEP or
qualified retirement plan will be processed at the net asset value
next determined after Legg Mason's Funds Client Service receives a
check for the amount of the purchase. Other share purchases will be
processed at the net asset value next determined after your Legg
Mason or affiliated investment executive has transmitted your order
to the Fund; payment must be made within five business days to Legg
Mason. Orders received by Legg Mason's Funds Client Service 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's Funds Client Service 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 10. The Fund reserves the right to
reject any order for shares of the Fund or to suspend the offering
of shares for a period of time.
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You should always furnish your shareholder account number when
making additional purchases of shares.
There are three ways you can invest in the Fund:
1. Through Your Legg Mason or Affiliated Investment Executive
Fund shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to
open an account for you, explain to you the shareholder services
available from the Fund, and answer any questions you may have.
After you have established a Legg Mason or affiliated account, you
can order shares of the Fund from your investment executive in
person, by telephone or by mail.
2. Through the Future First Systematic Investment Plan
You may also buy shares of the Fund through the Future First
Systematic Investment Plan. Under this plan, you may arrange for
automatic monthly investments in the Fund of $50 or more by
authorizing Boston Financial Data Services ("BFDS"), the Fund's
transfer agent, to prepare a check each month drawn on your checking
account. There is no minimum initial investment. Please contact any
Legg Mason or affiliated investment executive for further
information.
3. Through Automatic Investments
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares of the Fund. In
addition, it may be possible for dividends from certain unit
investment trusts to be invested automatically in Fund shares.
Persons interested in establishing such automatic investment
programs should contact the Fund through any Legg Mason or
affiliated investment executive.
How Your Shareholder Account is Maintained
When you initially purchase Fund shares, a shareholder account is
established automatically for you. Any shares that you purchase or
receive as a dividend or other distribution will be credited
directly to your account at the time of purchase or receipt. No
certificates are issued unless you specifically request them in
writing. Shareholders who elect to receive certificates can redeem
their shares only by mail. Certificates will be issued in full
shares only. No certificates will be issued for shares prior to 15
business days after purchase of such shares by check unless the Fund
can be reasonably assured during that period that payment for the
purchase of such shares has been collected. Fund shares may not be
held in, or transferred to, an account with any brokerage firm other
than Legg Mason or its affiliates.
How You Can Redeem Your Fund Shares
There are two ways you can redeem your Fund shares. First, you may
give your Legg Mason or affiliated investment executive an order for
repurchase of your shares. Please have the following information
ready when you call: the number of shares to be redeemed and your
shareholder account number. Second, you may send a written request
for redemption to "Legg Mason American Leading Companies Trust, c/o
Legg Mason Funds Client Service, P.O. Box 1476, Baltimore, Maryland
21203-1476."
Upon receipt of a request for redemption in "good order," as
described below, before the close of the Exchange on any day when
the Exchange is open, BFDS, as transfer agent for the Fund, will
redeem Fund shares at the net asset value per share determined as of
the close of the Exchange on that day. Requests for redemption
received by the transfer agent 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's Funds Client Service 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.
Your check normally will be forwarded immediately after
redemption. However, the Fund reserves the right to take up to seven
days to make payment upon redemption if, in the judgment of the
Adviser, the Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the
right of redemption suspended.) The proceeds of your redemption or
repurchase may be more or less than your original cost. If the
shares to be redeemed or repurchased were paid for
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by check (including certified or cashier's checks), within 15
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.
A redemption request will be considered to be received in "good
order" only if:
1. You have indicated in writing the number of shares to be redeemed
and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates
representing the shares that have been issued to you, and you have
endorsed the certificates for transfer or an accompanying stock
power exactly as the name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have
been guaranteed without qualification by a national bank, a state
bank, a member 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 Fund
shares, contact your Legg Mason or affiliated investment executive.
The Fund will not be responsible for the authenticity of
redemption instructions received by telephone, provided it follows
reasonable procedures to identify the caller. The Fund may request
identifying information from callers or employ identification
numbers. The Fund may be liable for losses due to unauthorized or
fraudulent instructions if it does not follow reasonable procedures.
Telephone redemption privileges are available automatically to all
shareholders unless certificates have been issued. Shareholders who
do not wish to have telephone redemption privileges should call
their Legg Mason or affiliated investment executive for further
instructions.
To redeem your Legg Mason Fund retirement account, a Distribution
Request Form must be completed and returned to Legg Mason Retirement
Administration for processing. This form can be obtained through
your Legg Mason or affiliated investment executive or Legg Mason
Retirement Administration in Baltimore, Maryland.
Because of the relatively high cost of maintaining small accounts,
the Fund may elect to close any account with a current value of less
than $500 by redeeming all of the shares in the account and mailing
the proceeds to you. However, the Fund will not redeem accounts that
fall below $500 solely as a result of a reduction in net asset value
per share. If the Fund elects to redeem the shares in your account,
you will be notified that your account is below $500 and will be
allowed 60 days in which to make an additional investment in order
to avoid having your account closed.
How Net Asset Value is Determined
Net asset value per share is determined for the Fund daily as of
the close of the Exchange on every day that the Exchange is open, by
subtracting the Fund's liabilities from its total assets and
dividing the result by the number of shares outstanding. Securities
owned by the Fund for which market quotations are readily available
are valued at current market value. In the absence of readily
available market quotations, securities are valued at fair value as
determined by or under the supervision of the Trust's Board of
Directors. Where a security is traded on more than one market, which
may include foreign markets, the securities are generally valued on
the market considered by the Adviser to be the primary market.
Securities with remaining maturities of 60 days or less are valued
at amortized cost. The Fund will value its foreign securities in
U.S. dollars on the basis of the then-prevailing exchange rates.
Dividends and Other Distributions
The Fund declares and pays dividends to its shareholders out of
its net investment income following the end of each quarter.
Dividends from net short-term capital gain and distributions of
substantially all net capital gain (that is, the excess of net
long-term capital gain over net short-term capital loss) and of any
net realized gain from foreign cur-
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<PAGE>
rency transactions generally are declared and paid after the end of
the taxable year in which the gain is realized. Dividends and other
distributions, if any, on shares held by shareholders maintaining a
Systematic Withdrawal Plan generally are reinvested in Fund shares
on the payment dates. Other shareholders may elect to:
1. Receive both dividends and other distributions in Fund shares;
2. Receive dividends in cash and other distributions in Fund shares;
3. Receive dividends in Fund shares and other distributions in
cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, you may reinvest your dividends and other
distributions in shares of another Legg Mason fund. Please contact
your Legg Mason or affiliated investment executive for additional
information about this option.
If no election is made, both dividends and other distributions
will be credited to your account in additional Fund shares at the
net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any
of the first three (reinvestment) elections above also will be
credited to your account at that net asset value. If you elect to
receive dividends and/or other distributions in cash, you will be
sent a check or will have your Legg Mason account credited on the
payment date. You may elect at any time to change your option by
notifying in writing Legg Mason American Leading Companies Trust,
c/o Legg Mason Funds Client Service, 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.
Taxes
The Fund intends to continue to qualify for treatment as a
regulated investment company under the Code so that it will be
relieved of federal income tax on that part of its investment
company taxable income (generally consisting of net investment
income, any net short-term capital gain and any net gains from
certain foreign currency transactions) and net capital gain that is
distributed to its shareholders.
Dividends from the Fund's investment company taxable income
(whether paid in cash or reinvested in Fund shares) are taxable to
its shareholders (other than IRAs, Keogh Plans, SEPs, other
qualified retirement plans and other tax-exempt investors) as
ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash
or reinvested in Fund shares) are taxable to those shareholders as
long-term capital gain, regardless of how long they have held their
Fund shares.
The Fund sends each shareholder a notice following the end of each
calendar year specifying, among other things, the amounts of all
ordinary income dividends and other distributions paid (or deemed
paid) during that year. The Fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds
payable to any individuals and certain other non-corporate
shareholders who do not provide the Fund with a certified taxpayer
identification number. The Fund also is required to withhold 31% of
all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption
proceeds are more or less than the shareholder's adjusted basis for
the redeemed shares. An exchange of Fund shares for shares of any
other Legg Mason fund generally will have similar tax consequences.
See "Shareholder Services---Exchange Privilege," page 12. If Fund
shares are purchased within 30 days before or after redeeming Fund
shares at a loss, all or part of that loss will not be deductible
and instead will increase the basis of the newly purchased shares.
A dividend or other distribution paid shortly after shares have
been purchased, although in effect a return of capital, is subject
to federal taxation. Accordingly, an investor should not purchase
Fund shares immediately prior to a dividend or other distribution
record date solely for the purpose of receiving the dividend or
other distribution.
The foregoing is only a summary of some of the important federal
income tax considerations
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<PAGE>
generally affecting the Fund and its shareholders; see the Statement
of Additional Information for a further discussion. In addition to
those considerations, which are applicable to any investment in the
Fund, there may be other federal, state, local or foreign tax
considerations applicable to a particular investor. Prospective
shareholders are therefore urged to consult their tax advisers with
respect to the effects of this investment on their own tax
situations.
