As filed with the Securities and Exchange Commission on May 17, 1996.
1933 Act File No. 33-62174
1940 Act File No. 811-7692
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 4 [X]
------
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 [X]
------
LEGG MASON INVESTORS TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on , 1996 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1996 pursuant to Rule 485(a)(i) [ ] 75 days after filing pursuant to
Rule 485(a)(ii)
[X] on July 31 , 1996 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and expects to file the notice required by such Rule for its
most recent fiscal year on or about May 31, 1996.
<PAGE>
Legg Mason Investors Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Legg Mason American Leading Companies Trust -- Primary Shares
Legg Mason Balanced Trust -- Primary Shares
Part A - Prospectus
Navigator American Leading Companies Trust
Navigator Balanced Trust
Part A - Prospectus
Legg Mason American Leading Companies Trust -- Primary Shares
Legg Mason Balanced Trust -- Primary Shares
Navigator American Leading Companies Trust
Navigator Balanced Trust
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason American Leading Companies Trust--Primary Shares
Legg Mason Balanced Trust -- Primary Shares
Form N-1A Cross Reference Sheet
Part A. Item No. Prospectus Caption
1 Cover Page
2 Prospectus Highlights;
Expenses
3 Performance Information;
Financial Highlights
4 Investment Objectives and Policies;
Description of each Corporation/Trust and Its
Shares
5 Expenses;
The Funds' Management and
Investment Adviser;
The Funds' Distributor;
6 Prospectus Highlights;
Description of each Corporation/Trust and
Its Shares;
Dividends and Other Distributions;
Shareholder Services;
Tax Treatment of Dividends and Other
Distributions
7 How You Can Invest in the Funds;
How Your Shareholder Account is
Maintained;
How Net Asset Value is Determined;
The Funds' Distributor;
Investing Through Tax-Deferred
Retirement Plans
8 How You Can Redeem Your Primary
Shares
9 Not Applicable
<PAGE>
Navigator American Leading Companies Trust
Navigator Balanced Trust
Form N-1A Cross Reference Sheet
Part A. Item No. Prospectus Caption
1 Cover Page
2 Expenses
3 Performance Information;
Financial Highlights
4 Investment Objectives
and Policies;
Description of each Corporation/Trust and Its
Shares
5 Expenses;
The Funds' Management and
Investment Adviser;
The Funds' Distributor;
6 Description of each Corporation/Trust and
Its Shares;
Dividends and Other Distributions;
Shareholder Services;
Tax Treatment of Dividends and Other
Distributions
7 How To Purchase and Redeem Shares;
How Your Shareholder Account is
Maintained;
How Net Asset Value is Determined;
The Funds' Distributor;
8 How To Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason American Leading Companies Trust--Primary Shares
Legg Mason Balanced Trust--Primary Shares
Navigator American Leading Companies Trust
Navigator Balanced Trust
Form N-1A Cross Reference Sheet
Statement of Additional
Part B. Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About
Investment Limitations
and Policies;
Portfolio Transactions and
Brokerage
14 The Funds' Directors and
Officers
15 The Funds' Directors and
Officers
16 The Funds' Investment Adviser;
The Funds' Distributor;
The Funds' Independent Accountants/
Auditors;
The Funds' Custodian and
Transfer and Dividend-
Disbursing Agent
17 Portfolio Transactions and
Brokerage
18 Not Applicable
19 Valuation of Fund Shares;
Additional Purchase and
Redemption Information
20 Additional Tax Information;
Tax-Deferred Retirement Plans
21 The Funds' Distributor;
Portfolio Transactions and
<PAGE>
Brokerage
22 Performance Information
23 Financial Statements
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 5
Performance Information 9
Investment Objectives and Policies 10
How You Can Invest in the Funds 20
How Your Shareholder Account is Maintained 21
How You Can Redeem Your Primary Shares 22 LEGG MASON
EQUITY
FUNDS
How Net Asset Value is Determined 23 VALUE TRUST, INC.
TOTAL RETURN TRUST, INC.
SPECIAL INVESTMENT
Dividends and Other Distributions 23 TRUST, INC.
AMERICAN LEADING
COMPANIES TRUST
Tax Treatment of Dividends and Other BALANCED TRUST
Distributions 24
Shareholder Services 24 PRIMARY SHARES
Investing Through Tax-Deferred
Retirement Plans 26
The Funds' Management and Investment
Adviser 27
PUTTING YOUR FUTURE FIRST
The Funds' Distributor 28
Description of each Corporation /Trust
and its Shares 29 PROSPECTUS
JULY 31, 1996
ADDRESSES
DISTRIBUTOR:
[LEGG MASON LOGO]
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036-1800
INDEPENDENT ACCOUNTANTS /AUDITORS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
[ ]
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ANY FUND OR ITS
DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY ANY FUND OR
BY THE PRINCIPAL UNDERWRITER IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
[RECYCLE LOGO] PRINTED ON RECYCLED PAPER
LMF-001
<PAGE>
LEGG MASON EQUITY FUNDS -- PRIMARY SHARES
LEGG MASON VALUE TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON AMERICAN LEADING COMPANIES
TRUST (A SERIES OF LEGG MASON INVESTORS TRUST, INC.)
LEGG MASON BALANCED TRUST
(A SERIES OF LEGG MASON INVESTORS TRUST, INC.)
This Prospectus sets forth concisely the information about the
funds that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the funds dated July 31, 1996 has been
filed with the Securities and Exchange Commission ("SEC") and, as
amended or supplemented from time to time, is incorporated herein by
this reference. The Statement of Additional Information is available
without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers
listed below).
Legg Mason Special Investment Trust, Inc. may invest up to 35% of
its net assets in lower-rated debt securities (commonly known as "junk
bonds"), and may invest up to 20% of its total assets in the
securities of companies involved in actual or anticipated
restructurings. Both types of investments involve an increased risk of
payment default and/or loss of principal.
Shares of Legg Mason Special Investment Trust, Inc. are not
registered for sale to investors in Missouri, and this Prospectus is
not an offer to investors residing in that State.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE
NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION 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.
PROSPECTUS
July 31, 1996
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
THE LEGG MASON VALUE TRUST, INC. ("Value Trust") is a diversified,
open-end management investment company seeking long-term growth of
capital. Value Trust invests principally in those equity securities which
its investment adviser, Legg Mason Fund Adviser, Inc. ("Adviser" or
"Manager"), believes are undervalued and therefore offer above-average
potential for capital appreciation. The Adviser believes that Value Trust
shares may be appropriate for investments by Individual Retirement
Accounts, Keogh Plans, Simplified Employee Pension Plans and other
qualified retirement plans (collectively referred to as "Retirement
Plans") whose principal investment objective is capital appreciation.
Other investors who seek capital appreciation may also invest in Value
Trust shares.
THE LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
diversified, open-end management investment company seeking capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. In attempting to
achieve this objective, the Adviser selects a diversified portfolio,
composed of dividend-paying common stocks and securities convertible into
common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common
stock which do not pay current dividends but which offer prospects for
capital appreciation and future income; and debt instruments of various
maturities. Total Return Trust may write covered put and call options. The
Adviser believes that Total Return Trust shares may be appropriate for
investments by Retirement Plans. Due to Total Return Trust's investment
objective, however, investors should not expect capital appreciation
comparable to funds devoted solely to growth, or income comparable to
funds devoted to maximum current income.
THE LEGG MASON SPECIAL INVESTMENT TRUST, INC. ("Special Investment
Trust") is a diversified, open-end management investment company seeking
capital appreciation. Special Investment Trust invests principally in
equity securities of companies with market capitalizations of less than
$2.5 billion which, in the opinion of the Adviser, have one or more of the
following characteristics: they are not closely followed by, or are out of
favor with, investors generally, and the Adviser believes they are
undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the
market value of the securities will increase; or they are involved in
actual or anticipated reorganizations or restructurings under the
Bankruptcy Code. Special Investment Trust also invests in the securities
of companies with larger capitalizations which have one or more of these
characteristics. Special Investment Trust may invest up to 35% of its
assets in debt securities rated below investment grade.
THE LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies") is a professionally managed portfolio seeking long-term
capital appreciation and current income consistent with prudent investment
risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Trust"), a diversified, open-end management
investment company. Under normal market conditions, American Leading
Companies will invest at least 75% of its total assets in a diversified
portfolio of dividend-paying common stocks of Leading Companies that have
market capitalizations of at least $2 billion. American Leading Companies'
investment adviser, Legg Mason Capital Management, Inc. ("LMCM"), defines
a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major
2
<PAGE>
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"). LMCM believes that American Leading Companies' shares
may be appropriate for investment by Retirement Plans.
THE LEGG MASON BALANCED TRUST ("Balanced Trust") is a professionally
managed portfolio seeking long-term capital appreciation and current
income in order to achieve an attractive total investment return
consistent with reasonable risk. Balanced Trust is a separate series of
the Trust. Under normal conditions, Balanced Trust will invest no more
than 75% of its assets in equity securities. The term "equity securities"
includes, without limitation, common stocks, and convertible securities of
domestic issuers, securities of closed-end investment companies and U.S.
dollar-denominated securities of foreign issuers, including American
Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs").
Balanced Trust will invest at least 25% of its portfolio in fixed income
securities. Bartlett & Co. ("Bartlett"), as investment adviser, believes
that Balanced Trust shares may be appropriate for investment by Retirement
Plans.
Value Trust, Total Return Trust, Special Investment Trust, American
Leading Companies and Balanced Trust (each separately referred to as a
"Fund" and collectively referred to as the "Funds") each may invest a
significant portion of its assets in debt securities, and may invest to
some extent in securities rated below investment grade. Each Fund may
invest in foreign securities, which would expose it to the possibility of
currency fluctuations and other risks of foreign investing. Each Fund may
use futures contracts and/or options for hedging or income purposes.
Of course, there can be no assurance that any Fund will achieve its
objective. See "Investment Objectives and Policies," page 10.
Each Fund offers two classes of shares, Primary Class ("Primary
Shares") and Navigator Class ("Navigator Shares"). Primary Shares offered
in this Prospectus are available to all investors except certain
institutions (see page 5). No initial sales charge is payable on
purchases, and no redemption charge is payable on sales of the Funds'
shares. Each Fund pays management fees to the Adviser/Manager and
distribution fees (Pri-
mary Shares only) to Legg Mason, as described in this Prospectus.
DISTRIBUTOR :
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER :
Legg Mason Fund Adviser, Inc. (for Value Trust, Total Return Trust and
Special Investment Trust)
Legg Mason Capital Management, Inc. (for American Leading Companies)
Bartlett & Co. (for Balanced Trust)
INITIAL PURCHASE:
$1,000 minimum, generally. Lower minimums for initial and subsequent
purchases apply for automatic investments. See page [ ].
SUBSEQUENT PURCHASE:
$100 minimum, generally.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Funds," page 16.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 21.
DIVIDENDS :
Declared and paid quarterly for Value Trust, Total Return Trust,
American Leading Companies and Balanced Trust. Declared and paid after the
end of each taxable year of Special Investment Trust. See "Dividends and
Other Distributions," page 19.
REINVESTMENT :
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth in the table are based on average net assets and annual Fund
operating expenses related to Primary Shares of Value Trust, Total Return
Trust, Special Investment Trust and American Leading Companies for the
year ended March 31, 1995. For Balanced Trust, which has no operating
history prior to the date of this Prospectus, other expenses are based on
estimates for the current fiscal period, and fees are adjusted for current
expense limits and fee waiver levels.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
<S> <C> <C> <C> <C> <C>
Management fees
(after fee
waivers) 0.78% 0.75% 0.79% 0.58% 0.65%
12b-1 fees
(after fee
waivers) 0.95% 1.00% 1.00% 1.00% 1.00%
Other expenses 0.12% 0.19% 0.16% 0.37% 0.50%
Total operating
expenses
(after fee
waivers) 1.85% 1.94% 1.95% 1.95% 2.15%
</TABLE>
(A) The Manager and Legg Mason have voluntarily agreed to waive the
management and 12b-1 fees and assume certain other expenses to the
extent necessary to limit total operating expenses relating to Primary
Shares (exclusive of taxes, brokerage commissions, interest and
extraordinary expenses) as follows: for American Leading Companies,
1.95% of average daily net assets indefinitely; and for Balanced Trust,
2.15% of average daily net assets until March 31, 1997. In the absence
of such waivers, the management fee, 12b-1 fee, other expenses and total
operating expenses relating to Primary Shares would have been as
follows: For American Leading Companies, 0.75%, 1.00%, 0.37% and 2.12%
of average net assets; and for Balanced Trust, 0.75%, 1.00%, 0.50% and
2.25% of average net assets.
For further information concerning the Funds' expenses, please see
"The Funds' Management and Investment Adviser" and "The Funds'
Distributor," pages 23-24. Because each Fund pays 12b-1 fees with respect
to Primary Shares, long-term investors in Primary Shares may pay more in
distribution expenses than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD").