Shareholder Services
Confirmations and Reports
You will receive from the distributor a confirmation after each
transaction (except a reinvestment of dividends and capital gain
distributions and purchases made through the Future First Systematic
Investment Plan or through automatic investments). An account
statement will be sent to you monthly unless there has been no
activity in the account or you are purchasing shares through the
Future First Systematic Investment Plan or through automatic
investments, in which case a cumulative account statement will be
sent quarterly. Reports will be sent to shareholders at least
semi-annually showing the Fund's portfolio and other information. An
annual report containing financial statements audited by the
independent auditors of the Trust will be sent to shareholders each
year.
Shareholder inquiries should be addressed to "Legg Mason American
Leading Companies Trust, c/o Legg Mason Funds Client Service, 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 the Fund while they are
participating in the Systematic Withdrawal Plan. Please contact your
Legg Mason or affiliated investment executive for further
information.
Exchange Privilege
As a Fund shareholder, you are entitled to exchange your shares of
the Fund for shares of any other fund in the Legg Mason Family of
Funds, provided that such shares are eligible for sale in your state
of residence. The other funds in the Legg Mason Family of Funds are:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current
income consistent with stability of principal.
Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking high current income exempt from
federal income tax, preservation of capital, and liquidity.
Legg Mason U. S. Government Money Market Portfolio
A money market fund seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
Legg Mason Special Investment Trust, Inc.
A mutual fund seeking capital appreciation by investing
principally in issuers with market capitalizations of less than $1
billion.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent
with reasonable risk.
Legg Mason U. S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U. S. Government, its
agencies or instrumentalities, while maintaining an average
dollar-weighted maturity of between three and ten years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income primarily
through investment in a diversified portfolio of investment grade
debt securities.
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<PAGE>
Legg Mason High Yield Portfolio
A mutual fund primarily seeking a high level of current income and
secondarily, capital appreciation, by investing principally in high
yield, fixed-income securities.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by
foreign governments, the U.S. Government, their agencies,
instrumentalities and political subdivisions.
Legg Mason Maryland Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income
taxes, consistent with prudent investment risk and preservation of
capital.
Legg Mason Pennsylvania Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal
income tax, consistent with prudent investment risk and preservation
of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent
investment risk.
*Shares of these funds are sold with an initial sales charge.
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 sales charge has already been paid. Exchanges from the other
Legg Mason funds sold without an initial sales charge will be at net
asset value. There is no charge for the exchange privilege, but the
Fund reserves the right to terminate or limit the exchange privilege
of any shareholder who makes more than four exchanges from the Fund
in one calendar year. To obtain further information concerning the
exchange privilege and prospectuses of other Legg Mason funds, or to
make an exchange, please contact your Legg Mason or affiliated
investment executive. To effect an exchange by telephone, please
call your Legg Mason or affiliated investment executive with the
information described in "How You Can Redeem Your Fund Shares" on
page 9. The other factors relating to telephone redemptions
described in that section apply also to telephone exchanges. Please
read the prospectus for the other fund carefully before you invest
by exchange. The Fund reserves the right to modify or terminate the
exchange privilege upon 60 days' notice to shareholders. There is no
assurance the money market funds will be able to maintain a $1.00
share price. None of the funds is insured or guaranteed by the U.S.
Government.
The Fund's Management and Investment Adviser
Board of Directors
The business and affairs of the Fund are managed under the
direction of the Board of Directors of Legg Mason Investors Trust,
Inc. ("Trust").
Manager
Pursuant to a management agreement with the Fund ("Management
Agreement"), which was approved by the Trust's Board of Directors,
Legg Mason Fund Adviser, Inc. ("Manager"), a wholly owned subsidiary
of Legg Mason, Inc., serves as the Fund's manager. The Fund pays the
Manager, pursuant to the Management Agreement, a management fee
equal to an annual rate of 0.75% of the Fund's average daily net
assets. The Fund pays all its other expenses which are not assumed
by the Manager. These expenses include, among others, interest
expense, taxes, brokerage fees, commissions, expenses of preparing
and printing prospectuses, statements of additional information,
proxy statements and reports and of distributing them to existing
shareholders, custodian charges, transfer agency fees,
organizational expenses, distribution and shareholder servicing fees
to the Fund's dis-
13
<PAGE>
tributor, compensation of the independent directors, legal and audit
expenses, insurance expenses, expenses of registering and qualifying
shares of the Fund for sale under federal and state law,
governmental fees and expenses incurred in connection with
membership in investment company organizations. The Manager has
agreed to waive its fees and to reimburse the Fund for its expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses)
in excess of 1.95% of the Fund's average net assets until March 31,
1995.
The Manager acts as investment adviser, manager or consultant to
fourteen investment company portfolios (excluding the Fund) which
had aggregate assets under management of over $3.7 billion as of
June 30, 1994.
Adviser
Legg Mason Capital Management, Inc. ("Adviser"), a wholly owned
subsidiary of Legg Mason, Inc., serves as investment adviser to the
Fund pursuant to the terms of an Investment Advisory Agreement with
the Manager, which was approved by the Trust's Board of Directors.
The Adviser manages the investment and other affairs of the Fund and
directs the investments of the Fund in accordance with its
investment objectives, policies and limitations. For these services,
the Manager (not the Fund) pays the Adviser a fee, computed daily
and payable monthly, at an annual rate equal to 40% of the fee
received by the Manager, or 0.30% of the Fund's average daily net
assets.
The Adviser has not previously advised a registered investment
company. However, the Adviser manages private accounts with a value
as of June 30, 1994 of approximately $550 million. The address of
the Adviser is 111 South Calvert Street, Baltimore, MD 21202.
J. Eric Leo serves as portfolio manager for the Fund and is
primarily responsible for the selection of investments. Mr. Leo has
been Executive Vice President and Chief Investment Officer of the
Adviser since December 1991. From October 1986 to December 1991, he
served as Managing Director of Equitable Capital Management, where
he managed, among other assets, the Equitable Account #---Growth &
Income Commingled Fund. Prior to joining Equitable, Mr. Leo was
President and Chief Investment Officer for Sperry Capital Management
Corp., where he was responsible for $1.1 billion in pension assets.
The Fund uses Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission
rates and under circumstances consistent with the policy of best
execution.
The Fund's Distributor
Legg Mason is the distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Fund. The Underwriting Agreement
obligates Legg Mason to pay certain expenses in connection with the
offering of shares of the Fund, including any compensation to its
investment executives, the printing and distribution of
prospectuses, statements of additional information and periodic
reports used in connection with the offering to prospective
investors, after the prospectuses 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, and receives a fee from BFDS for such activities.
For the period ended March 31, 1994, Legg Mason received $7,432 for
performing such services in connection with this Fund.
The Board of Directors of the Trust 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 shareholders and its
activities and expenses related to the sale and distribution of Fund
shares, Legg Mason receives from the Fund an annual distribution fee
equal to 0.75% of the Fund's average daily net assets, and an annual
service fee equal to 0.25% of the Fund's average daily net assets.
The distribution fee and the service fee are calculated daily and
paid monthly. The fees received by Legg Mason during any year may be
more or less than its cost of providing distribution and shareholder
services to the Fund and its shareholders. Legg Mason has
temporarily agreed to waive the distribution fee to the extent
necessary to limit the Fund's total expenses (exclusive of taxes,
interest, brokerage
14
<PAGE>
fees and extraordinary expenses) as described above.
NASD rules limit the amount of annual distribution fees that may
be paid by mutual funds and impose a ceiling on the cumulative
distribution fees received. The Fund's Plan complies with those
rules.
The Chairman, President and Treasurer of the Fund are employed by
Legg Mason.
The Fund's Custodian and Transfer Agent
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and similar
assets of the Fund. Boston Financial Data Services, Two Heritage
Drive, Quincy, Massachusetts 02171, is the transfer agent for Fund
shares and dividend-disbursing agent for the Fund.
Pursuant to rules adopted under Section 17(f) of the 1940 Act, the
Fund may maintain foreign securities and cash in the custody of
certain eligible foreign banks and securities depositories.
Selection of these foreign custodial institutions is made by the
Board of Directors in accordance with SEC rules. The Board of
Directors will consider a number of factors, including, but not
limited to, the relationship of the institution to State Street, the
reliability and financial stability of the institution, the ability
of the institution to capably perform custodial services for the
Fund, the reputation of the institution in its national market, the
political and economic stability of the countries in which the
sub-custodians will be located and risks of potential
nationalization or expropriation of Fund assets. No assurance can be
given that the Board of Directors' appraisal of the risks in
connection with foreign custodial arrangements will always be
correct or that expropriation, nationalization, freezes, or
confiscation of Fund assets will not occur.
Description of the Trust and its Shares
The Trust was established as a Maryland corporation on May 5,
1993. The Articles of Incorporation authorize the Trust to issue one
billion shares of par value $.001 per share and to create additional
series, each of which may issue separate classes of shares. The Fund
is the only series currently being offered.
Shareholders of each series of the Trust are entitled to one vote
per share and fractional votes for fractional shares held. Voting
rights are not cumulative. All shares of the Fund are fully paid and
nonassessable and have no preemptive or conversion rights.
Shareholders' meetings will not be held except when the 1940 Act
requires a shareholder vote on certain matters (including the
election of directors, approval of an advisory contract and approval
of a plan of distribution pursuant to Rule 12b-1). The Trust will
also call a special meeting of the shareholders at the request of
10% or more of the shares entitled to vote; shareholders wishing to
call such a meeting should submit a written request to the Fund at
111 South Calvert Street, Baltimore, Maryland 21202, stating the
purpose of the proposed meeting and the matters to be acted upon.
15
<PAGE>
Table of Contents
Prospectus Highlights 2
Fund Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objective and Policies 6
How You Can Invest in the Fund 8
How Your Shareholder Account is Maintained 9
How You Can Redeem Your Fund Shares 9
How Net Asset Value is Determined 10
Dividends and Other Distributions 10
Taxes 11
Shareholder Services 12
The Fund's Management and Investment Adviser 13
The Fund's Distributor 14
The Fund's Custodian and Transfer Agent 15
Description of the Trust and its Shares 15
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
800 (bullet) 822 (bullet) 5544
Transfer and Shareholders' Servicing Agent:
Boston Financial Data Services
Boston, MA 02171
Counsel:
Kirkpatrick & Lockhart
1800 M Street, N.W., Washington, DC 20036
Auditors:
Ernst & Young
One North Charles Street, Baltimore, MD 21201
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of
Additional Information in connection with the offering made by the
Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. The Prospectus does not constitute an offering by the Fund
or by the principal underwriter in any jurisdiction in which such
offering may not lawfully be made.
(recycle logo) Printed on Recycled Paper
Prospectus
July 31, 1994
The Legg Mason
American
Leading
Companies
Trust
Adding Value To Your Future
(LEGG MASON FUNDS LOGO)
<PAGE>
LEGG MASON INVESTORS TRUST, INC.
AMERICAN LEADING COMPANIES TRUST
Supplement to the Prospectus dated July 31, 1994
The following information is inserted in the section captioned
"Fund Expenses" on page 3 of the Prospectus:
"Pursuant to a voluntary expense limitation, the Manager and
Legg Mason have agreed to waive indefinitely, management and 12b-1 fees
and assume certain other expenses in any month to the extent necessary
to limit total operating expenses (exclusive of taxes, brokerage
commissions, interest and extraordinary expenses) to an annual rate of
1.95% of the Fund's average daily net assets."
The following information is inserted in the section captioned "The
Fund's Management and Investment Adviser" on page 14 of the Prospectus:
"The Manager has agreed to waive indefinitely, its fees and to
reimburse the Fund in any month for its expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) in excess of an annual
rate of 1.95% of the Fund's average daily net assets."
March 31, 1995
<PAGE>
Legg Mason Investors Trust, Inc.
Legg Mason American Leading Companies Trust
STATEMENT OF ADDITIONAL INFORMATION
Legg Mason American Leading Companies Trust ("Fund"), a
diversified, professionally managed portfolio, is a separate series of
Legg Mason Investors Trust, Inc., an open-end investment company
("Trust"). The Fund seeks long-term capital appreciation and current
income consistent with prudent investment risk. The Fund 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. The
Adviser, Legg Mason Capital Management, Inc., defines a "Leading
Company" as a company that, in the opinion of the Adviser, has attained
a major market share in one or more products or services within its
industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future.
Such companies 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").
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for the Fund, dated
July 31, 1994, which has been filed with the Securities and Exchange
Commission ("SEC"). Copies of the Fund's Prospectus are available
without charge from the Fund at (410) 539-0000.
Dated: July 31, 1994
Legg Mason Wood Walker
Incorporated
111 South Calvert Street
Baltimore, Maryland 21202
(410) 539-0000
(800) 822-5544
<PAGE>
Table of Contents
Page
Additional Information About
Investment Limitations and Policies 1
Additional Purchase and Redemption Information 9
Additional Tax Information 11
Tax-Deferred Retirement Plans 13
Performance Information 16
Valuation of Fund Shares 19
The Trust's Directors and Officers 19
The Fund's Manager 21
The Fund's Investment Adviser 23
The Fund's Distributor 24
Portfolio Transactions and Brokerage 26
The Fund's Custodian and Transfer and
Dividend-Disbursing Agent 28
The Trust's Legal Counsel 28
The Trust's Independent Auditors 28
Financial Statements 28
Appendix A 29
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this Statement of
Additional Information in connection with the offerings made by the
Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. The Prospectus and the Statement of Additional
Information do not constitute offerings by the Fund or by the
distributor in any jurisdiction in which such offerings may not
lawfully be made.
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective described in the
Prospectus, the Fund has adopted the following fundamental investment
limitations that cannot be changed except by vote of the holders of a
majority of the outstanding voting securities of the Fund. The Fund may
not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
5% of the value of its total assets at the time of borrowings. (Although
not a fundamental policy subject to shareholder approval, the Fund will
repay any money borrowed before any portfolio securities are purchased);
2. Issue senior securities, except as permitted under the
Investment Company Act of 1940 ("1940 Act");
3. Engage in the business of underwriting the securities of
other issuers except insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933, as amended, in disposing of a
portfolio security;
4. Buy or hold any real estate; provided, however, that
instruments secured by real estate or interests therein are not subject
to this limitation;
5. With respect to 75% of its total assets, invest more than 5%
of its total assets (taken at market value) in securities of any one
issuer, other than the U.S. Government, its agencies and
instrumentalities, or purchase more than 10% of the voting securities of
any one issuer;
6. Purchase or sell any commodities or commodities contracts,
except that the Fund may purchase or sell currencies, interest rate and
currency futures contracts, options on currencies, securities, and
securities indexes and options on interest rate and currency futures
contracts;
7. Make loans, except loans of portfolio securities and except
to the extent the purchase of notes, bonds or other evidences of
indebtedness, the entry into repurchase agreements, or deposits with
banks and other financial institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of
its total assets would be invested in the securities of issuers having
their principal business activities in the same industry. This
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto.
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<PAGE>
The foregoing investment limitations cannot be changed without
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 of the
Fund present at a shareholders' meeting if more than 50% of the
outstanding shares of the Fund are represented at the meeting in person
or by proxy. If a percentage restriction is adhered to at the time of an
investment or transaction, a later increase or decrease in percentage
resulting from a change in the value of portfolio securities or amount
of total assets will not be considered a violation of any of the
foregoing limitations.
Except as otherwise specified, the investment limitations and
policies which follow, and those set forth throughout this Statement of
Additional Information, are non-fundamental and may be changed by the
Fund's Board of Directors without shareholder approval.
The following are some of the non-fundamental limitations which
the Fund currently observes. The Fund may not:
1. Purchase or sell any oil, gas or mineral exploration or
development programs;
2. Buy securities on "margin," except for short-term credits
necessary for clearance of portfolio transactions and except that the
Fund may make margin deposits in connection with the use of permitted
currency futures contracts and options on currency futures contracts;
3. Make short sales of securities or maintain a short position,
except that the Fund may sell short "against the box". This limit does
not apply to short sales and short positions in connection with its use
of options, futures contracts and options on futures contracts (The Fund
does not intend to make short sales in excess of 5% of its net assets
during the coming year);
4. Purchase or retain the securities of an issuer if, to the
knowledge of the Fund's management, those officers and directors of the
Fund, of Legg Mason Fund Adviser, Inc. and of Legg Mason Capital
Management, Inc. who individually own beneficially more than 0.5% of the
outstanding securities of that issuer own in the aggregate more than 5%
of the securities of that issuer;
5. Purchase any security if, as a result, more than 5% of the
Fund's total assets would be invested in securities of companies that
together with any predecessors have been in continuous operation for
less than three years;
6. Purchase a security restricted as to resale if, as a result
thereof, more than 10% of the Fund's total assets would be invested in
restricted securities. For purposes of this limitation, securities that
can be sold freely in the principal
2
<PAGE>
market in which they are traded are not considered restricted, even it
they cannot be sold in the United States.
7. Make investments in warrants if such investments, valued at
the lower of cost or market, exceed 5% of the value of its net assets,
which amount may include warrants that are not listed on the New York or
American Stock Exchanges, provided that such unlisted warrants, valued
at the lower of cost or market, do not exceed 2% of the Fund's net
assets, and further provided that this restriction does not apply to
warrants attached to, or sold as a unit with, other securities. For
purposes of this restriction, the term "warrants" does not include
options on securities, stock or bond indices, foreign currencies or
futures contracts.