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. As noted in the prior table, the Funds charge no redemption fees
of any kind.
<TABLE>
<CAPTION>
SPECIAL AMERICAN
TOTAL RETURN INVESTMENT LEADING
VALUE TRUST TRUST TRUST COMPANIES BALANCED TRUST
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $19 $20 $20 $20 $22
3 Years $58 $61 $61 $61 $67
5 Years $100 $105 $105 $105 N/A
10 Years $217 $226 $227 $227 N/A
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT
THE PROJECTED OR ACTUAL PERFORMANCE OF, PRIMARY SHARES OF THE FUNDS. THE
ABOVE TABLES AND EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The actual expenses attributable to Primary Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which the Manager and/or
Legg Mason waive their fees and reimburse all or a portion of each Fund's
expenses and the extent to which Primary Shares incur variable expenses,
such as transfer agency costs.
4
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. Navigator Shares are currently offered for sale only to
institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own monies and monies for which they act in a fiduciary
capacity, to clients of Legg Mason Trust Company ("Trust Company") for
which Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg Mason
Profit Sharing Plan and Trust. Navigator Shares pay no 12b-1 distribution
fees and may pay lower transfer agency fees. The information for Primary
Shares reflects the 12b-1 fees paid by that Class.
The financial highlights tables that follow have been derived from each
Fund's financial statements which have been audited for Value Trust, Total
Return Trust and Special Investment Trust by Coopers & Lybrand L.L.P.,
independent accountants and for American Leading Companies by [ ],
independent auditors. Each Fund's financial statements for the year ended
March 31, 1995 and the report of Coopers & Lybrand L.L.P. or [ ]
thereon are included in that Fund's annual report and are incorporated by
reference in the Statement of Additional Information. The annual report for
each Fund is available to shareholders without charge by calling your Legg
Mason or affiliated investment executive or Legg Mason's Funds Marketing
Department at 800-822-5544. As of the date of this Prospectus, Balanced
Trust has not commenced operations and has not issued any annual reports.
VALUE TRUST (A)
<TABLE>
<CAPTION>
NAVIGATOR CLASS PRIMARY CLASS
<S> <C> <C> <C> <C> <C> <C> <C>
Years Ended March 31, 1996 1995(B) 1996 1995 1994 1993 1992
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $18.76 $ $18.50 $17.81 $15.69 $13.38
Net investment income .12 .10 .08 .18 .25
Net realized and
unrealized
gain (loss) on
investments 1.40 1.70 .92 2.12 2.34
Total from investment
operations 1.52 1.80 1.00 2.30 2.59
Distributions to
shareholders from:
Net investment
income (.01) (.05) (.11) (.18) (.28)
Net realized gain on
investments -- (.04) (.20) -- --
Net asset value, end
of period $20.27 $20.21 $18.50 $17.81 $15.69
Total return 8.11%(C) 9.77% 5.65% 14.76% 19.53%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.82%(D) 1.81%(E) 1.82%(E) 1.86%(E) 1.90%(E)
Net investment
income 1.8%(D) 0.5% 0.5% 1.1% 1.7%
Portfolio turnover
rate 20.1% 20.1% 25.5% 21.8% 39.4%
Net assets, end of
period
(in thousands) $36,519 $986,325 $912,418 $878,394 $745,833
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31, 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $14.19 $14.16 $12.14 $15.07 $15.34
Net investment income .32 .33 .21 .21 .21
Net realized and
unrealized
gain (loss) on
investments (.74) .77 1.99 (1.54) 1.11
Total from investment
operations (.42) 1.10 2.20 (1.33) 1.32
Distributions to
shareholders from:
Net investment
income (.36) (.33) (.18) (.20) (.20)
Net realized gain on
investments (.03) (.74) -- (1.40) (1.39)
Net asset value, end
of period $13.38 $14.19 $14.16 $12.14 $15.07
Total return (2.88)% 7.74% 18.33% (8.42)% 9.89%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 1.90%(E) 1.86%(E) 1.96%(E) 1.97%(E) 2.00%(E)
Net investment
income 2.5% 2.2% 1.6% 1.5% 1.5%
Portfolio turnover
rate 38.8% 30.7% 29.7% 47.8% 42.5%
Net assets, end of
period
(in thousands) $690,053 $808,780 $720,961 $665,689 $819,348
</TABLE>
(A) ALL SHARE AND PER SHARE FIGURES REFLECT THE 2-FOR-1 STOCK SPLIT EFFECTIVE
JULY 29, 1991.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
(E) INCLUDES DISTRIBUTION FEE OF 1.0% THROUGH MAY 11, 1987 AND 0.95%
THEREAFTER.
5
<PAGE>
TOTAL RETURN TRUST
<TABLE>
<CAPTION>
NAVIGATOR CLASS PRIMARY CLASS
<S> <C> <C> <C> <C> <C> <C>
Years Ended March 31, 1996 1995(A) 1996 1995 1994 1993
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period $12.66 $ $13.54 $13.61 $11.64
Net investment
income .15 .33 .36 .39(B)
Net realized and
unrealized
gain (loss) on
investments .25 (.19) .24 1.89
Total from
investment
operations .40 .14 .60 2.28
Distributions to
shareholders
from:
Net investment
income (.06) (.29) (.33) (.31)
Net realized
gain on
investments (.17) (.60) (.34) --
Net asset value,
end of
period $12.83 $12.79 $13.54 $13.61
Total return(C) 2.28% 1.09% 4.57% 19.88%
RATIOS/SUPPLEMENTAL
DATA:
Ratios to average
net assets:
Expenses 0.86%(D) 1.93%(E) 1.94%(E) 1.95%(B,E)
Net investment
income 3.6%(D) 2.5% 2.7% 3.1%(C)
Portfolio
turnover rate 61.9% 61.9% 46.6% 40.5%
Net assets, end
of period (in
thousands) $4,823 $194,767 $184,284 $139,034
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31, 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period $9.64 $10.03 $10.06 $8.86 $11.63 $10.78
Net investment
income .34 .28 .21 .15 .18 .18
.18
Net realized and
unrealized
gain (loss) on
investments 1.91 (.31) .15 1.18 (1.35) .90
Total from
investment
operations 2.25 (.03) .36 1.33 (1.17) 1.08
Distributions to
shareholders
from:
Net investment
income (.25) (.29) (.21) (.13) (.21) --
Net realized
gain on
investments -- (.07) (.18) -- (1.39) (.04)
Net asset value,
end of
period $11.64 $9.64 $10.03 $10.06 $8.86 $11.63
Total return(C) 23.59% (0.05)% 3.48% 15.16% (10.17)% 10.24%
RATIOS/SUPPLEMENTAL
DATA:
Ratios to average
net assets:
Expenses 2.34%(E) 2.50%(E) 2.39%(E) 2.40%(E) 2.30%(E) 2.40%(E)
Net investment
income 3.1% 3.1% 2.0% 1.6% 1.9% 1.7%
Portfolio
turnover rate 38.4% 62.1% 39.2% 25.7% 50.1% 82.7%
Net assets, end
of period (in
thousands) $52,360 $22,822 $26,815 $30,102 $35,394 $47,028
</TABLE>
(A) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(B) NET OF FEES WAIVED BY THE ADVISER IN EXCESS OF AN INDEFINITE VOLUNTARY
EXPENSE LIMITATION OF 1.95% BEGINNING NOVEMBER 1, 1992.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
(E) INCLUDES DISTRIBUTION FEE OF 1.0%.
6
<PAGE>
SPECIAL INVESTMENT TRUST
<TABLE>
<CAPTION>
NAVIGATOR CLASS PRIMARY CLASS
Years Ended March 31, 1996 1995(A) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of period $19.11 $ $21.56 $17.91 $17.00 $14.59
Net investment
income .07 (.06) (.11) .03 .12
Net realized and
unrealized
gain (loss) on
investments .85 (1.31) 3.93 1.66 2.83
Total from
investment
operations .92 (1.37) 3.82 1.69 2.95
Distributions to
shareholders
from:
Net investment
income -- -- (.03) -- (.14)
Net realized gain
on
investments -- (.23) (.14) (.78) (.40)
Net asset value,
end of
period $20.03 $19.96 $21.56 $17.91 $17.00
Total return(C) 4.81% (6.37)% 21.35% 10.50% 20.46%
RATIOS/SUPPLEMENTAL
DATA:
Ratios to average
net assets:
Expenses 0.90%(D) 1.93%(E) 1.94%(E) 2.0%(E) 2.10%(E)
Net investment
income 1.0%(D) (0.2)% (0.6)% 0.2% 0.8%
Portfolio turnover
rate 27.5% 27.5% 16.7% 32.5% 56.9%
Net assets, end of
period (in
thousands) $26,123 $612,093 $565,486 $322,572 $201,772
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31, 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of period $13.58 $11.84 $10.14 $12.80 $11.53
Net investment
income .18 .12 .06(B) .13(B) --(B)
Net realized and
unrealized
gain (loss) on
investments 2.42 1.70 1.65 (1.825) 1.51
Total from
investment
operations 2.60 1.82 1.71 (1.695) 1.51
Distributions to
shareholders
from:
Net investment
income (.27) (.08) (.01) (.075) (.02)
Net realized gain
on
investments (1.32) -- -- (.89) (.22)
Net asset value,
end of
period $14.59 $13.58 $11.84 $10.14 $12.80
Total return(C) 21.46% 15.37% 16.99% (14.18)% 13.39%
RATIOS/SUPPLEMENTAL
DATA:
Ratios to average
net assets:
Expenses 2.30%(E) 2.30%(E) 2.50%(E) 2.50%(E) 2.50%(E)
Net investment
income 1.4% 1.0% 0.7% 1.0% --
Portfolio turnover
rate 75.6% 115.9% 122.4% 158.9% 77.0%
Net assets, end of
period (in
thousands) $106,770 $68,240 $44,450 $43,611 $55,822
</TABLE>
(A) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(B) EXCLUDES INVESTMENT ADVISORY FEES AND OTHER EXPENSES IN EXCESS OF A 2.5%
ADVISER-IMPOSED EXPENSE LIMITATION.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
(E) INCLUDES DISTRIBUTION FEE OF 1.0%.
7
<PAGE>
AMERICAN LEADING COMPANIES
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended March 31, 1996 1995 1994(A)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $9.69 $10.00
Net investment income(B) 0.12 0.059
Net realized and unrealized gain (loss) on investments 0.48 (0.344)
Total from investment operations 0.60 (0.285)
Distributions to shareholders from net investment income (0.11) (0.025)
Net asset value, end of period $10.18 $9.69
Total return(C) 6.24% (2.86)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 1.95% 1.95%(D)
Net investment income(B) 1.21% 1.14%(D)
Portfolio turnover rate 30.5% 21.0%(D)
Net assets, end of period (in thousands) $59,985 $55,022
</TABLE>
(A) FOR THE PERIOD SEPTEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1994.
(B) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 1.95% OF
AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE MANAGER, THE
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD SEPTEMBER 1,
1993 TO MARCH 31, 1994 AND THE YEAR ENDED MARCH 31, 1995 WOULD HAVE BEEN
2.28% AND 2.12%, RESPECTIVELY.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
8
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class
of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
CUMULATIVE TOTAL RETURN shows the fund's performance over a specific
period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, Value Trust's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and Standard & Poor's 500 Stock Composite Index
("S&P Stock Index"), two unmanaged indexes of widely held common stocks.
No adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in each
Fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Returns of each Fund would
have been lower if the Adviser and/or Legg Mason had not waived certain
fees for the fiscal years ended March 31, as follows: 1989 through 1995
for Value Trust; 1986 through 1995 for Total Return Trust and Special
Investment Trust; and 1994 through 1995 for American Leading Companies. As
of the date of this Prospectus, Balanced Trust has no operating history.
Performance figures reflect past performance only and are not intended
to and do not indicate future performance. Further information about each
Fund's performance is contained in its Annual Report to Shareholders,
which may be obtained without charge by calling your Legg Mason or
affiliated investment executive or Legg Mason's Funds Marketing Department
at 800-822-5544.
Total returns as of March 31, 1995 were as follows:
<TABLE>
<CAPTION>
SPECIAL AMERICAN
TOTAL RETURN INVESTMENT LEADING VALUE LINE S&P STOCK
CUMULATIVE ANNUAL TOTAL RETURN VALUE TRUST TRUST TRUST COMPANIES INDEX INDEX
<S> <C> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +6.24% +5.12% +15.54%
Five Years +54.50 +56.57 +83.68 N/A +38.57 +71.50
Ten Years +177.23 N/A N/A N/A +102.99 +284.58
Life of Class +584.27(A) +99.17(B) +178.15(C) +3.20(D) +244.66(A) +586.40(A)
Navigator Class:
Life of Class(E) +8.11 +2.28 +4.81 N/A +6.37 +11.37
</TABLE>
<TABLE>
<CAPTION>
SPECIAL AMERICAN
TOTAL RETURN INVESTMENT LEADING VALUE LINE S&P STOCK
AVERAGE ANNUAL TOTAL RETURN VALUE TRUST TRUST TRUST COMPANIES INDEX INDEX
<S> <C> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +6.24% +5.12% +15.54%
Five Years +9.09 +9.38 +12.93 N/A +6.74 +11.39
Ten Years +10.73 N/A N/A N/A +7.34 +14.42
Life of Class +16.00(A) +7.64(B) +11.69(C) +2.02(D) +10.02(A) +16.03(A)
</TABLE>
(A) Inception of Value Trust -- April 16, 1982.