8. Acquire securities of other open-end investment companies,
except in connection with a merger, consolidation, reorganization or
acquisition.
9. Hold more than 10% of the outstanding voting securities of
any one issuer.
10. Purchase or sell interest rate and currency futures
contracts, options on currencies, securities, and securities indexes and
options on interest rate and currency futures contracts, provided,
however, that the Fund may sell covered call options on securities and
may purchase options to the extent necessary to close out its position
in one or more call options.
The Fund interprets fundamental investment limitation (4) to
prohibit investment in real estate limited partnerships.
If a 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 the Fund, or in the number of securities an
issuer has outstanding will not be considered a violation of any
limitation.
Repurchase Agreements
When cash is temporarily available, or for temporary defensive
purposes, the Fund may invest in repurchase agreements as described in
the Prospectus. Repurchase agreements are usually for periods of one
week or less, but may be for longer periods. The Fund will not enter
into repurchase agreements of more than seven days' duration if more
than 15% of its total assets 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, the Fund might suffer a loss. If bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund could be delayed or limited.
However, the
3
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Fund has adopted standards for the parties with whom it may enter into
repurchase agreements, including monitoring by the 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
timeframe contemplated by the repurchase agreement.
When the Fund enters into a repurchase agreement, it will obtain
as collateral from the other party securities equal in value to 102% of
the amount of the repurchase agreement (or 100%, if the securities
obtained are U.S. Treasury bills, notes or bonds). Such securities will
be held by the Fund's custodian or an approved securities depository or
book-entry system.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid
securities. 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 has determined to be liquid pursuant to guidelines
established by the Trust's Board of Directors.
SEC regulations permit the sale of certain restricted securities
to qualified institutional buyers. The Adviser, acting pursuant to
guidelines established by the Board, may determine that certain
restricted securities which qualify for trading on this newly developing
market are liquid. If the market does not develop as anticipated, it may
adversely affect the Fund's liquidity. Pricing of illiquid securities
may involve more judgment than is the case for more liquid securities.
Foreign Securities
Since the Fund may invest in securities denominated in
currencies other than the U.S. dollar, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in
the exchange rates between such currencies and the U.S. dollar. Changes
in currency exchange rates may influence the value of the Fund's shares,
and also may affect the value of dividends and interest earned by the
Fund and gains and losses realized by the Fund. 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 and other economic and financial conditions, government
intervention, speculation and other factors.
Foreign securities transactions could be subject to settlement
procedures different from those followed in the United States,
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where delivery is made versus payment. The settlement procedures in some
foreign markets expose investors to the creditworthiness of an
intermediary, such as a bank or brokerage firm, for a period of time
during settlement.
Securities Lending
The Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities provided that cash 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 pays the Fund an amount equivalent
to any dividends or interest paid on such securities, and the Fund may
invest the cash collateral and earn income, or it may receive an agreed
upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay
a negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. The Fund does not have the
right to vote securities on loan, but would terminate the loan and
retain 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, described above. The Fund presently does not
intend to loan more than 5% of its portfolio securities at any given
time during the foreseeable future.
Debt Securities
The ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P") represent the opinions of those
agencies. It should be emphasized that such ratings are relative and
subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities,
but they may not be attractive to as many buyers. Regardless of rating
levels, all debt securities considered for purchase (whether rated or
unrated) are analyzed by the 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 is subsequently downgraded to a rating
below A, the Adviser 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, the Adviser may rely on the higher
rating in determining to purchase or retain the security. Bonds rated A
may be given a "+" or "-" by the rating agency. The Fund considers bonds
denominated A, A+ or A- to be included in the rating A.
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Convertible Securities
A convertible security is a bond, debenture, note, preferred
stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities ordinarily provide a stream of
income with generally higher yields than those of common stocks of the
same or similar issuers, but lower than the yield of non-convertible
debt. Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a
corporation's capital structure.
The value of a convertible security is a function of (1) its
yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege and (2) its
worth, at market value, if converted into the underlying common stock.
The price of a convertible security often reflects variations in the
price of the underlying common stock in a way that non-convertible debt
does not. A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible
security's governing instrument, which may be less than the ultimate
conversion value.
Many convertible securities are rated below investment grade or,
if unrated, are considered of comparable quality. The Fund does not
intend to purchase any convertible securities rated below BB by S&P or
below Ba by Moody's or, if unrated, deemed by the Adviser 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."
Lower rated debt securities are especially affected by adverse
changes in the industries in which the issuers are engaged and by
changes in the financial condition of the issuers. Highly leveraged
issuers may also experience financial stress during periods of rising
interest rates.
The market for lower rated debt securities expanded rapidly in
the 1980's, which growth paralleled a long period of economic expansion.
In the late 1980's, the prices of many lower rated debt securities
declined, indicating that many issuers of such securities might
experience financial difficulties. The yields on lower rated debt
securities rose dramatically, reflecting the risk that holders of such
securities could lose a substantial portion of
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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 securities, which may limit
the Fund's ability to sell such securities at fair value. Judgment plays
a greater role in pricing such securities than is the case for
securities having more active markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower rated securities, especially
in a thinly traded market.
When-Issued Securities
The Fund may enter into commitments to purchase securities on a
when-issued basis. When the Fund purchases securities on a when- issued
basis, it assumes the risks of ownership at the time of the purchase,
not at the time of receipt. However, the Fund does not have to pay for
the obligations until they are delivered to it. This is normally seven
to 15 days later, but could be longer. Use of this practice would have a
leveraging effect on the Fund. The Fund does not currently expect that
its commitment to purchase when-issued securities will at any time
exceed, in the aggregate, 5% of its net assets.
To meet its payment obligation under a when-issued commitment,
the Fund will establish a segregated account with its custodian and
maintain cash or liquid high-quality debt obligations, in an amount at
least equal in value to the Fund's commitments to purchase when- issued
securities.
The Fund may sell the securities underlying a when-issued
purchase, which may result in capital gains or losses.
Covered Call Options
The Fund may write covered call options on securities in which
it is authorized to invest. Because it can be expected that a call
option will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, the Fund might
write covered call options on securities generally when its Adviser
believes that the premium received by the Fund will exceed the extent to
which the market price of the underlying security will exceed the
exercise price. The strategy may be used to provide limited protection
against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any
transaction costs. Thus, in the event that the market price of the
underlying security held by the Fund declines, the amount of such
decline will be offset wholly or in part by the amount of the premium
received by the Fund. If, however, there is an increase in the market
price of the underlying
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security and the option is exercised, the Fund would be obligated to
sell the security at less than its market value. The Fund would give up
the ability to sell the portfolio securities used to cover the call
option while the call option was outstanding. In addition, the Fund
could lose the ability to participate in an increase in the value of
such securities above the exercise price of the call option because such
an increase would likely be offset by an increase in the cost of closing
out the call option (or could be negated if the buyer chose to exercise
the call option at an exercise price below the securities' current
market value).
If the Fund desires to close out its obligation under a call
option it has sold, it will have to purchase an offsetting option. The
value of an option position will reflect, among other things, the
current market price of the underlying security, futures contract or
currency, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of
the underlying security, and general market conditions. Accordingly,
when the price of the security rises toward the strike price of the
option, the cost of offsetting the option will negate to some extent the
benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy
depends upon the Adviser's ability to forecast the direction of price
fluctuations in the underlying market or market sector.
The Fund may write exchange-traded options. The ability to
establish and close out positions on the exchange is subject to the
maintenance of a liquid secondary market. Although the Fund intends to
write only those exchange-traded options for which there appears to be
an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any specific
time. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the
Fund. For example, because the Fund must maintain a covered position
with respect to any call option it writes on a security, the Fund may
not sell the underlying security during the period it is obligated under
such option. This requirement may impair the Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
The Fund will not enter into an options position that exposes it
to an obligation to another party unless it owns an offsetting
("covering") position in securities or other options. The Fund will
comply with guidelines established by the SEC with respect to coverage
of these strategies by mutual funds, and, if the guidelines so require,
will set aside cash and/or liquid, high- grade debt securities in a
segregated account with its custodian in the amount prescribed, as
marked-to-market daily. Securities positions used for cover and
securities held in a segregated account cannot be sold or closed out
while the strategy is
8
<PAGE>
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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Future First Systematic Investment Plan and Transfer of Funds from
Financial Institutions
The Fund's Prospectus explains that you may buy additional
shares of the Fund through the Future First Systematic Investment Plan.
Under this plan you may arrange for automatic monthly investments in the
Fund of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Fund's transfer agent, to prepare a check each month drawn
on your checking account. Each month the transfer agent will send a
check to your bank for collection, and the proceeds of the check will be
used to buy shares of the Fund at the per share net asset value
determined on the day the check is sent to your bank. You will receive a
quarterly cumulative 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.
You may also buy additional shares of the Fund through a plan
permitting transfers of funds from a financial institution. Certain
financial institutions may allow you, on a pre-authorized basis, to have
$50 or more automatically transferred monthly for investment in shares
of the Fund to:
Legg Mason Wood Walker, Incorporated
Funds Client Service
P.O. Box 1476
Baltimore, Maryland 21203-1476
If your check is not honored by the institution it is drawn on,
you may be subject to extra charges in order to cover collection costs.
These charges may be deducted from your shareholder account.
Systematic Withdrawal Plan
You may also elect to make systematic withdrawals from your Fund
account of a minimum of $50 on a monthly basis if you own shares with a
net asset value of $5,000 or more. The amounts paid to you each month
are obtained by redeeming sufficient shares from your account to provide
the withdrawal amount that you have
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<PAGE>
specified. The Systematic Withdrawal Plan is not currently available for
shares held in an Individual Retirement Account ("IRA"), Self-Employed
Individual Retirement Plan ("Keogh Plan"), Simplified Employee Pension
Plan ("SEP") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a
year by notifying Legg Mason or the affiliate with which you have an
account. Redemptions will be made at the net asset value determined as
of the close of regular trading of the New York Stock Exchange
("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 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 distributions on all shares in your account must be automatically
reinvested in Fund shares. You may terminate the Systematic Withdrawal
Plan at any time without charge or penalty. The Fund, its transfer
agent, and Legg Mason Wood Walker, Incorporated ("Legg Mason") also
reserve the right to modify or terminate the Systematic Withdrawal Plan
at any time.
Withdrawal payments are treated as a sale of shares rather than
as a dividend or a capital gain distribution. These payments are taxable
to the extent that the total amount of the payments exceeds the tax
basis of the shares sold. If the periodic withdrawals exceed reinvested
dividends and distributions, the amount of your original investment may
be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the
Fund if you maintain a Systematic Withdrawal Plan because you may incur
tax liabilities in connection with such purchases and withdrawals. The
Fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase
is equal to at least one year's scheduled withdrawals. In addition, if
you maintain a Systematic Withdrawal Plan you may not make periodic
investments under the Future First Systematic Investment Plan.
Other Information Regarding Redemption
The date of payment for redemption may not be postponed for more
than seven days, and the right of redemption may not be suspended,
except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in
markets the Fund normally utilizes is restricted, or an emergency, as
defined by rules and regulations of the SEC, exists, making disposal of
the Fund's investments or determination of its net asset value not
reasonably practicable, or (iii) for such other periods as the SEC by
regulation or order may permit for protection of the Fund's
shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the
net asset value next determined after the suspension is lifted.
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The Fund reserves the right, under certain conditions, to honor
any request for redemption, or combination of requests from the same
shareholder in any 90-day period, totalling $250,000 or 1% of the net
assets of the Fund, whichever is less, by making payment in whole or in
part by securities valued in the same way as they would be valued for
purposes of computing the Fund's net asset value per share. If payment
is made in securities, a shareholder should expect to incur brokerage
expenses in converting those securities into cash and will be subject to
fluctuation in the market price of those securities until they are sold.
The Fund does not redeem in kind under normal circumstances, but would
do so where the Adviser determines that it would be in the best
interests of the shareholders as a whole.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the Fund and its shareholders. Investors are
urged to consult their own tax advisers for more detailed information
regarding any federal, state, local or foreign taxes that may be
applicable to them.
General
The Fund intends to continue to qualify for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code of
1986, as amended ("Code"). In order to continue to qualify for that
treatment, the Fund must distribute annually to its shareholders at
least 90% of its investment company taxable income (generally, net
investment income plus any net short-term capital gain and any net gains
from certain foreign currency transactions) ("Distribution Requirement")
and must meet several additional requirements. These requirements
include the following: (1) the Fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition
of securities or foreign currencies, or other income (including gains
from options) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale
or other disposition of securities or options held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities;
and (4) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the
securities (other than U.S. government securities or the securities of
other RICs) of any one issuer.
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The Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for that year and
capital gain net income for the one-year period ending on October 31 of
that year, plus certain other amounts.
Dividends and interest received by the Fund may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on the Fund's securities. Tax
conventions between certain countries and the United States may reduce
or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.
Passive Foreign Investment Companies
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general,
meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets
produce, or are held for the production of, passive income. Under
certain circumstances, the Fund will be subject to federal income tax on
a portion of any "excess distribution" received on the stock of a PFIC
or of any gain on disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the
PFIC income will be included in the Fund's investment company taxable
income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC
and elects to treat the PFIC as a "qualified electing fund," then in
lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital gain
(the excess of net long-term capital gain over net short-term capital
loss), even if they are not distributed to the Fund; those amounts would
have to be distributed to satisfy the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
Three bills, passed by Congress in 1991 and 1992 and vetoed by
President Bush would have substantially modified the taxation of U.S.
shareholders of foreign corporations, including eliminating the
provisions described above dealing with PFICS and replacing them (and
other provisions) with a regulatory scheme involving entities called
"passive foreign corporations." The "Tax Simplification and Technical
Corrections Bill of 1993," passed in May 1994 by the House of
Representatives, contains the same modifications. It is unclear at this
time whether, and in what form, the proposed modifications may be
enacted into law.
Proposed regulations have been published pursuant to which
open-end RICs, such as the Fund, would be entitled to elect to
"mark-to-market" their stock in certain PFICs. "Marking-to-
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market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of
such a PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in
effect).
Options and Currencies
Income from foreign currencies (except certain gains therefrom
that may be excluded by future regulations), and income from
transactions in options derived by the Fund with respect to its business
of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from
the disposition of options will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition
of foreign currencies that are deemed not directly related to the Fund's
principal business of investing in securities (or options with respect
thereto), if any, also will be subject to the Short-Short Limitation if
they are held for less than three months.
Dividends and Other Distributions
Dividends and other distributions declared by the Fund in
October, November or December of any year and payable to shareholders of
record on a date in any of those months are deemed to have been paid by
the Fund and received by the shareholders on December 31 of that year if
they 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 investment company taxable
income (whether paid in cash or reinvested in additional Fund shares)
may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund for the taxable year from domestic
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax. Distributions of net capital
gain made by the Fund do not qualify for the dividends-received
deduction.
If Fund shares are sold at a loss after being held for six
months or less, the loss will be treated as a long-term, instead of a
short-term, capital loss to the extent of any capital gain distributions
received on those shares.
TAX-DEFERRED RETIREMENT PLANS
As noted in the Fund's Prospectus, an investment in Fund shares
may be appropriate for IRAs, Keogh Plans, SEPs and other qualified
retirement plans. In general, income earned through the investment of
assets of those plans is not taxed to their beneficiaries until the
income is distributed to them. Investors who are considering
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<PAGE>
establishing such a plan should consult their attorneys or other tax
advisers with respect to individual tax questions. The option of
investing in these plans through regular payroll deductions may be
arranged with a Legg Mason or affiliated investment executive and your
employer. Additional information with respect to these plans is
available upon request from any Legg Mason or affiliated investment
executive.
Individual Retirement Account -- IRA
If neither you nor your spouse is an active participant in a
qualified employer or government retirement plan, or if either you or
your spouse is an active participant and your adjusted gross income does
not exceed a certain level, you may deduct cash contributions made to an
IRA in an amount for each taxable year not exceeding the lesser of 100%
of your earned income or $2,000. In addition, if your spouse is not
employed and you file a joint return, you may establish a separate IRA
for your spouse and contribute up to a total of $2,250 to the two IRAs,
provided that the contribution to neither exceeds $2,000. If you and
your spouse are both employed and neither of you is an active
participant in a qualified employer or government retirement plan and
you establish separate IRAs, you each may contribute all of your earned
income, up to $2,000 each, and thus may together receive tax deductions
of up to $4,000 for contributions to your IRAs. If your employer's plan
permits voluntary contributions and meets certain requirements, you may
make voluntary contributions to that plan that are treated as deductible
IRA contributions.
Even if you are not in one of the categories described in the
preceding paragraph, you may find it advantageous to invest in shares of
the Fund through IRA contributions, up to certain limits, because all
dividends and other distributions on your Fund shares are not
immediately taxable to you or the IRA; they become taxable only when
distributed to you. To avoid penalties, your interest in an IRA must be
distributed, or start to be distributed, to you not later than the end
of the taxable year in which you attain age 70 1/2. Distributions made
before age 59 1/2, in addition to being taxable, generally are subject
to a penalty equal to 10% of the distribution, except in the case of
death or disability or where the distribution is rolled over into
another qualified plan or certain other situations.
Self-Employed Individual Retirement Plan -- Keogh Plan
Legg Mason makes available to self-employed individuals a Plan
and Custodial Agreement for a Keogh Plan through which Fund shares may
be purchased. The custodial services pursuant to that Agreement are
performed by Legg Mason. However, you have the right to use a bank of
your own choice to provide these services at your own cost. There are
penalties for distributions from a Keogh Plan prior to age 59 1/2,
except in the case of death or disability.