(B) Inception of Total Return Trust -- November 21, 1985.
(C) Inception of Special Investment Trust -- December 30, 1985.
(D) Inception of American Leading Companies -- September 1, 1993.
(E) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
The S&P Stock Index and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P Stock Index and Value Line Index figures do not include
brokerage commissions and other costs of investing.
9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. The Adviser
believes that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
the Adviser believes the return on certain debt securities may equal or
exceed the return on equity securities. The Fund may invest in debt
securities of both foreign and domestic issuers of any maturity without
regard to rating, and may invest its assets in such securities without
regard to a percentage limit. Although not a fundamental policy subject to
shareholder vote, the Adviser currently anticipates that under normal
market conditions, the Fund will invest no more than 25% of its total
assets in long-term debt securities. Up to 10% of its total assets may be
invested in debt securities rated below investment grade, i.e., rated
lower than BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, deemed by the Adviser to be of
comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may
10
<PAGE>
invest its assets in such securities without regard to a percentage limit.
The Adviser currently anticipates that under normal market conditions, the
Fund will invest no more than 50% of its total assets in intermediate-term
and long-term debt securities, and no more than 5% of its total assets in
debt securities rated below investment grade, i.e., rated lower than BBB
by S&P or Baa by Moody's or, if unrated, deemed by the Adviser to be of
comparable quality.
SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities of companies with market capitalizations of less than $2.5
billion which the Adviser believes have one or more of the following
characteristics:
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. Equity securities of companies involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. No more than
20% of the Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
may not be widely traded, and that the Fund's position in such securities
may be substantial in relation to the market for such securities.
Accordingly, it may be difficult for the Fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact
11
<PAGE>
that the market prices of such securities are subject to sudden and
erratic market movements and above-average price volatility. Such
securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
assets may be invested in debt securities rated below BBB by S&P, or below
Baa by Moody's, and unrated securities deemed by the Adviser to be of
comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be rated in one of the four highest rating categories by
S&P or Moody's or, if unrated by S&P or Moody's, deemed by the Adviser to
be of comparable quality.
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMCM
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMCM's goal is to invest in companies having what LMCM believes is a
reasonable price/earnings ratio, and it will favor those companies with
well established histories of dividends and dividend growth rates. The
Fund may also invest in companies having capitalizations above or below $2
billion which LMCM believes show strong potential for future market
leadership, and in companies which LMCM believes, because of corporate
restructuring or other changes, are undervalued based on their potential
for future growth. There is always a risk that LMCM will not properly
assess the potential for an issuer's future growth, or that an issuer will
not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. Under normal circumstances, the Fund
expects to own a minimum of 35 different securities. The Fund may also
invest in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income. The Fund may invest in when-issued
securities, which may involve additional risks.
During periods when LMCM believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMCM to be of comparable quality.
12
<PAGE>
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.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. The Fund will invest in
a combination of equity, debt and money market securities in attempting to
achieve its objective. Under normal conditions, the Fund will invest no
more than 75% of its assets in equity securities. Bartlett will emphasize
investments in dividend-paying equity securities that, in the opinion of
Bartlett, offer the potential for long-term growth, and in common stocks
or securities convertible into common stock that do not pay current
dividends but offer prospects for capital appreciation and future income.
The Fund generally will invest at least 25% of its portfolio in fixed
income securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations, and mortgage-related securities;
securities of financial services companies; Treasury bills, notes, bonds
and other obligations of the U.S. Government, its agencies and
instrumentalities; commercial paper and other money market instruments
rated not less than A-1, P-1 or F-1 by Moody's, S&P or Fitch Investors
Services ("Fitch"), respectively; and repurchase agreements. No more than
5% of the Fund's total assets may be invested in fixed income or
convertible securities rated below BBB or Baa at the time of purchase, or
comparable unrated securities. The Fund may invest in securities of any
maturity, but, under normal circumstances, expects to maintain its
portfolio of fixed income securities so as to have an average
dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity
and debt securities. This approach attempts to "balance" the potential
for growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common
and preferred stocks and the remaining 40% in various fixed income
securities. These percentages may vary in attempting to increase returns
or reduce risk.
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and exchange-traded futures contracts on stock
indices and options thereon. No more than 15% of the Fund's net assets may
be invested in illiquid securities. The Fund may also engage in reverse
repurchase agreements.
The portfolio turnover rate for the equity portion of the Fund's
portfolio is estimated to be 50% and the portfolio turnover rate for the
fixed income portion is estimated to be 120%. The Fund's portfolio
turnover rate is not expected to exceed 75%.
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements and high-quality short-term debt
securities. A repurchase agreement is an agreement under which either U.S.
government obligations or high-quality liquid debt securities are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for each Fund by State Street Bank and
Trust Company ("State Street"), the Funds' custodian, as collateral until
resold and will be supplemented by additional collateral if necessary to
maintain a total value equal to or in excess of the value of the
repurchase agreement. Each Fund bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, which may decline in value in the interim. The
Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust, Total Return Trust and Special Investment Trust) or 15% (for
American Leading Companies and Balanced Trust) of its net assets would be
invested in such agreements and other illiquid investments.
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its total assets.
For further information concerning securities lending, see the Statement
of Additional Information.
13
<PAGE>
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in to same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness that are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Value Trust, Total Return Trust and Special Investment Trust do not
currently expect to invest more than 5% of net assets in preferred stock.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established
in the convertible security's governing instrument.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA") ); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Banks
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Federal National Mortgage Association ("FNMA")
securities); and (4) solely the creditworthiness of the issuer (e.g.,
Federal Home Loan Mortgage Corporation ("FHLMC") securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic
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issuers. Moreover, securities of many foreign issuers may be less liquid
and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation, confiscatory taxation, withholding taxes and
limitations on the use or removal of funds or other assets.
The Funds may also invest in ADRs, which are securities issued by
domestic banks evidencing their ownership of specific foreign securities.
ADRs may be sponsored or unsponsored; issuers of securities underlying
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. Accordingly, there may be less information
available about such issuers than there is with respect to domestic
companies and issuers of securities underlying sponsored ADRs. Although
ADRs are denominated in U.S. dollars, the underlying security often is
not; thus, the value of the ADR may be subject to exchange controls and
variations in the exchange rate. Balanced Trust may also invest in GDRs,
which are receipts, often denominated in U.S. dollars, issued by either a
U.S. or non-U.S. bank evidencing its ownership of the underlying foreign
securities.
Although not a fundamental policy subject to shareholder vote, the
adviser currently anticipates that Value Trust, Total Return Trust and
Special Investment Trust will each invest no more than 25% of its total
assets in foreign securities. Bartlett currently anticipates that Balanced
Trust will not invest more than 10% of its total assets in foreign
securities, either directly or through ADRs or GDRs. American Leading
Companies may not invest more than 25% of its total assets in foreign
securities, either directly or through ADRs.
ILLIQUID SECURITIES
Value Trust, Total Return Trust, and Special Investment may each
invest up to 10% of its net assets in illiquid securities. American
Leading Companies and Balanced Trust may each invest up to 15% of its net
assets in illiquid securities. Illiquid securities are securities that
cannot be expected to be sold within seven days at approximately the price
at which they are valued. Due to the absence of an active trading market,
a Fund may have difficulty valuing or disposing of illiquid securities
promptly. Securities that are freely tradeable in their country of origin
or in their principal market are not considered illiquid securities even
if they are not registered for sale in the U.S.
WHEN-ISSUED SECURITIES
Each Fund may enter into commitments to purchase securities on a
when-issued basis. A Fund may purchase when-issued securities because
such securities are often the most efficiently priced and have the best
liquidity in the bond market. As with the purchase of all securities,
when a Fund purchases securities on a when-issued basis, it assumes the
risks of ownership, including the risk of price fluctuation, at the time
of purchase, not at the time of receipt. However, a Fund does not have to
pay for the obligations until they are delivered to it, which is normally
7 to 15 days later, but could be considerably longer in the case of some
mortgage-backed securities. To meet that payment obligation, that Fund
will set aside cash or liquid, high-quality debt securities in an account
with its custodian equal to the payment that will be due. Depending on
market conditions, a Fund's when-issued purchases could cause its net
asset value to be more volatile, because they will increase the amount by
which that Fund's total assets, including the value of the when-issued
securities held by it, exceed its net assets. A Fund may sell the
securities subject to a when-issued purchase, which may result in a gain
or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. A Fund
may sell an interest rate futures contract to offset price changes of debt
securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk
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and return characteristics are similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be limited to the amount of
the premium it received. If stock prices remain the same over time, it is
likely that the Fund will also profit, because it should be able to close
out the option at a lower price. If stock prices fall, the Fund would
expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying index, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, the Fund would give up
some ability to participate in security price increases when writing call
options.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the adviser in managing the Funds'
portfolios. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate its hedged position. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract involves an obligation to purchase or
sell a specific amount of a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. By entering into
a foreign currency contract, a Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. A Fund may enter into these contracts for the
purpose of hedging against risk arising from its investment in
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securities denominated in foreign currencies or when it anticipates
investing in such securities. Forward currency contracts involve certain
costs and risks, including the risk that anticipated currency movements
will not be accurately predicted, causing a Fund to sustain losses on
these contracts.
AMERICAN LEADING COMPANIES:
The Fund may sell covered call options on any security in which it is
permitted to invest for the purpose of enhancing income. A call option
gives the purchaser the right to purchase the underlying security from the
Fund at a specified price (the "strike price") during a specified period.
A call option is "covered" if, at all times the option is outstanding, the
Fund holds the underlying security or a right to obtain that security at
no additional cost. The Fund may purchase a call option for the purpose of
closing out a short position in an option.
The use of options involves certain risks. These risks include: (1)
the fact that use of these instruments can reduce the opportunity for
gain; (2) dependence on LMCM's ability to predict movements in the prices
of individual securities, fluctuations in the general securities markets
or in market sectors; (3) imperfect correlation between movements in the
price of options and movements in the price of the underlying securities;
(4) the possible lack of a liquid secondary market for a particular option
at any particular time; (5) the possibility that the use of cover
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other
short-term obligations; and (6) the possible need to defer closing out
positions in these instruments in order to avoid adverse tax consequences.
There can be no assurance that the use of options by the Fund will be
successful. As a non-fundamental policy, the Fund will not sell a covered
call option if, as a result, the value of the portfolio securities
underlying all outstanding covered call options would exceed 25% of the
value of the equity securities held by the Fund. See the Statement of
Additional Information for a more detailed discussion of options
strategies.
BALANCED TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. Certificates of Participation are participations in municipal lease
obligations or installment sales contracts. Each certificate represents a
proportionate interest in or right to the lease purchase payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed.
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IDBs and PABs are usually revenue bonds and are not payable from the
unrestricted revenues of the issuer. The credit quality of IDBs and PABs
is usually directly related to the credit standing of the corporate user
of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit a Fund's ability to realize the appreciation in the
value of such securities that would otherwise accompany declining interest
rates. An increase in mortgage prepayments could cause the Fund to incur a
loss on a mortgage-related security that was purchased at a premium. On
the other hand, a decrease in the rate of prepayments, resulting from an
increase in market interest rates, among other causes, may extend the
effective maturities of mortgage-related securities, increasing their
sensitivity to changes in market interest rates. In determining the
average maturity of the fixed income portion of the Fund, Bartlett must
apply certain assumptions and projections about the maturity and
prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, issues
mortgage participation certificates ("PCs") which represent interests in
mortgages from FHLMC's national portfolio. The mortgage loans in FHLMC's
portfolio are not government backed; rather, the loans are either
uninsured with loan-to-value ratios of 80% or less, or privately insured
if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-
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through certificates issued by FNMA ("FNMA certificates") are guaranteed
as to timely payment of principal and interest by FNMA, not the U.S.
Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. Although full payoff of
each class of bonds is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of
an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, the
Adviser/LMCM/Bartlett reviews and monitors the creditworthiness of each
issuer and issue. The Adviser/LMCM/Bartlett also analyzes interest rate
trends and specific developments which it believes may affect individual
issuers.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER RATED DEBT SECURITIES
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher
current yield than that provided by higher grade issues, but also involve
higher risks. Debt securities rated D by S&P are in default. However, debt
securities, regardless of their ratings, generally have a higher priority
in the issuer's capital structure than do equity securities.