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Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a
SEP for investment in Fund shares.
Withholding at the rate of 20% is required for federal income
tax purposes on certain distributions (excluding, for example, certain
periodic payments) from the foregoing retirement plans (except IRAs),
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 or 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. Please consult your plan
administrator or tax adviser for further information.
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<PAGE>
PERFORMANCE INFORMATION
The following table shows the value, as of the end of each
fiscal year, of a hypothetical investment of $10,000 made at the Fund's
commencement of operations on September 1, 1993. The table assumes that
all dividends and other distributions are reinvested in the Fund. It
includes the effect of all charges and fees the Fund has paid. (There
are no fees for investing or reinvesting in the Fund, and there are no
redemption fees.) It does not include the effect of any income tax that
an investor would have to pay on distributions.
Value of Original
Shares Plus
Shares Obtained
Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
1994* $9,690 $24 $9,714
* September 1, 1993 (commencement of operations) to March 31, 1994.
If the investor had not reinvested dividends and other
distributions, the total value of the hypothetical investment as of
March 31, 1994 would have been $9,690, and the investor would have
received a total of $25 in distributions. If the Adviser had not waived
or reimbursed certain Fund expenses in the 1994 fiscal year, returns
would have been lower.
Total Return Calculations
Average annual total return quotes used in the Fund's
advertising and other promotional materials ("Performance
Advertisements") are calculated according to the following formula:
P(1+T)n = 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
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<PAGE>
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 the Fund are assumed to
have been reinvested at net asset value on the reinvestment dates during
the period.
From time to time the Fund may compare its performance in
advertising and sales literature to the performance of other investment
companies, groups of investment companies or various market indices. One
such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of
the largest publicly traded stocks in the U.S. The S&P 500 includes
reinvestment of all dividends. It takes no account of the costs of
investing or the tax consequences of distributions. The Fund may invest
in securities that are not included in the S&P 500.
The Fund may also cite rankings and ratings, and compare its
return with data published by Lipper Analytical Services, Inc.
("Lipper"), CDS Investment Technologies, Inc., Wiesenberger Investment
Company Services, Value Line, Morningstar, and other services or
publications that monitor, compare and/or rank the performance of
investment companies. The Fund may also refer to mutual fund performance
rankings, ratings, comparisons with funds having similar investment
objectives, and other data, such as comparative asset, expense and fee
levels, published by Lipper and other organizations. Fund advertisements
may also refer to information about the Fund and other mutual funds
reported in independent periodicals, including, but not limited to,
FINANCIAL WORLD, MONEY Magazine, FORBES, BUSINESS WEEK, BARRON'S,
FORTUNE, THE KIPLINGER LETTERS, THE WALL STREET JOURNAL, and THE NEW
YORK TIMES.
The Fund may compare its investment return 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 Fund's yield will
vary.
Fund advertisements may refer to the history of the distributor
and its affiliates, the education and experience of the portfolio
manager, and the portfolio manager's philosophy and style of investing.
They may also refer to Legg Mason's general philosophy of value
investing. With value investing, the Fund 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
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sound, well-managed companies that may be temporarily out
of favor due to earnings declines or other adverse developments are
likely to provide a greater total return than securities with prices
that appear to reflect anticipated favorable developments and that are
therefore subject to correction should any unfavorable developments
occur.
In advertising, the Fund may illustrate hypothetical investment
plans designed to help investors meet long-term financial goals, such as
saving for a child's college education or for retirement. Sources such
as the Internal Revenue Service, the Social Security Administration, the
Consumer Price Index and Chase Global Data and Research may supply data
concerning interest rates, college tuitions, the rate of inflation,
Social Security benefits, mortality statistics and other relevant
information. The Fund may use other recognized, reliable sources as they
become available.
The Fund may use data prepared by Ibbotson Associates of
Chicago, Illinois (Ibbotson) to compare the returns of various capital
markets and to show the value of a hypothetical investment in a capital
market. Ibbotson relies on different indices to calculate the
performance of common stocks, corporate and government bonds and
Treasury bills.
The Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is
represented by the performance of an appropriate market index, such as
the S&P 500 and the performance of bonds is represented by a nationally
recognized bond index, such as the Lehman Brothers Long-Term Government
Bond Index.
The Fund may also include in advertising biographical
information on key investment and managerial personnel.
The Fund may advertise examples of the potential benefits of
periodic investment plans, such as dollar cost averaging, a long- term
investment technique designed to lower average cost per share. Under
such a plan, an investor invests in a mutual fund at regular intervals a
fixed dollar amount thereby purchasing more shares when prices are low
and fewer shares when prices are high. Although such a plan does not
guarantee profit or guard against loss in declining markets, the average
cost per share could be lower than if a fixed number of shares were
purchased at the same intervals. Investors should consider their ability
to purchase shares through low price levels.
The Fund may discuss Legg Mason's tradition of service. Since
1899, Legg Mason and its affiliated companies have helped investors meet
their specific investment goals and have provided a full spectrum of
financial services. Legg Mason affiliates serve as investment advisors
for private accounts and mutual funds with assets of more than $16
billion.
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VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily as of the
close of the Exchange, on every day that the Exchange is open, by
dividing the value of the total assets of the Fund, less liabilities, by
the number of shares outstanding. Pricing will not be done on days when
the Exchange is closed. The Exchange currently observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas. Securities
owned by the Fund for which market quotations are readily available are
valued at current market value. Securities traded on an exchange or NASD
National Market System securities (including debt securities) are
normally valued at last sale prices. Other over-the-counter securities,
and securities traded on exchanges for which there is no sale on a
particular day (including debt securities), are valued at the mean of
latest closing bid and asked prices. Short-term securities with
remaining maturities of less than 60 days and commercial paper are
valued at amortized cost. Foreign securities denominated in foreign
currency generally are valued at the U.S. dollar equivalents at the spot
currency value as reported by a major New York bank. All other
securities are valued at fair value as determined by or under the
direction of the Fund's Board of Directors. Premiums received on the
sale of call options are included in the Fund's net asset value, and the
current market value of options sold by the Fund will be subtracted from
net assets.
THE TRUST'S DIRECTORS AND OFFICERS
The Trust's officers are responsible for the operation of the
Fund under the supervision of the Board of Directors. The officers and
directors of the Trust and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates those officers
and/or directors who are interested persons of the Trust as defined by
the 1940 Act. The business address of each officer and director is 111
South Calvert Street, Baltimore, Maryland 21202, unless otherwise
indicated.
JOHN F. CURLEY, JR.*, Chairman of the Board and Director; Vice
Chairman and Director of Legg Mason Wood Walker, Inc. and Legg Mason,
Inc.; 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.;
President and Director of Legg Mason Special Investment Trust, Inc.,
Legg Mason Total Return Trust, Inc., and Legg Mason Value Trust, Inc.;
Chairman of the Board and Director of Legg Mason Income Trust, Inc.,
Legg Mason Tax Exempt Trust, Inc. and Legg Mason Global Trust, Inc.;
Chairman of the Board, President and Trustee of Legg Mason Cash Reserve
Trust; Chairman of the Board and Trustee of Legg Mason Tax-Free Income
Fund.
RICHARD G. GILMORE, Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant; formerly: Senior Vice President
and Chief Financial Officer of Philadelphia Electric
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Company (electric and gas utility); Executive Vice President and
Treasurer, the Girard Company (bank holding company) and Director of
Finance, City of Philadelphia. Director of CSS Industries, Inc.
(diversified holding company engaged in manufacture and sale of
decorative paper products, business forms, and specialty metal
packaging), and Philadelphia Electric Company; Director of Legg Mason
Value Trust, Inc., Legg Mason Tax-Exempt Trust, Inc., Legg Mason Total
Return Trust, Inc., Legg Mason Special Investment Trust, Inc., Legg
Mason Income Trust, Inc. and Legg Mason Global Trust, Inc.; Trustee of
Legg Mason Tax-Free Income Fund.
CHARLES F. HAUGH, Director; 2730 University Blvd., West #604,
Wheaton, Maryland. Real Estate Developer and Investor; President and
Director of Resource Realty, Inc. (real estate brokerage and management)
and Greater Laurel Nursing Home, Inc.; Partner in Greater Laurel
Professional Park Ltd. Partnership and Greater Laurel Health Park Ltd.
Partnership (real estate investment and development); Director of Legg
Mason Tax-Exempt Trust, Inc., Legg Mason Value Trust, Inc., Legg Mason
Total Return Trust, Inc., Legg Mason Special Investment Trust, Inc.,
Legg Mason Income Trust, Inc., Legg Mason Global Trust, Inc.; Trustee of
Legg Mason Cash Reserve Trust and Legg Mason Tax-Free Income Fund.
ARNOLD L. LEHMAN, Director; The Baltimore Museum of Art, Art
Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of
Art; Director of Legg Mason Value Trust, Inc., Legg Mason Tax-Exempt
Trust, Inc., Legg Mason Total Return Trust, Inc., Legg Mason Special
Investment Trust, Inc., Legg Mason Income Trust, Inc., and Legg Mason
Global Trust, Inc.; Trustee of Legg Mason Cash Reserve Trust and Legg
Mason Tax-Free Income Fund.
JILL E. McGOVERN, Director; 1500 Wilson Boulevard, Arlington,
Virginia. Chief Executive of the Marrow Foundation; formerly: Executive
Director of the Baltimore International Festival, (January 1991-March
1993); Senior Assistant to the President of the Johns Hopkins University
(1986 - 1991). Director of Legg Mason Value Trust, Inc., Legg Mason
Tax-Exempt Trust, Inc., Legg Mason Total Return Trust, Inc., Legg Mason
Special Investment Trust, Inc., Legg Mason Income Trust, Inc., and Legg
Mason Global Trust, Inc.; Trustee of Legg Mason Cash Reserve Trust and
Legg Mason Tax- Free Income Fund.
T. A. RODGERS, Director; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting);
Director of Polk Audio, Inc. (manufacturer of audio components);
formerly: Partner, Bufka & Rodgers (investment counsellors) (June
1987-April 1990). Director of Legg Mason Value Trust, Inc., Legg Mason
Tax-Exempt Trust, Inc., Legg Mason Total Return Trust, Inc., Legg Mason
Special Investment Trust, Inc., Legg Mason Income Trust, Inc. and Legg
Mason Global Trust, Inc.; Trustee of Legg Mason Tax-Free Income Fund.
EDWARD A. TABER, III,* President and Director; Executive Vice
President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice
Chairman and Director of Legg Mason Fund Adviser, Inc.;
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President and Director of Legg Mason Global Trust, Inc.; Director of
Legg Mason Value Trust, Inc., Legg Mason Total Return Trust, Inc., and
Legg Mason Special Investment Trust, Inc.; Trustee of Legg Mason
Tax-Free Income Fund; Vice President of Worldwide Value Fund, Inc;
formerly: Director, Taxable Fixed Income Division of T. Rowe Price
Associates (1984-1992), Officer and/or Director of various other
affiliates of T. Rowe Price Associates (1978-1991).
The executive officers of the Fund, other than those who also
serve as directors, are:
MARIE K. KARPINSKI*, Vice President and Treasurer; Treasurer of
the Adviser; Vice President and Treasurer of Legg Mason Value Trust,
Inc., Legg Mason Tax-Exempt Trust, Inc., Legg Mason Total Return Trust,
Inc., Legg Mason Special Investment Trust, Inc., Legg Mason Income
Trust, Inc., Legg Mason Tax-Free Income Fund, Legg Mason Global Trust,
Inc. and Legg Mason Cash Reserve Trust; Vice President, Secretary and
Treasurer of Worldwide Value Fund, Inc.; Vice President of Legg Mason
Wood Walker, Inc.
STEFANIE L. WONG*, Secretary; Secretary of Legg Mason Income
Trust, Inc.; employee of Legg Mason since 1990. Prior to 1990, full-time
student.
BLANCHE P. ROCHE*, Assistant Secretary and Assistant Vice
President; Assistant Secretary and Assistant Vice President of Legg
Mason Value Trust, Inc., Legg Mason Total Return Trust, Inc., Legg Mason
Special Investment Trust, Inc., Legg Mason Tax Exempt Trust, Inc., Legg
Mason Income Trust, Inc., Legg Mason Tax-Free Income Fund and Legg Mason
Global Trust, Inc.; employee of Legg Mason since 1991; formerly: Manager
of Consumer Financial Services (1989- 1991) and Treasury Manager
(1987-1989), Primerica Corporation.
Officers and directors of the Trust who are "interested persons"
of the Trust receive no salary or fees from the Trust. Each director of
the Trust receives a fee of $400 annually for serving as a director, and
a fee of $400 for each meeting of the Board of Directors attended by him
or her. During the period ended March 31, 1994, the independent
directors received, as a group, a total of $7,000. On June 30, 1994, the
directors and officers of the Fund beneficially owned in the aggregate
less than 1% of the Fund's outstanding shares.
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.
THE FUND'S MANAGER
The Manager, Legg Mason Fund Adviser, Inc., a Maryland
corporation, is located at 111 South Calvert Street, Baltimore, Maryland
21202. The Manager is a wholly owned subsidiary of Legg Mason, Inc.,
which also is the parent of Legg Mason Wood Walker,
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Incorporated. The Adviser serves as the Fund's investment adviser and
manager under an Investment Advisory and Management Agreement
("Management Agreement") dated August 2, 1993. Continuation of the
Management Agreement was most recently approved by the Board of
Directors on October 22, 1993. The Management Agreement provides that,
subject to overall direction by the Board of Directors, the Manager
manages the investment and other affairs of the Fund. The Manager is
responsible for managing the Fund consistent with the Fund's investment
objective and policies described in its Prospectus and this Statement of
Additional Information. The Manager also is obligated to (a) furnish the
Fund with office space and executive and other personnel necessary for
the operations of the Fund; (b) supervise all aspects of the Fund's
operations; (c) bear the expense of certain informational and purchase
and redemption services to the Fund's shareholders; (d) arrange, but not
pay for, the periodic updating of prospectuses, proxy material, tax
returns and reports to shareholders and state and federal regulatory
agencies; and (e) report regularly to the Trust's officers and
directors. The Manager and its affiliates pay all the compensation of
directors and officers of the Trust who are employees of the Manager or
Adviser. The Fund pays all its other expenses which are not expressly
assumed by the Manager. The Fund also is liable for such nonrecurring
expenses as may arise, including litigation to which the Fund may be a
party. The Fund may also have an obligation to indemnify its directors
and officers with respect to litigation.
As explained in the Fund's Prospectus, the Manager receives for
its services a management fee, calculated daily and payable monthly, at
an annual rate of 0.75% of the Fund's average daily net assets. The
Manager has agreed to waive its fees and to reimburse the Fund for its
expenses (exclusive of taxes, interest, brokerage and extraordinary
expenses) in excess of 1.95% of the Fund's average net assets until
March 31, 1995. For the period September 1, 1993 (commencement of
operations) to March 31, 1994, the Manager waived management fees of
$82,244.
Under the Management Agreement, the Manager will not be liable
for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the performance of the 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 by it of its
obligations or duties thereunder.
The Management Agreement terminates automatically upon
assignment by the Manager. It also is terminable at any time without
penalty by vote of the Trust's Board of Directors, by vote of a majority
of the Fund's outstanding voting securities, or by the Manager, on not
less than 60 days' notice to the other party to
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<PAGE>
the Agreement, and may be terminated immediately upon the mutual written
consent of both parties to the Agreement.
Under the Management Agreement, the Fund has the non-exclusive
right to use the name "Legg Mason" until that Agreement is terminated or
until the right is withdrawn in writing by the Manager.
THE FUND'S INVESTMENT ADVISER
The Adviser, Legg Mason Capital Management, Inc., 111 South
Calvert Street, Baltimore, MD 21202, an affiliate of Legg Mason, serves
as investment adviser to the Fund pursuant to an Investment Advisory
Agreement dated August 2, 1993, between the Adviser and the Manager
("Advisory Agreement"). The Advisory Agreement was approved by the Board
of Directors, including a majority of the directors who are not
"interested persons" (as that term is defined in the 1940 Act) of the
Trust, the Adviser or the Manager, on October 22, 1993. 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, the Adviser is responsible,
subject to the general supervision of the Manager and the Trust's Board
of Directors, for the actual management of the Fund's assets, including
responsibility for making decisions and placing orders to buy, sell or
hold a particular security. For the Adviser's services to the Fund, the
Manager (not the Fund) pays the Adviser a fee, computed daily and
payable monthly, at an annual rate equal to 40% of the fee received by
the Manager from the Fund. For the period September 1, 1993
(commencement of operations) to March 31, 1994, the Manager paid $42,550
to the Adviser on behalf of the Fund.
Under the Advisory Agreement, the Adviser will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Manager or by the Fund in connection with the performance of the
Advisory Agreement, except a loss resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services or a loss
resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it
of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of the
Corporations's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, by the Manager or by the Adviser, on not
less than 60 days' notice to the Fund and/or the other party(ies). The
Advisory Agreement terminates immediately
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<PAGE>
upon any termination of the Management Agreement or upon the mutual
written consent of the Adviser, the Manager and the Fund.
THE FUND'S DISTRIBUTOR
Legg Mason acts as distributor of the Fund's shares pursuant to
an Underwriting Agreement with the Trust. 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.