Lower rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
The market for lower rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on lower
rated debt securities rose dramatically, reflecting the risk that holders
of such securities could lose a
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substantial portion of their value as a result of the issuers' financial
restructuring or default. There can be no assurance that such declines
will not recur.
The market for lower rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the adviser to determine, to
the extent possible, that the planned investment is sound. Each Fund does
not intend to invest in securities that are in default, or where, in the
adviser's opinion, default appears likely.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Other Fund policies, unless described as fundamental, can be
changed by action of the Board of Directors.
The fundamental restrictions applicable to American Leading Companies
include a prohibition on investing 25% or more of its total assets in the
securities of issuers having their principal business activities in the
same industry (with the exception of securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements with respect thereto).
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds 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 Funds 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 Funds through an Individual
Retirement Account ("IRA"), Self-Employed Individual Retirement Plan
("Keogh Plan"), Simplified Employee Pension Plan ("SEP") or other
qualified retirement plan.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds, is $1,000, and the minimum investment for each purchase of
additional shares is $100, except as noted below. Initial and subsequent
investments in an IRA established on behalf of a nonworking spouse of a
shareholder who has an IRA invested in the Funds require a minimum amount
of only $250. However, once an account is established, the minimum amount
for subsequent investments will be waived if an investment in an IRA or
similar plan will bring the investment for the year to the maximum amount
permitted under the Internal
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Revenue Code of 1986, as amended ("Code"). For those investing through the
Funds' Future First Systematic Investment Plan, payroll deduction plans
and plans involving automatic payment of funds from financial institutions
or automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. Each Fund may change
these minimum amount requirements at its discretion.
Primary Shares purchased on behalf of an IRA, Keogh Plan, SEP or other
qualified retirement plan will be processed at the net asset value next
determined after Legg Mason's Funds Processing receives a check for the
amount of the purchase. Other Primary Share purchases will be processed at
the net asset value next determined after your Legg Mason or affiliated
investment executive has received your order; payment must be made within
three business days to Legg Mason. Orders received by your Legg Mason or
affiliated investment executive before the close of regular trading on the
New York Stock Exchange ("Exchange") (normally 4:00 p.m. Eastern time)
("close of the Exchange") on any day the Exchange is open will be executed
at the net asset value determined as of the close of the Exchange on that
day. Orders received by your Legg Mason or affiliated investment executive
after the close of the Exchange or on days the Exchange is closed will be
executed at the net asset value determined as of the close of the Exchange
on the next day the Exchange is open. See "How Net Asset Value is
Determined," page 19. Each Fund reserves the right to reject any order for
its shares or to suspend the offering of shares for a period of time.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. THROUGH YOUR LEGG MASON OR AFFILIATED INVESTMENT EXECUTIVE
Shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to open an
account for you, explain to you the shareholder services available from
the Funds and answer any questions you may have. After you have
established a Legg Mason or affiliated account, you can order shares from
your investment executive in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Funds of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to prepare a check each month drawn
on your checking account. Please contact any Legg Mason or affiliated
investment executive for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated investment executive.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. No certificates are issued
unless you specifically request them in writing. Shareholders who elect to
receive certificates can redeem their shares only by mail. Certificates
will be issued in full shares only. No certificates will be issued for
shares of any Fund prior to 10 business days after purchase of such shares
by check unless the Fund can be reasonably assured during that period that
payment for the purchase of such shares has been collected. Shares may not
be held in, or transferred to, an account with any brokerage firm other
than Legg Mason or its affiliates.
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HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated investment executive an order for
redemption of your shares. Please have the following information ready
when you call: the name of the Fund, the number of shares to be redeemed
and your shareholder account number. Second, you may send a written
request for redemption to: [insert complete Fund name], c/o Legg Mason
Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated investment executive before the close of
the Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Funds, for redemption at the net asset value
per share determined as of the close of the Exchange on that day. Requests
for redemption received by your Legg Mason or affiliated investment
executive after the close of the Exchange will be executed at the net
asset value determined as of the close of the Exchange on its next trading
day. A redemption request received by your Legg Mason or affiliated
investment executive may be treated as a request for repurchase and, if it
is accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason brokerage
account two days after trade date. However, each Fund reserves the right
to take up to seven days to make payment upon redemption if, in the
judgment of the Adviser, the respective Fund could be adversely affected
by immediate payment. (The Statement of Additional Information describes
several other circumstances in which the date of payment may be postponed
or the right of redemption suspended.) The proceeds of your redemption or
repurchase may be more or less than your original cost. If the shares to
be redeemed or repurchased were paid for by check (including certified or
cashier's checks), within 10 business days of the redemption or repurchase
request, the proceeds will not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
A redemption request will be considered to be received in "good order"
only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed, the complete Fund name and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Legg Mason or
affiliated investment executive.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do not follow reasonable procedures. Telephone redemption privileges
are available automatically to all shareholders unless certificates have
been issued. Shareholders who do not wish to have telephone redemption
privileges should call their 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 Client Services
for processing. This form can be obtained through your Legg Mason or
affiliated investment
22
<PAGE>
executive or Legg Mason Client Services in Baltimore, Maryland. Upon
receipt of your form, your shares will be redeemed at the net asset value
per share determined as of the next close of the Exchange.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days to
make an additional investment to avoid having your account closed.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Securities owned by each Fund for which
market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by the Adviser/LMCM/Bartlett to be the primary market.
Securities with remaining maturities of 60 days or less are valued at
amortized cost. Each Fund will value its foreign securities in U.S.
dollars on the basis of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Primary Shares out of its
investment company taxable income (which consists of net investment
income, any net short-term capital gain and any net gains from certain
foreign currency transactions) attributable to those shares. Value Trust,
Total Return Trust, American Leading Companies and Balanced Trust declare
and pay dividends from net investment income quarterly; they pay dividends
from any net short-term capital gains and net gains from foreign currency
transactions annually. Special Investment Trust declares and pays
dividends from its investment company taxable income following the end of
each taxable year. Each Fund also distributes substantially all of its net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) after the end of the taxable year in which the gain is
realized. A second distribution of net capital gain may be necessary in
some years to avoid imposition of the excise tax described under the
heading "Additional Tax Information" in the Statement of Additional
Information. Dividends and other distributions, if any, on shares held in
an IRA, Keogh Plan, SEP or other qualified retirement plan and by
shareholders maintaining a Systematic Withdrawal Plan generally are
reinvested in Primary Shares of the distributing Fund on the payment
dates. Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of
the distributing Fund;
2. Receive dividends in cash and other distributions in Primary Shares
of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Legg Mason
fund. Please contact your investment executive for additional information
about this option.
If no election is made, both dividends and other distributions are
credited to your Fund account in Primary Shares at the net asset value of
the shares determined as of the close of the Exchange on the reinvestment
date. Shares received pursuant to any of the first three (reinvestment)
elections above also are credited to your account at that net asset value.
Shareholders electing to receive dividends or other distributions in cash
will be sent a check or will have their Legg Mason account credited after
the payment date. You may elect at any time to change your option
23
<PAGE>
by notifying the applicable Fund in writing at: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476. Your election must be received at least 10 days before the
record date in order to be effective for dividends and other distributions
paid to shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to qualify (in the case of Balanced Trust) or 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 and net capital gain that is
distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Primary 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 each Fund's
net capital gain (whether paid in cash or reinvested in Primary Shares),
when designated as such, are taxable to those shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Primary Shares for shares of any other Legg Mason
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege," page 21. If shares of a Fund are
purchased within 30 days before or after redeeming other shares of the
same Fund (regardless of class) at a loss, all or part of that loss will
not be deductible and instead will increase the basis of the newly
purchased shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Funds, depending on the laws of your home
state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital gain
distributions and shares purchased through the Future First Systematic
Investment Plan or through automatic investments). An account statement
will be sent to you monthly unless there has been no activity in the
account or you are purchasing shares only through the Future First
Systematic Investment Plan or through automatic investments, in which case
an account statement will be sent quarterly. Reports will be sent to each
Fund's shareholders at least semiannually showing its
24
<PAGE>
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its respective independent
accountants/auditors.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Legg Mason
or affiliated investment executive for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence:
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 $2.5 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 American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Legg Mason Balanced Trust
A mutual fund seeking long-term capital appreciation and current
income in order to achieve an attractive total investment return with
reasonable risk.
Legg Mason International Equity Trust
A mutual fund seeking maximum long-term total return, by investing
primarily in common stocks of companies located outside the United States.
Legg Mason Emerging Markets Trust
A mutual fund seeking long-term capital appreciation, by investing
primarily in equity securities of companies based in or doing business in
emerging market countries.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total return consistent with prudent investment
risk, by investing principally in debt securities issued or guaranteed by
foreign governments, the U.S. Government, their agencies,
instrumentalities or political subdivisions.
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
25
<PAGE>
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, through
investment in a diversified portfolio consisting primarily of investment
grade debt securities.
Legg Mason High Yield Portfolio
A mutual fund seeking primarily a high level of current income and
secondarily, capital appreciation, by investing principally in
lower-rated, fixed-income securities.
Legg Mason Maryland Tax-Free Income Trust (A)
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)
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,B)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
(A) Shares of these funds are sold with an initial sales charge.
(B) Effective August 1, 1995 through July 31, 1996, the sales charge will
be waived for all new accounts and subsequent investments into
existing accounts. After July 31, 1996, any exchanges of these shares
will be subject to the full sales charge, if any, since no sales
charge will have been paid on shares purchased during this period.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a fund on which the same
or higher initial sales charge previously was paid. There is no charge for
the exchange privilege, but each Fund reserves the right to terminate or
limit the exchange privilege of any shareholder who makes more than four
exchanges from that Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your 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 Primary Shares," page
18. The other factors relating to telephone redemptions described in that
section apply also to telephone exchanges. Please read the prospectus for
the other fund(s) carefully before you invest by exchange. Each Fund
reserves the right to modify or terminate the exchange privilege upon 60
days' notice to shareholders.
There is no assurance the money market funds will be able to maintain
a $1.00 share price. None of the funds is insured or guaranteed by the
U.S. Government.
INVESTING THROUGH TAX-DEFERRED RETIREMENT PLANS
Investors who are considering establishing an IRA, Keogh Plan, SEP or
other qualified retirement plan may wish to consult their attorneys or tax
advisers with respect to individual tax questions. Your Legg Mason or
affiliated investment executive can make available to you forms of plans.
The option of investing in these plans through regular payroll deductions
may be arranged with Legg Mason and your employer. Additional information
with respect to these plans is available upon request from any Legg Mason
or affiliated investment executive.
26
<PAGE>
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
ADVISER
Pursuant to separate advisory agreements with Value Trust, Total
Return Trust and Special Investment Trust (each an "Advisory Agreement"),
which were approved by each respective Fund's Board of Directors, the
Adviser, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to each of those Funds. The Adviser administers and
acts as the portfolio manager for each Fund and has responsibility for the
actual investment management of the Funds, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security. The Adviser acts as adviser, manager or consultant to seventeen
investment company portfolios which had aggregate assets under management
of approximately $5.6 billion as of April 30, 1996. The Adviser's address
is 111 South Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed Value Trust from its inception in
1982 to November 1990, when he assumed primary responsibility for the
day-to-day management. Mr. Miller has been responsible for the day-to-day
management of Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of Total Return Trust on January 1, 1992.
Mr. Miller has also been primarily responsible for the day-to-day
management of Special Investment Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser. Mr.
Miller has been employed by the Adviser since 1982. Mrs. Dennin is a Vice
President of the Adviser and has been employed by the Adviser since 1985.
From 1985 through 1991, Mrs. Dennin analyzed various industries for the
Adviser including financial services, retail, apparel and insurance.
The Adviser receives for its services a management fee from each Fund
attibutable to the net assets of Primary Shares, calculated daily and
payable monthly. The Adviser receives a fee at an annual rate of 1.0% of
Value Trust's average daily net assets for the first $100 million of
average net assets; 0.75% of average daily net assets between $100 million
and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets and 0.75% of average daily net
assets exceeding $100 million. The management fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For Total Return Trust, the Adviser has agreed to waive indefinitely its
fees in any month to the extent Total Return Trust's expenses related to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during any month an annual rate of 1.95% of the Fund's
average daily net assets. During the fiscal year ended March 31, 1995,
Value Trust paid a management fee of 0.78% of its average daily net
assets, Total Return Trust paid a management fee of 0.75% of its average
daily net assets, and Special Investment Trust paid a management fee of
0.79% of its average daily net assets.
MANAGER
Pursuant to separate management agreements with American Leading
Companies and Balanced Trust (each a "Management Agreement"), which were
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
Funds' manager. The Funds pay the Manager, pursuant to each Management
Agreement, a management fee equal to an annual rate of 0.75% of American
Leading Companies' average daily net assets and an annual rate of 0.75% of
Balanced Trust's average daily net assets. The management fees paid by the
Funds are higher than most other equity funds. Each Fund pays all its
other expenses which are not assumed by the Manager. The Manager has
agreed to waive its fees and to reimburse each Fund for its expenses
27
<PAGE>
related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) as follows: for American Leading Companies, 1.95%
of average net assets indefinitely; and for Balanced Trust, 2.15% of
average net assets until March 31, 1997. These agreements are voluntary
and may be terminated by the Manager at any time.