The Fund has adopted a Distribution and Shareholder Services
Plan ("Plan") which, among other things, permits the Fund to pay Legg
Mason fees for its services related to sales and distribution of Fund
shares and the provision of ongoing services to shareholders. Under the
Plan, the aggregate fees may not exceed an annual rate of 1.00% of the
Fund's average daily net assets. 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.
Continuation of the Plan was most recently approved by the
Trust's Board of Directors, including a majority of the directors who
are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan or any related
agreements ("12b-1 Directors"), on October 22, 1993. The Plan was
approved by Legg Mason Fund Adviser, Inc., as sole shareholder of the
Fund, on August 2, 1993.
The Plan makes clear that, of the aggregate 1.00% fees, 0.75% is
paid for distribution services and 0.25% is paid for ongoing services to
shareholders. The Plan also specifies that the Fund may not pay more in
cumulative distribution fees than 6.25% of total new gross assets, plus
interest, as specified in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
In approving the Plan, in accordance with the requirements of
Rule 12b-1, the directors determined that there was a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
The directors considered, among other things, the extent to which the
potential benefits of the Plan to the Fund's shareholders outweighed the
costs of the Plan; the likelihood that
24
<PAGE>
the Plan would succeed in producing such potential benefits; the merits
of certain possible alternatives to the Plan; and the extent to which
the retention of assets and additional sales of the Fund's shares would
be likely to maintain or increase the amount of compensation paid by the
Fund to its Manager.
In considering the costs of the Plan, the directors gave
particular attention to the fact that any payments made by the Fund to
Legg Mason under the Plan would increase the Fund's level of expenses in
the amount of such payments. Further, the directors recognized that the
Manager would earn greater management fees if the Fund's assets were
increased, because such fees are calculated as a percentage of the
Fund's assets and thus would increase if net assets increase. The
directors further recognized that there can be no assurance that any of
the potential benefits described below would be achieved if the Plan
were implemented.
Among the potential benefits of the Plan, the directors noted
that the payment of commissions and service fees to Legg Mason and its
investment executives could motivate them to improve their sales efforts
with respect to the Fund's shares and to maintain and enhance the level
of services they provide to the Fund's shareholders. These efforts, in
turn, could lead to increased sales and reduced redemptions, eventually
enabling the Fund to achieve economies of scale and lower per-share
operating expenses. Any reduction in such expenses would serve to
offset, in whole or in part, the additional expenses incurred by the
Fund in connection with the Plan. Furthermore, the investment management
of the Fund could be enhanced, as net inflows of cash from new sales
might enable its portfolio manager to take advantage of attractive
investment opportunities, and reduced redemptions could eliminate the
potential need to liquidate attractive securities positions in order to
raise the funds necessary to meet the redemption requests.
The Plan will continue in effect only so long as it is approved
at least annually by the vote of a majority of the Board of Directors,
including a majority of the 12b-1 Directors, cast in person at a meeting
called for the purpose of voting on the Plan. The Plan may be terminated
with respect to the Fund by a vote of a majority of 12b-1 Directors or
by vote of a majority of the outstanding voting securities of the Fund.
Any change in the Plan that would materially increase the distribution
costs to the Fund requires shareholder approval; otherwise, the Plan may
be amended by the directors, including a majority of the 12b-1
Directors.
In accordance with Rule 12b-1, the Plan provides that Legg Mason
will submit to the Trust'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 such expenditures were
made. In addition, as long as the Plan is in effect, the selection and
nomination of the disinterested
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<PAGE>
directors will be committed to the discretion of such disinterested
directors.
For the fiscal year ended March 31, 1994, the Fund paid Legg
Mason $251,492 in fees under the Plan. During the same period, Legg
Mason incurred the following expenses with respect to the Fund:
Compensation to sales personnel $148,000
Advertising 23,000
Printing and mailing of prospectuses to
prospective shareholders 33,000
Other 171,000
________
Total expenses $375,000
________
________
The foregoing are estimated and do not include all expenses
fairly allocable to Legg Mason's or its affiliates' efforts to
distribute Fund shares.
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 period September 1, 1993
(commencement of operations) to March 31, 1994, the Fund's annualized
portfolio turnover rate was 21.0%
Under the Advisory Agreement, the Adviser is responsible for the
execution of the Fund's portfolio transactions and must seek the most
favorable price and execution for such transactions, subject to the
possible payment, as described below, of higher brokerage commissions or
spreads to brokers who provide research and analysis. The Fund may not
always pay the lowest commission or spread available. Rather, the
Adviser also will take into account such factors as size of the order,
difficulty of execution, efficiency of the executing broker's
facilities, including the services described below, and any risk assumed
by the executing broker.
Consistent with the policy of most favorable price and
execution, the Adviser may give consideration to research, statistical
and other services furnished by brokers or dealers to the Adviser for
its use, may place orders with brokers who provide supplemental
investment and market research and securities and economic analysis and
may pay to those 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
26
<PAGE>
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts. Such
research and analysis may be useful to the Adviser in connection with
services to clients other than the Fund. The Adviser's fee is not
reduced by reason of its receiving such brokerage and research services.
From time to time, the Fund 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." The Adviser
also selects other brokers to execute portfolio transactions. In the
over-the-counter market, the Fund generally deals with responsible
primary market-makers unless the Adviser believes a more favorable
execution can otherwise be obtained. For the period September 1, 1993
(commencement of operations) to March 31, 1994, the Fund paid total
brokerage commissions of $75,165. Legg Mason received no brokerage
commissions from the Fund for the same period.
Except as permitted by SEC rules or orders, the Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated
persons as principal. The Trust's Board of Directors has adopted
procedures in conformity with Rule 10f-3 under the 1940 Act whereby the
Fund may purchase securities that are offered in certain underwritings
in which Legg Mason or any of its affiliated persons is a participant.
These procedures, among other things, limit the Fund's investment in the
amount of securities of any class of securities offered in an
underwriting in which Legg Mason or any of its affiliated persons is a
participant so that: (i) the Fund together with all other registered
investment companies advised by the Adviser, may not purchase more than
4% of the principal amount of the offering of such class or $500,000 in
principal amount, whichever is greater, but in no event greater than 10%
of the principal amount of the offering; and (ii) the consideration to
be paid by the Fund in purchasing the securities being offered may not
exceed 3% of the total assets of the Fund. In addition, the Fund may not
purchase securities during the existence of an underwriting if Legg
Mason is the sole underwriter of those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits
Legg Mason from effecting transactions on an exchange for its
affiliates, such as the Fund, unless the affiliate expressly consents by
written contract. The Management and Advisory Agreements expressly
provide such consent.
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<PAGE>
Among the brokers regularly used by the Fund during the year
ended March 31, 1994, the Fund owned 20,000 shares of the following
parent company: J. P. Morgan & Co. Incorporated at a market value of
$1,252,500.
Investment decisions for the Fund are made independently from
those of other funds and accounts advised by the Adviser. However, the
same security may be held in the portfolios of more than one fund or
account. When two or more accounts simultaneously engage in the purchase
or sale of the same security, the prices and amounts will be equitably
allocated to each account. In some cases, this procedure may adversely
affect the price or quantity of the security available to a particular
account. In other cases, however, an account's ability to participate in
large-volume transactions may produce better executions and prices.
THE TRUST'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets. BFDS
serves as transfer and dividend-disbursing agent, and administrator of
various shareholder services. Legg Mason also assists BFDS with certain
of its duties as transfer agent for which BFDS pays Legg Mason a fee.
Shareholders who request an historical transcript of their account will
be charged a fee based on the number of years researched. The Fund
reserves the right, upon 60 days' written notice, to make other charges
to investors to cover administrative costs.
THE TRUST'S LEGAL COUNSEL
Kirkpatrick & Lockhart, 1800 M Street, N.W., Washington, D.C.
20036, serves as counsel to the Fund.
THE TRUST'S INDEPENDENT AUDITORS
Ernst & Young, have been selected by the Fund to serve as the
Fund's independent auditors.
FINANCIAL STATEMENTS
The Statement of Net Assets as of March 31, 1994; the Statement
of Operations, the Statement of Changes in Net Assets and the Financial
Highlights for the period September 1, 1993 (commencement of operations)
to March 31, 1994; the Notes to Financial Statements and the Report of
the Independent Auditors, all of which are included in the Fund's annual
report for the period ended March 31, 1994, are hereby incorporated by
reference in this Statement of Additional Information.
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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.
Description of Standard & Poor's Ratings Group corporate bond ratings:
AAA-This is the highest rating assigned by Standard & Poor's to
an obligation and indicates an extremely strong capacity/to pay
principal and interest.
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.
Description of Moody's preferred stock ratings:
aaa-An issue which is rated "aaa" is considered to be a
top-quality preferred stock. This rating indicates good asset
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protection and the least risk of dividend impairment within the universe
of preferred stock.
aa-An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance that earnings and asset protection will remain relatively well
maintained in the foreseeable future.
a-An issue which is rated "a" is considered to be an
upper-medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels.
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