LMCM
LMCM, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to American Leading Companies pursuant to the terms of
an Investment Advisory Agreement with the Manager, which was approved by
the Trust's Board of Directors. LMCM manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays LMCM a fee, computed daily and
payable monthly, at an annual rate equal to 40% of the fee received by the
Manager, or 0.30% of the Fund's average daily net assets.
LMCM has not previously advised a registered investment company.
However, LMCM manages private accounts with a value as of April 30, 1996
of approximately $ million. The address of LMCM is 111 South Calvert
Street, Baltimore, MD 21202.
J. Eric Leo serves as portfolio manager for the Fund and is primarily
responsible for the selection of investments. Mr. Leo has been Executive
Vice President and Chief Investment Officer of LMCM since December 1991.
From October 1986 to December 1991, he served as Managing Director of
Equitable Capital Management, where he managed, among other assets, the
Equitable Account #1 -- Growth & Income Commingled Fund.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
Bartlett & Co.
Bartlett, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to Balanced Trust pursuant to the terms of an
Investment Advisory Agreement with the Manager, which was approved by the
Trust's Board of Directors. Bartlett 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 Bartlett a fee, computed daily
and paid monthly, at an annual rate equal to 66-2/3% of the fee received
by the Manager, or 0.50% of the Fund's average daily net assets. Bartlett
acts as adviser to individuals, corporations, pension and profit sharing
plans and trust accounts, as well as to five investment company portfolios
which had aggregate assets under management of approximately [ ]
as of April 30, 1996. The address of Bartlett is 36 East Fourth Street,
Cincinnati, Ohio 45202.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage the
Fund. Both are senior portfolio managers of Bartlett. Mr. Rabiner has been
employed by Bartlett since 1983 and has served since then as Director of
its Fixed Income Group. He is a member of Bartlett's Management Committee
and Investment Policy Committee. Mr. Uible has been employed by Bartlett
since 1980. He chairs Bartlett's Equity Investment Group, and is
responsible for Bartlett's equity investment processes. He is a member of
Bartlett's Management Committee and Investment Policy Committee.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and
28
<PAGE>
for any supplementary sales literature and advertising costs. Legg Mason
also assists BFDS with certain of its duties as transfer agent; for the
year ended March 31, 1995, Legg Mason received from BFDS $222,259,
$52,972, $178,389 and $19,487 for performing such services in connection
with Value Trust, Total Return Trust, Special Investment Trust and
American Leading Companies, respectively.
The Board of Directors of each Fund has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). The Plan provides that as
compensation for its ongoing services to investors in Primary Shares and
its activities and expenses related to the sale and distribution of
Primary Shares, Legg Mason receives from each Fund an annual distribution
fee payable from the assets attributable to Primary Shares, of up to:
0.75% of the average daily net assets attributable to Primary Shares of
the Total Return Trust, Special Investment Trust, American Leading
Companies and Balanced Trust and 0.70% of the average daily net assets
attributable to Primary Shares of Value Trust; and an annual service fee
equal to 0.25% of the average daily net assets attributable to Primary
Shares of each of the Funds. The distribution fee and service fee are
calculated daily and paid monthly. The fees received by Legg Mason during
any year may be more or less than its cost of providing distribution and
shareholder services for Primary Shares. Legg Mason has agreed to waive
indefinitely distribution fees in any month to the extent the Total Return
Trust's and American Leading Companies' expenses related to Primary Shares
(exclusive of taxes, interest, brokerage costs and extraordinary expenses)
exceed an annual rate of 1.95% each of Total Return Trust's and American
Leading Companies average daily net assets.
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. Each Fund's Plan complies with those rules.
The Chairman, President and Treasurer of each Fund are employed by
Legg Mason.
DESCRIPTION OF EACH CORPORATION/TRUST AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and Legg
Mason Investors Trust, Inc. were established as Maryland corporations on
January 20, 1982, May 22, 1985, October 31, 1985 and May 5, 1993,
respectively. Value Trust has authorized capital of 200 million shares of
common stock, par value $0.001 per share. Total Return Trust and Special
Investment Trust each has authorized capital of 100 million shares of
common stock, par value $0.001 per share. The Articles of Incorporation of
the Trust authorize issuance of one billion shares of par value $.001 per
share of American Leading Companies and 250 million shares of par value
$.001 per share of Balanced Trust. Each corporation may issue additional
series of shares. Each Fund currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses. Salespersons and others
entitled to receive compensation for selling or servicing Fund shares may
receive more with respect to one Class than another.
Navigator Shares are currently offered for sale only to institutional
clients of Fairfield for investment of their own monies and monies for
which they act in a fiduciary capacity, to clients of Trust Company for
which Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. The initial and subsequent investment
minimums for Navigator Shares are $50,000 and $100, respectively.
Investments in Navigator Shares may be made through investment executives
of Fairfield Group, Inc., Horsham, Pennsylvania, or Legg Mason.
Each Fund pays no Rule 12b-1 fee with respect to Navigator Shares. The
per share net asset value of Navigator Shares, and dividends paid to
Navigator shareholders, are generally expected to be higher than those of
Primary Shares
29
<PAGE>
of the Funds, because of the lower expenses attributable to Navigator
Shares. The per share net asset value of the classes of shares will tend
to converge, however, immediately after the payment of ordinary income
dividends. Navigator Shares of the Funds may be exchanged for the
corresponding class of shares of certain other Legg Mason funds.
Investments by exchange into other Legg Mason funds are made at the per
share net asset value, determined on the same business day as redemption
of the Navigator Shares the investors wish to redeem.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). Each Fund will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
30
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
EQUITY FUNDS
Putting Your Future First
Growth
Navigator Class of Value Trust
Navigator Class of American Leading Companies Trust
Growth &Income
Navigator Class of Total Return Trust
Aggressive Growth
Navigator Class of Special Investment Trust
Balanced Portfolio
Navigator Class of Balanced Trust
Prospectus
July 31, 1996
This wrapper is not part of the prospectus.
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
AUTHORIZED DEALER:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.,
Washington, DC 20036-1800
INDEPENDENT ACCOUNTANTS/AUDITORS:
Coopers & Lybrand L.L.P.
217 East Redwood Street
Baltimore, Maryland 21202
[ ]
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus does not
constitute an offering by the Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
[LEGG MASON FUNDS LOGO]
<PAGE>
NAVIGATOR EQUITY FUNDS
PROSPECTUS
JULY 31, 1996
LEGG MASON VALUE TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON AMERICAN LEADING COMPANIES,
A SERIES OF LEGG MASON INVESTORS TRUST, INC.
LEGG MASON BALANCED TRUST, A SERIES
OF LEGG MASON INVESTORS TRUST, INC.
Shares of Navigator Value Trust, Navigator Total Return Trust, Navigator
Special Investment Trust, Navigator American Leading Companies and Navigator
Balanced Trust (collectively referred to as "Navigator Shares") represent
separate classes ("Navigator Classes") of common stock in Legg Mason Value
Trust, Inc. ("Value Trust"), Legg Mason Total Return Trust, Inc. ("Total Return
Trust"), Legg Mason Special Investment Trust, Inc. ("Special Investment Trust"),
Legg Mason American Leading Companies Trust ("American Leading Companies") and
Legg Mason Balanced Trust ("Balanced Trust") (each separately referred to as a
"Fund" and collectively referred to as the "Funds"), respectively.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they act in
a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust Company")
for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with such Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
SPECIAL INVESTMENT TRUST MAY INVEST UP TO 35% OF ITS NET ASSETS IN
LOWER-RATED DEBT SECURITIES (COMMONLY KNOWN AS "JUNK BONDS"), AND MAY INVEST UP
TO 20% OF ITS TOTAL ASSETS IN THE SECURITIES OF COMPANIES INVOLVED IN ACTUAL OR
ANTICIPATED RESTRUCTURINGS. BOTH TYPES OF INVESTMENTS INVOLVE AN INCREASED RISK
OF PAYMENT DEFAULT AND/OR LOSS OF PRINCIPAL.
SHARES OF SPECIAL INVESTMENT TRUST ARE NOT REGISTERED FOR SALE TO INVESTORS
IN MISSOURI, AND THIS PROSPECTUS IS NOT AN OFFER TO INVESTORS RESIDING IN THAT
STATE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated July 31, 1996 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by this reference. The Statement of Additional Information
is available without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed on the
following page).
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.
Navigator Shares are sold and redeemed without any purchase or redemption
charge imposed by the Funds, although Institutional Clients may charge their
Customer Accounts for services provided in connection with the purchase or
redemption of shares. See "How to Purchase and Redeem Shares." Each Fund will
pay management fees to Legg Mason Fund Adviser, Inc., but Navigator Shares pay
no distribution fees.
VALUE TRUST is a diversified, open-end management investment company seeking
long-term growth of capital. Value Trust invests principally in those equity
securities which its investment adviser, Legg Mason Fund Adviser, Inc.
("Adviser" or "Manager"), believes are undervalued and therefore offer
above-average potential for capital appreciation.
TOTAL RETURN TRUST is a diversified, open-end management investment company
seeking capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, the Adviser selects a diversified
portfolio, composed of dividend-paying common stocks and securities convertible
into common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common stock
which do not pay current dividends but which offer prospects for
<PAGE>
capital appreciation and future income; and debt instruments of various
maturities. Total Return Trust may write covered put and call options. Due to
Total Return Trust's investment objective, however, investors should not expect
capital appreciation comparable to funds devoted solely to growth, or income
comparable to funds devoted to maximum current income.
SPECIAL INVESTMENT TRUST is a diversified, open-end management investment
company seeking capital appreciation. Special Investment Trust invests
principally in equity securities of companies with market capitalizations of
less than $2.5 billion which, in the opinion of the Adviser, have one or more of
the following characteristics: they are not closely followed by, or are out of
favor with, investors generally, and the Adviser believes they are undervalued
in relation to their long-term earning power or asset values; unusual
developments have occurred which suggest the possibility that the market value
of the securities will increase; or they are involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. Special Investment
Trust also invests in the securities of companies with larger capitalizations
which have one or more of these charac-teristics. Special Investment Trust may
invest up to 35% of its assets in debt securities rated below investment grade.
AMERICAN LEADING COMPANIES is a professionally managed portfolio seeking
long-term capital appreciation and current income consistent with prudent
investment risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Trust"), a diversified open-end management investment
company. Under normal market conditions, American Leading Companies will invest
at least 75% of its total assets in a diversified portfolio of dividend-paying
common stocks of Leading Companies that have market capitalizations of at least
$2 billion. The Fund's investment adviser, Legg Mason Capital Management, Inc.
("LMCM"), defines a "Leading Company" as a company that, in the opinion of LMCM,
has attained a major market share in one or more products or services within its
industry(ies), and possesses the financial strength and management talent to
maintain or increase market share and profit in the future. Such companies are
typically well known as leaders in their respective industries; most are found
in the top half of the Standard & Poor's Composite Index of 500 Stocks ("S&P
500").
BALANCED TRUST is a professionally managed portfolio seeking long-term
capital appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. Balanced Trust is a separate
series of the Trust. Under normal conditions, Balanced Trust will invest no more
than 75% of its assets in equity securities. The term "equity securities"
includes, without limitation, common stocks, and convertible securities of
domestic issuers, securities of closed-end investment companies and U.S. dollar-
denominated securities of foreign issuers, including American Depositary
Receipts ("ADRs") and Global Depositary Receipts ("GDRs"). Balanced Trust will
invest at least 25% of its portfolio in fixed income securities.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 8
Investment Objectives and Policies 9
How To Purchase and Redeem Shares 18
How Your Shareholder Account is
Maintained 19
How Net Asset Value is Determined 20
Dividends and Other Distributions 20
Tax Treatment of Dividends and
Other Distributions 20
Shareholder Services 21
The Funds' Management and Investment Adviser 22
The Funds' Distributor 24
Description of each Corporation/Trust
and Its Shares 24
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
2
<PAGE>
EXPENSES
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees set
forth in the tables are based on average net assets and annual Fund operating
expenses related to Navigator Shares of Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies for the year ended March 31,
1995. For Balanced Trust, which has no operating history prior to the date of
this Prospectus, other expenses are based on estimates for the current fiscal
period, and fees are adjusted for current expense limits and fee waiver levels.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES (A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
<S> <C> <C> <C> <C> <C>
Management fees
(after fee
waivers) 0.78% 0.75% 0.79% 0.58% 0.65%
12b-1 fees None None None None None
Other expenses 0.04% 0.11% 0.11% 0.37% 0.50%
Total operating
expenses (after
fee waivers) 0.82% 0.86% 0.90% 0.95% 1.15%
</TABLE>
(A) The Manager has voluntarily agreed to waive the management fee and assume
certain other expenses to the extent necessary to limit total operating
expenses relating to Navigator Shares (exclusive of taxes, brokerage
commissions, interest and extraordinary expenses) as follows: for American
Leading Companies, 0.95% of average daily net assets indefinitely; and for
Balanced Trust, 1.15% of average daily net assets until March 31, 1997. In
the absence of such waivers, the management fee, other expenses and total
operating expenses relating to Navigator Shares would have been as follows:
for American Leading Companies, 0.75%, 0.37% and 1.12% of average net
assets; and for Balanced Trust, 0.75%, 0.50% and 1.25% of average net
assets.
For further information concerning the Funds' expenses, please see "The
Funds' Management and Investment Adviser," page 19.
EXAMPLE OF EFFECT OF FUND EXPENSES
The following examples illustrate the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming (1) a
5% annual rate of return and (2) redemption at the end of each time period. As
noted in the prior table, the Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
<S> <C> <C> <C> <C> <C>
1 Year $ 8 $ 9 $ 9 $ 10 $12
3 Years $ 26 $ 27 $ 29 $ 30 $37
5 Years $ 45 $ 48 $ 50 $ 53 N/A
10 Years $101 $106 $111 $ 117 N/A
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above tables and the
assumption in the example of a 5% annual return are required by regulations of
the SEC applicable to all mutual funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A
PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED OR ACTUAL PERFORMANCE OF,
NAVIGATOR SHARES OF THE FUNDS. THE ABOVE TABLES AND EXAMPLES SHOULD NOT BE
CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The actual expenses attributable to Navigator
Shares will depend upon, among other things, the level of average net assets,
the levels of sales and redemptions of shares, the extent to which the Manager
waives its fees and reimburses all or a portion of each Fund's expenses and the
extent to which Navigator Shares incur variable expenses, such as transfer
agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. Navigator Shares pay no 12b-1 distribution fees and may pay lower
transfer agency fees. The information for Primary Shares reflects the 12b-1
fees paid by that Class.
The financial highlights tables that follow have been derived from each
Fund's financial statements which have been audited for Value Trust, Total
Return Trust and Special Investment Trust by Coopers & Lybrand L.L.P.,
independent accountants and for American Leading Companies by [ ],
independent auditors. Each Fund's financial statements for the year ended
March 31, 1995 and the report of Coopers & Lybrand L.L.P. or [ ] thereon
are included in that Fund's annual report and are incorporated by reference
in the Statement of Additional Information. The annual report for each Fund
is available to shareholders without charge by calling your Legg Mason or
affiliated investment executive or Legg Mason's Funds Marketing Department
at 800-822-5544.
As of the date of this Prospectus, Balanced Trust has not commenced
operations and has not issued any annual reports.
VALUE TRUST (A)
<TABLE>
<CAPTION>
NAVIGATOR
CLASS PRIMARY CLASS
Years Ended March 31,
1995(B) 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 18.76 $18.50 $17.81 $15.69 $13.38 $14.19 $14.16 $12.14 $15.07
Net investment
income .12 .10 .08 .18 .25 .32 .33 .21 .21
Net realized and
unrealized gain
(loss) on
investments 1.40 1.70 .92 2.12 2.34 (.74) .77 1.99 (1.54)
Total from
investment
operations 1.52 1.80 1.00 2.30 2.59 (.42) 1.10 2.20 (1.33)
Distributions to
shareholders from:
Net investment
income (.01) (.05) (.11) (.18) (.28) (.36) (.33) (.18) (.20)
Net realized gain
on investments -- (.04) (.20) -- -- (.03) (.74) -- (1.40)
Net asset value,
end of period $ 20.27 $20.21 $18.50 $17.81 $15.69 $13.38 $14.19 $14.16 $12.14
Total return(C) 8.11% 9.77% 5.65% 14.76% 19.53% (2.88)% 7.74% 18.33% (8.42)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average
net assets:
Expenses 0.82%(D) 1.81%(E) 1.82%(E) 1.86%(E) 1.90%(E) 1.90%(E) 1.86%(E) 1.96%(E) 1.97%(E)
Net investment
income 1.8%(D) 0.5% 0.5% 1.1% 1.7% 2.5% 2.2% 1.6% 1.5%
Portfolio turnover
rate 20.1% 20.1% 25.5% 21.8% 39.4% 38.8% 30.7% 29.7% 47.8%
Net assets, end of
period (in
thousands) $36,519 $986,325 $912,418 $878,394 $745,833 $690,053 $808,780 $720,961 $665,689
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31, 1987 1986
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $15.34 $11.55
Net investment
income .21 .25
Net realized and
unrealized gain
(loss) on
investments 1.11 4.15
Total from
investment
operations 1.32 4.40
Distributions to
shareholders from:
Net investment
income (.20) (.18)
Net realized gain
on investments (1.39) (.43)
Net asset value,
end of period $15.07 $15.34
Total return(C) 9.89% 39.75%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average
net assets:
Expenses 2.00%(E) 2.07%(E)
Net investment
income 1.5% 2.0%
Portfolio turnover
rate 42.5% 32.6%
Net assets, end of
period (in
thousands) $819,348 $599,004
</TABLE>
(A) ALL SHARE AND PER SHARE FIGURES REFLECT THE 2-FOR-1 STOCK SPLIT EFFECTIVE
JULY 29, 1991.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
(E) INCLUDES DISTRIBUTION FEE OF 1.0% THROUGH MAY 11, 1987 AND 0.95%
THEREAFTER.
4
<PAGE>
TOTAL RETURN TRUST
<TABLE>
<CAPTION>
NAVIGATOR
CLASS PRIMARY CLASS
Years Ended March 31, 1995(B) 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 12.66 $13.54 $13.61 $11.64 $ 9.64 $10.03 $10.06 $ 8.86 $11.63
Net investment income .15 .33 .36 .39(C) .34 .28 .21 .15 .18
Net realized and
unrealized gain (loss)
on investments .25 (.19) .24 1.89 1.91 (.31) .15 1.18 (1.35)
Total from investment
operations .40 .14 .60 2.28 2.25 (.03) .36 1.33 (1.17)
Distributions to
shareholders from:
Net investment income (.06) (.29) (.33) (.31) (.25) (.29) (.21) (.13) (.21)
Net realized gain on
investments (.17) (.60) (.34) -- -- (.07) (.18) -- (1.39)
Net asset value, end of
period $ 12.83 $12.79 $13.54 $13.61 $11.64 $ 9.64 $10.03 $10.06 $ 8.86
Total return(E) 2.28% 1.09% 4.57% 19.88% 23.59% (0.05)% 3.48% 15.16% (10.17)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.86%(F) 1.93%(G) 1.94%(G) 1.95%(C,G) 2.34%(G) 2.50%(G) 2.39%(G) 2.40%(G) 2.30%(G)
Net investment income 3.6%(F) 2.5% 2.7% 3.1%(C) 3.1% 3.1% 2.0% 1.6% 1.9%
Portfolio turnover rate 61.9% 61.9% 46.6% 40.5% 38.4% 62.1% 39.2% 25.7% 50.1%
Net assets, end of period
(in thousands) $4,823 $194,767 $184,284 $139,034 $52,360 $22,822 $26,815 $30,102 $35,394
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31, 1987 1986(A)
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $10.78 $10.00
Net investment income .18 .13(D)
Net realized and
unrealized gain (loss)
on investments .90 .65
Total from investment
operations 1.08 .78
Distributions to
shareholders from:
Net investment income (.19) --
Net realized gain on
investments (.04) --
Net asset value, end of
period $11.63 $10.78
Total return(E) 10.24% 7.80%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 2.40%(G) 2.20%(F,G)
Net investment income 1.7% 3.8%(F)
Portfolio turnover rate 82.7% 40.0%(F)
Net assets, end of period
(in thousands) $47,028 $44,357
</TABLE>
(A) FOR THE PERIOD NOVEMBER 21, 1985 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1986.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(C) NET OF FEES WAIVED BY THE ADVISER IN EXCESS OF AN INDEFINITE VOLUNTARY
EXPENSE LIMITATION OF 1.95% BEGINNING NOVEMBER 1, 1992.
(D) EXCLUDES INVESTMENT ADVISORY FEES AND OTHER EXPENSES IN EXCESS OF A 1.2%
ADVISER-IMPOSED EXPENSE LIMITATION.
(E) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(F) ANNUALIZED.
(G) INCLUDES DISTRIBUTION FEE OF 1.0%.
5
<PAGE>
SPECIAL INVESTMENT TRUST
<TABLE>
<CAPTION>
NAVIGATOR
CLASS PRIMARY CLASS
Years Ended March 31, 1995(B) 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 19.11 $21.56 $17.91 $17.00 $14.59 $13.58 $11.84 $10.14 $12.80
Net investment income .07 (.06) (.11) .03 .12 .18 .12 .06(C) .13(C)
Net realized and
unrealized gain (loss)
on investments .85 (1.31) 3.93 1.66 2.83 2.42 1.70 1.65 (1.825)
Total from investment
operations .92 (1.37) 3.82 1.69 2.95 2.60 1.82 1.71 (1.695)
Distributions to
shareholders from:
Net investment income -- -- (.03) -- (.14) (.27) (.08) (.01) (.075)
Net realized gain on
investments -- (.23) (.14) (.78) (.40) (1.32) -- -- (.89)
Net asset value, end of
period $ 20.03 $19.96 $21.56 $17.91 $17.00 $14.59 $13.58 $11.84 $10.14
Total return(D) 4.81% (6.37)% 21.35% 10.50% 20.46% 21.46% 15.37% 16.99% (14.18)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.90%(E) 1.93%(F) 1.94%(F) 2.00%(F) 2.10%(F) 2.30%(F) 2.30%(F) 2.50%(F) 2.50%(F)
Net investment income 1.0%(E) (0.2)% (0.6)% 0.2% 0.8% 1.4% 1.0% 0.7% 1.0%
Portfolio turnover rate 27.5% 27.5% 16.7% 32.5% 56.9% 75.6% 115.9% 122.4% 158.9%
Net assets, end of
period (in thousands) $26,123 $612,093 $565,486 $322,572 $201,772 $106,770 $68,240 $44,450 $43,611
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31, 1987 1986(A)
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $11.53 $10.00
Net investment income --(C) .04(C)
Net realized and
unrealized gain (loss)
on investments 1.51 1.49
Total from investment
operations 1.51 1.53
Distributions to
shareholders from:
Net investment income (.02) --
Net realized gain on
investments (.22) --
Net asset value, end of
period $12.80 $11.53
Total return(D) 13.39% 15.30%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 2.50%(F) 2.50%(E,F)
Net investment income -- 1.2%(E)
Portfolio turnover rate 77.0% 41.0%(E)
Net assets, end of
period (in thousands) $55,822 $34,337
</TABLE>
(A) FOR THE PERIOD DECEMBER 30, 1985 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1986.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
(C) EXCLUDES INVESTMENT ADVISORY FEES AND OTHER EXPENSES IN EXCESS OF A 2.5%
ADVISER-IMPOSED EXPENSE LIMITATION.
(D) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(E) ANNUALIZED.
(F) INCLUDES DISTRIBUTION FEE OF 1.0%.
6
<PAGE>
AMERICAN LEADING COMPANIES
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended March 31, 1995 1994(A)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.69 $10.00
Net investment income(B) 0.12 0.059
Net realized and unrealized gain (loss) on investments 0.48 (0.344)
Total from investment operations 0.60 (0.285)
Distributions to shareholders from net investment income (0.11) (0.025)
Net asset value, end of period $10.18 $ 9.69
Total return(C) 6.24% (2.86)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.95%(B) 1.95%(B,D)
Net investment income 1.21%(B) 1.14%(B,D)
Portfolio turnover rate 30.5% 21.0%(D)
Net assets, end of period (in thousands) $59,985 $55,022
</TABLE>
(A) FOR THE PERIOD SEPTEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1994.
(B) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 1.95% OF
AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE MANAGER, THE
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD SEPTEMBER 1,
1993 TO MARCH 31, 1994 AND THE YEAR ENDED MARCH 31, 1995 WOULD HAVE BEEN
2.28% AND 2.12%, RESPECTIVELY.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
7
<PAGE>
PERFORMANCE INFORMATION
From time to time the Funds may quote the TOTAL RETURN of each class of
shares in advertisements or in reports or other communications to shareholders.
A mutual fund's total return is a measurement of the overall change in value of
an investment in the fund, including changes in share price and assuming
reinvestment of dividends and other distributions. CUMULATIVE TOTAL RETURN shows
the fund's performance over a specific period of time. AVERAGE ANNUAL TOTAL
RETURN is the average annual compounded return that would have produced the same
cumulative total return if the fund's performance had been constant over the
entire period. Average annual returns, which differ from actual year-to-year
results, tend to smooth out variations in a fund's returns. For comparison
purposes, Value Trust's total return is compared with total returns of the Value
Line Geometric Average, an index of approximately 1,700 stocks ("Value Line
Index"), and Standard & Poor's 500 Stock Composite Index ("S&P Stock Index"),
two unmanaged indexes of widely held common stocks. No adjustment has been made
for any income taxes payable by shareholders.
The investment return and principal value of an investment in each Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns of each Fund would have been lower if the
Adviser and/or Legg Mason had not waived certain fees for the fiscal years ended
March 31, as follows: 1989 through 1995 for Value Trust; 1986 through 1995 for
Total Return and Special Investment; and 1994 through 1995 for American Leading
Companies. As of the date of this Prospectus, Balanced Trust has no operating
history.
Performance figures reflect past performance only and are not intended to
and do not indicate future performance. Further information about each Fund's
performance is contained in its Annual Report to Shareholders, which may be
obtained without charge by calling your Legg Mason or affiliated investment
executive or Legg Mason's Funds Marketing Department at 800-822-5544.
Total returns as of March 31, 1995 are shown below.
<TABLE>
<CAPTION>
AMERICAN
TOTAL RETURN SPECIAL LEADING VALUE LINE S&P STOCK
CUMULATIVE TOTAL RETURN VALUE TRUST TRUST INVESTMENT TRUST COMPANIES INDEX INDEX
<S> <C> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +6.24% +5.12% +15.54%
Five Years +54.50 +56.57 +83.68 N/A +38.57 +71.50
Ten Years +177.23 N/A N/A N/A +102.99 +284.58
Life of Class +584.27(A) +99.17(B) +178.15(C) +3.20(D) +244.66(A) +586.40(A)
Navigator Class:
Life of Class(E) +8.11 +2.28 +4.81 N/A +6.37 +11.37
</TABLE>
<TABLE>
<CAPTION>
AMERICAN
TOTAL RETURN SPECIAL LEADING VALUE LINE S&P STOCK
AVERAGE ANNUAL TOTAL RETURN VALUE TRUST TRUST INVESTMENT TRUST COMPANIES INDEX INDEX
<S> <C> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +6.24% +5.12% +15.54%
Five Years +9.09 +9.38 +12.93 N/A +6.74 +11.39
Ten Years +10.73 N/A N/A N/A +7.34 +14.42
Life of Class +16.00(A) +7.64(B) +11.69(C) +2.02(D) +10.02(A) +16.03(A)
</TABLE>
(A) INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
(B) INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
(C) INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
(D) INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
(E) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
The S&P Stock Index and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P Stock Index and Value Line Index figures do not include
brokerage commissions and other costs of investing.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. The Adviser
believes that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
the Adviser believes the return on certain debt securities may equal or
exceed the return on equity securities. The Fund may invest in debt
securities of both foreign and domestic issuers of any maturity without
regard to rating, and may invest its assets in such securities without
regard to a percentage limit. Although not a fundamental policy subject to
shareholder vote, the Adviser currently anticipates that under normal
market conditions, the Fund will invest no more than 25% of its total
assets in long-term debt securities. Up to 10% of its total assets may be
invested in debt securities rated below investment grade, i.e., rated
lower than BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, deemed by the Adviser to be of
comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets in debt securities rated below investment grade, i.e.,
rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed by
the Adviser to be of comparable quality.
9
<PAGE>
SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities of companies with market capitalizations of less than $2.5
billion which the Adviser believes have one or more of the following
characteristics:
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. Equity securities of companies involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. No more than
20% of the Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
may not be widely traded, and that the Fund's position in such securities
may be substantial in relation to the market for such securities.
Accordingly, it may be difficult for the Fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
assets may be invested in debt securities rated below BBB by S&P, or below
Baa by Moody's, and unrated securities deemed by the Adviser to be of
comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be rated in one of the four highest rating categories by
S&P or Moody's or, if unrated by S&P or Moody's, deemed by the Adviser to
be of comparable quality.
10
<PAGE>
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMCM
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMCM's goal is to invest in companies having what LMCM believes is a
reasonable price/earnings ratio, and it will favor those companies with
well established histories of dividends and dividend growth rates. The
Fund may also invest in companies having capitalizations above or below $2
billion which LMCM believes show strong potential for future market
leadership, and in companies which LMCM believes, because of corporate
restructuring or other changes, are undervalued based on their potential
for future growth. There is always a risk that LMCM will not properly
assess the potential for an issuer's future growth, or that an issuer will
not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. The Fund's portfolio turnover rate is not
expected to exceed 100%. Under normal circumstances, the Fund expects to
own a minimum of 35 different securities. The Fund may also invest in
common stocks and securities convertible into common stocks which do not
pay current dividends but which offer prospects for capital appreciation
and future income. The Fund may invest in when-issued securities, which
may involve additional risks.
During periods when LMCM believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMCM to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities rated below Ba by Moody's or BB by S&P or, if unrated, deemed
by the Adviser to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. The Fund will invest in
a combination of equity, debt and money market securities in attempting to
achieve its objective. Under normal conditions, the Fund will invest no
more than 75% of its assets in equity securities. Bartlett & Co.
("Bartlett"), as investment adviser, will emphasize investments in
dividend-paying equity securities that, in the opinion of Bartlett, offer
the potential for long-term growth, and in common stocks or securities
convertible into common stock that do not pay current dividends but offer
prospects for capital appreciation and future income.
The Fund generally will invest at least 25% of its portfolio in fixed
income securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations and mortgage-related securities;
financial services companies; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by
11
<PAGE>
Moody's, S&P or Fitch Investors Services ("Fitch"), respectively; and
repurchase agreements. No more than 5% of the Fund's total assets may be
invested in fixed income or convertible securities rated below BBB or Baa
at the time of purchase, or comparable unrated securities. The Fund may
invest in securities of any maturity, but, under normal circumstances,
expects to maintain its portfolio of fixed income securities so as to have
an average dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity
and debt securities. This approach attempts to "balance" the potential
for growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and exchange-traded futures contracts on stock
indices and options thereon. No more than 15% of the Fund's net assets may
be invested in illiquid securities. The Fund may also engage in reverse
repurchase agreements.
The portfolio turnover rate for the equity portion of the Fund's
portfolio is estimated to be 50% and the portfolio turnover rate for the
fixed income portion is estimated to be 120%. The Fund's portfolio
turnover rate is not expected to exceed 75%.
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements and high-quality short-term debt
securities. A repurchase agreement is an agreement under which either U.S.
government obligations or high-quality liquid debt securities are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for each Fund by State Street Bank and
Trust Company ("State Street"), the Funds' custodian, as collateral until
resold and will be supplemented by additional collateral if necessary to
maintain a total value equal to or in excess of the value of the
repurchase agreement. Each Fund bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, which may decline in value in the interim. The
Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust, Total Return Trust and Special Investment Trust) or 15% (for
American Leading Companies and Balanced Trust) of its net assets would be
invested in such agreements and other illiquid investments.
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its total assets.
For further information concerning securities lending, see the Statement
of Additional Information.
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in to same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness that are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Value Trust, Total Return Trust and Special Investment Trust do not
currently expect to invest more than 5% of net assets in preferred stock.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields
12
<PAGE>
of other securities of comparable maturity and quality that do not have a
conversion privilege and (2) its worth, at market value, if converted into
the underlying common stock. Convertible securities are typically issued
by smaller capitalized companies whose stock prices may be volatile. The
price of a convertible security often reflects such variations in the
price of the underlying common stock in a way that non-convertible debt
does not. A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument.
U.S. Government Securities
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA")); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Banks
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Federal National Mortgage Association ("FNMA")
securities); and (4) solely the creditworthiness of the issuer (e.g.,
Federal Home Loan Mortgage Corporation ("FHLMC") securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
Foreign Securities
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic
issuers. In addition, with respect to certain foreign countries, there is
the possibility of expropriation, confiscatory taxation, withholding taxes
and limitations on the use or removal of funds or other assets.
The Funds may also invest in ADRs, which are securities issued by
domestic banks evidencing their ownership of specific foreign securities.
ADRs may be sponsored or unsponsored; issuers of securities underlying
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. Accordingly, there may be less information
available about such issuers than there is with respect to domestic
companies and issuers of securities underlying sponsored ADRs. Although
ADRs are denominated in U.S. dollars, the underlying security often is
not; thus, the value of the ADR may be subject to exchange controls and
variations in the exchange rate. Balanced Trust may also invest in GDRs,
which are receipts, often denominated in U.S. dollars, issued by either a
U.S. or non-U.S. bank evidencing its ownership of the underlying foreign
securities.
Although not a fundamental policy subject to shareholder vote, the
adviser currently anticipates that Value Trust, Total Return Trust and
Special Investment Trust will each invest no more than 25% of its total
assets in foreign securities. Bartlett currently anticipates that Balanced
Trust will not invest more than 10% of its total assets in foreign
securities, either directly or through ADRs or GDRs. American Leading
Companies may not invest more than 25% of its total assets in foreign
securities, either directly or through ADRs.
Illiquid Securities
Value Trust, Total Return Trust, and Special Investment may each
invest up to 10% of its net assets in illiquid securities. American
Leading Companies and Balanced Trust may each invest up to 15% of its net
assets in illiquid securities. Illiquid securities are securities that
cannot be expected to be sold within seven days at approximately the price
at which they are valued. Due to the absence of an active trading market,
a Fund may have difficulty valuing or disposing of illiquid securities
promptly. Securities that are freely tradeable in their country of origin
or in their principal market are not considered illiquid securities even
if they are not registered for sale in the U.S.
WHEN-ISSUED SECURITIES
Each Fund may enter into commitments to purchase securities on a
when-issued basis. A Fund may purchase when-issued securities because
such securities are often the most efficiently priced and have the best
liquidity in the bond market. As with the purchase of all securities,
when a Fund purchases securities on a when-issued basis, it assumes the
risks of ownership, including the risk of price fluctuation, at the time
of purchase, not at the time of receipt. However, a Fund does not have to
pay for the obligations until they are delivered to it, which is normally
7 to 15 days later, but could be considerably longer in the case of some
mortgage-backed securities. To meet that payment obligation, that Fund
will set aside cash or liquid, high-quality debt securities in an account
with its custodian equal to the payment that will be due. Depending on
market conditions, a Fund's when-issued purchases could cause its net
asset value to be more volatile, because they will increase the amount
by which that Fund's total assets, including the value of the when-issued
securities held by it, exceed its net assets. A Fund may sell the
securities subject to a when-issued purchase, which may result in a gain
or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market
13
<PAGE>
or market sector decline that could adversely affect the market value of
the Fund's portfolio. To the extent that a Fund's portfolio correlates
with a given stock index, the sale of futures contracts on that index
could reduce the risks associated with a market decline and thus provide
an alternative to the liquidation of securities positions. A Fund may sell
an interest rate futures contract to offset price changes of debt
securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be limited to the amount of
the premium it received. If stock prices remain the same over time, it is
likely that the Fund will also profit, because it should be able to close
out the option at a lower price. If stock prices fall, the Fund would
expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying index, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, the Fund would give up
some ability to participate in security price increases when writing call
options.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the adviser in managing the Funds'
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate hedged positions. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The
14
<PAGE>
Funds may purchase and write both over-the-counter and exchange-traded
options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract involves an obligation to purchase or
sell a specific amount of a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. By entering into
a foreign currency contract, a Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. A Fund may enter into these contracts for the
purpose of hedging against risk arising from its investment in securities
denominated in foreign currencies or when it anticipates investing in such
securities. Forward currency contracts involve certain costs and risks,
including the risk that anticipated currency movements will not be
accurately predicted, causing a Fund to sustain losses on these contracts.
AMERICAN LEADING COMPANIES:
The Fund may sell covered call options on any security in which it is
permitted to invest for the purpose of enhancing income. A call option
gives the purchaser the right to purchase the underlying security from the
Fund at a specified price (the "strike price") during a specified period.
A call option is "covered" if, at all times the option is outstanding, the
Fund holds the underlying security or a right to obtain that security at
no additional cost. The Fund may purchase a call option for the purpose of
closing out a short position in an option.
The use of options involves certain risks. These risks include: (1)
the fact that use of these instruments can reduce the opportunity for
gain; (2) dependence on LMCM's ability to predict movements in the prices
of individual securities, fluctuations in the general securities markets
or in market sectors; (3) imperfect correlation between movements in the
price of options and movements in the price of the underlying securities;
(4) the possible lack of a liquid secondary market for a particular option
at any particular time; (5) the possibility that the use of cover
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other
short-term obligations; and (6) the possible need to defer closing out
positions in these instruments in order to avoid adverse tax consequences.
There can be no assurance that the use of options by the Fund will be
successful. As a non-fundamental policy, the Fund will not sell a covered
call option if, as a result, the value of the portfolio securities
underlying all outstanding covered call options would exceed 25% of the
value of the equity securities held by the Fund. See the Statement of
Additional Information for a more detailed discussion of options
strategies.
BALANCED TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. Certificates of Participation are participations in municipal lease
obligations or installment sales contracts. Each certificate represents a
proportionate interest in or right to the lease purchase payments made.
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The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit a Fund's ability to realize the appreciation in the
value of such securities that would otherwise accompany declining interest
rates. An increase in mortgage prepayments could cause the Fund to incur a
loss on a mortgage-related security that was purchased at a premium. On
the other hand, a decrease in the rate of prepayments, resulting from an
increase in market interest rates, among other causes, may extend the
effective maturities of mortgage-related securities, increasing their
sensitivity to changes in market interest rates. In determining the
average maturity of the fixed income portion of the Fund, Bartlett must
apply certain assumptions and projections about the maturity and
prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, issues
mortgage participation certificates ("PCs") which represent interests in
mortgages from FHLMC's national portfolio. The mortgage loans in FHLMC's
portfolio are not government backed; rather, the loans are either
uninsured with loan-to-value ratios of 80% or less, or privately insured
if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
certificates issued by FNMA ("FNMA certificates") are guaranteed as to
timely payment of principal and interest by FNMA, not the U.S. Government.
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PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. Although full payoff of
each class of bonds is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of
an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, the
Adviser/LMCM/Bartlett reviews and monitors the creditworthiness of each
issuer and issue. The Adviser/LMCM/Bartlett also analyzes interest rate
trends and specific developments which it believes may affect individual
issuers.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER RATED DEBT SECURITIES
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher
current yield than that provided by higher grade issues, but also involve
higher risks. Debt securities rated D by S&P are in default. However, debt
securities, regardless of their ratings, generally have a higher priority
in the issuer's capital structure than do equity securities.
Lower rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
The market for lower rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on lower
rated debt securities rose dramatically, reflecting the risk that holders
of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur.
The market for lower rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not
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necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound. Each Fund does not intend to invest in securities
that are in default, or where, in the adviser's opinion, default appears
likely.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Other Fund policies, unless described as fundamental, can be
changed by action of the Board of Directors.
The fundamental restrictions applicable to American Leading Companies
include a prohibition on investing 25% or more of its total assets in the
securities of issuers having their principal business activities in the
same industry (with the exception of securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements with respect thereto).
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason. (Legg Mason and Fairfield are wholly owned subsidiaries of Legg
Mason, Inc., a financial services holding company.)
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares and $100 for each subsequent investment. Each Fund
reserves the right to change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after the
close of the Exchange or on days the Exchange is closed will be executed
at the net asset value determined as of the close of the Exchange on the
next day the Exchange is open. See "How Net Asset Value is Determined" on
page 16. Each Fund reserves the right to reject any order for its shares
or to suspend the offering of shares for a period of time.
In addition to Institutional Clients purchasing shares directly from
Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in the Funds. Information
concerning these services and any applicable charges will be provided by
the Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers
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of Institutional Clients wishing to redeem shares held in Customer
Accounts at the Institution may redeem only in accordance with
instructions and limitations pertaining to their Account at the
Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
investment executives at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the Fund. Such payments will
normally be transmitted on the next business day following receipt of a
valid request for redemption. However, each Fund reserves the right to
take up to seven days to make payment upon redemption if, in the judgment
of the adviser, that Fund could be adversely affected by immediate
payment. (The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) The proceeds of redemption or repurchase may be
more or less than the original cost. If the shares to be redeemed or
repurchased were paid for by check (including certified or cashier's
checks) within 10 business days of the redemption or repurchase request,
the proceeds may not be disbursed unless the Fund can be reasonably
assured that the check has been collected.
Each Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges should call their investment executive for further
instructions.
Because of the relatively high cost of maintaining small accounts, a
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
the investor. However, the Funds will not redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in an account, the investor will be
notified that the account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having the
account closed.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each investor.
Any shares the investor purchases or receives as a dividend or other
distribution will be credited directly to the account at the time of
purchase or receipt. No certificates are issued unless the shareholder
specifically requests them in writing. Shareholders who elect to receive
certificates can redeem their shares only by mail. Certificates will be
issued in full shares only. No certificates will be issued for shares of
any Fund prior to 10 business days after purchase of such shares by check
unless the Fund can be reasonably assured during that period that payment
for the purchase of such shares has been collected. Shares may not be held
in, or transferred to, an account with any brokerage firm other than
Fairfield, Legg Mason or their affiliates.
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund, which will also show the total number of
shares being held in safekeeping by the Funds' transfer agent for the
account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers. Institutional
Clients purchasing or
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holding Navigator Shares on behalf of their Customers are responsible for
the transmission of purchase and redemption orders (and the delivery of
funds) to a Fund on a timely basis.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by the Adviser/LMCM/Bartlett to be the primary market.
Securities with remaining maturities of 60 days or less are valued at
amortized cost. Each Fund will value its foreign securities in U.S.
dollars on the basis of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Navigator Shares out of its
investment company taxable income (which consists of net investment
income, any net short-term capital gain and any net gains from certain
foreign currency transactions) attributable to those shares. Value Trust,
Total Return Trust, American Leading Companies and Balanced Trust declare
and pay dividends from net investment income quarterly; they pay dividends
from any net short-term capital gains and net gains from foreign currency
transactions annually. Special Investment Trust declares and pays
dividends from its investment company taxable income following the end of
each taxable year. Each Fund also distributes substantially all of its net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) after the end of the taxable year in which the gain is
realized. A second distribution of net capital gain may be necessary in
some years to avoid imposition of the excise tax described under the
heading "Additional Tax Information" in the Statement of Additional
Information. Shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Navigator fund. A shareholder should
contact its investment executive for additional information about this
option. Qualified retirement plans that obtained Navigator Shares through
exchange generally receive dividends and other distributions in additional
shares.
If no election is made, both dividends and other distributions are
credited to the Institutional Client's account in Navigator Shares at the
net asset value of the shares determined as of the close of the Exchange
on the reinvestment date. Shares received pursuant to any of the first
three (reinvestment) elections above also are credited to your account at
that net asset value. If an investor elects to receive dividends or other
distributions in cash, a check will be sent. Investors purchasing through
Fairfield may elect at any time to change the distribution option by
notifying the applicable Fund in writing at: [insert complete Fund name],
c/o Fairfield Group, Inc., 200 Gibraltar Road, Horsham, Pennsylvania
19044. Those purchasing through Legg Mason should write to: [insert
complete Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476. An election must be received at least 10
days before the record date in order to be effective for dividends and
other distributions paid to shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to qualify (in the case of Balanced Trust) or to
continue to qualify for treatment as a regulated investment company under
the Internal Revenue Code of 1986, as amended ("Code"), so that it will be
relieved of federal income tax on that part of its investment company
taxable income (generally consisting of net investment income, any net
short-term capital gain and any net gains from certain foreign currency
transactions) and net capital gain that is distributed to its
shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Navigator Shares) are taxable to their
shareholders (other than tax-exempt investors) as
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ordinary income to the extent of each Fund's earnings and profits.
Distributions of each Fund's net capital gain (whether paid in cash or
reinvested in Navigator Shares), when designated as such, are taxable to
those shareholders as long-term capital gain, regardless of how long they
have held their Fund shares.
Each Fund sends each shareholder a notice following the end of each
calendar year specifying, among other things, the amounts of all ordinary
income dividends and other distributions paid (or deemed paid) during that
year.
A redemption of Navigator Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Navigator Shares for shares of any other Navigator
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege," page 18. If Fund shares are purchased
within 30 days before or after redeeming other shares of the same Fund
(regardless of class) at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, an investor may also be subject to state, local or
foreign taxes on distributions from the Funds, depending on the laws of
its home state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends and capital gain distributions) of Navigator
Shares made by Institutional Clients acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of persons maintaining
Customer Accounts at Institutional Clients will be sent to the
Institutional Client by the transfer agent. Beneficial ownership of shares
by Customer Accounts will be recorded by the Institutional Client and
reflected in the regular account statements provided by them to their
customers.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by its respective
independent accountants/auditors.
Shareholder inquiries should be addressed to "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or "[insert complete Fund name], c/o Fairfield Group, Inc.,
200 Gibraltar Road, Horsham, Pennsylvania 19044."
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for
Navigator Shares of the following funds, provided the shares to be
acquired are eligible for sale under applicable state securities laws:
Navigator Money Market Fund, Inc. -- Prime Obligations Portfolio
A money market fund seeking to provide as high a level of current
interest income as is consistent with liquidity and relative stability of
principal.
Navigator Tax-Free Money Market Fund, Inc.
A money market fund seeking to provide its shareholders with as high a
level of current interest income that is exempt from federal income taxes
as is consistent with liquidity and relative stability of principal.
Navigator Value Trust
A mutual fund seeking long-term growth of capital.
Navigator Total Return Trust
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total investment return consistent with
reasonable risk.
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Navigator Special Investment Trust
A mutual fund seeking capital appreciation by investing principally in
issuers with market capitalizations of less than $2.5 billion.
Navigator American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Navigator Balanced Trust
A mutual fund seeking long-term capital appreciation and current
income in order to achieve an attractive total investment return with
reasonable risk.
Navigator International Equity Trust
A mutual fund seeking maximum long-term total return, by investing
primarily in common stocks of companies located outside the United States.
Navigator Emerging Markets Trust
A mutual fund seeking long-term capital appreciation by investing
primarily in equity securities of companies based in or doing business in
emerging market countries.
Navigator Global Government
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total return consistent with prudent investment
risk, by investing principally in debt securities issued or guaranteed by
foreign governments, the U.S. Government, their agencies,
instrumentalities or political subdivisions.
Navigator U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Navigator Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, through
investment in a diversified portfolio consisting primarily of investment
grade debt securities.
Navigator High Yield Portfolio
A mutual fund seeking primarily a high level of current income and
secondarily, capital appreciation, by investing principally in lower-
rated, fixed-income securities.
Navigator Maryland Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Navigator Pennsylvania Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Navigator Tax-Free Intermediate-Term Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Investments by exchange into other Navigator funds are made at the per
share net asset value next determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your investment
executive. To effect an exchange by telephone, please call your investment
executive with the information described in the section "How to Purchase
and Redeem Shares," page 15. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders. There is no
assurance the money market funds will be able to maintain a $1.00 share
price. None of the funds is insured or guaranteed by the U.S. Government.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
ADVISER
Pursuant to separate advisory agreements with Value Trust, Total
Return Trust and Special Investment Trust (each an "Advisory Agreement"),
which were approved by each respective Fund's Board of Directors, the
Adviser, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to each of those Funds. The Adviser administers and
acts as the portfolio manager for each Fund and has responsibility for the
actual investment management of the Funds, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security. The Adviser acts as adviser, manager or consultant to seventeen
investment company portfolios which had aggregate assets under management
of approximately $5.6 billion as of April 30, 1996. The
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Adviser's address is 111 South Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed Value Trust from its inception in
1982 to November 1990, when he assumed primary responsibility for the
day-to-day management. Mr. Miller has been responsible for the day-to-day
management of the Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of the Total Return Trust on January 1,
1992. Mr. Miller has also been primarily responsible for the day-to-day
management of the Special Investment Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser. Mr.
Miller has been employed by the Adviser since 1982. Mrs. Dennin is a Vice
President of the Adviser and has been employed by the Adviser since 1985.
From 1985 through 1991, Mrs. Dennin analyzed various industries for the
Adviser including financial services, retail, apparel and insurance.
The Adviser receives for its services a management fee from each Fund
attributable to the net assets of Navigator Shares, calculated daily and
payable monthly. The Adviser receives a fee at an annual rate of 1.0% of
the Value Trust's average daily net assets for the first $100 million of
average net assets; 0.75% of average daily net assets between $100 million
and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets and 0.75% of average daily net
assets exceeding $100 million. The management fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For the Total Return Trust, the Adviser has agreed to waive indefinitely
its fees in any month to the extent the Total Return Trust's expenses
related to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 0.95% of
the Fund's average daily net assets. During the fiscal year ended March
31, 1995, Value Trust paid a management fee of 0.78% of its average daily
net assets, Total Return Trust paid a management fee of 0.75% of its
average daily net assets, and Special Investment Trust paid a management
fee of 0.79% of its average daily net assets.
MANAGER
Pursuant to separate management agreements with American Leading
Companies and Balanced Trust (each a "Management Agreement"), which were
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
Funds' manager. The Funds pay the Manager, pursuant to each Management
Agreement, a management fee equal to an annual rate of 0.75% of American
Leading Companies' average daily net assets and an annual rate of 0.75% of
Balanced Trust's average daily net assets attributable to Navigator
Shares. The management fees paid by the Funds are higher than fees paid by
most other equity funds. Each Fund pays all its other expenses which are
not assumed by the Manager. The Manager has agreed to waive its fees and
to reimburse each Fund for its expenses related to Navigator Shares
(exclusive of taxes, interest, brokerage and extraordinary expenses) as
follows: for American Leading Companies, 0.95% of average net assets
indefinitely; and for Balanced Trust, 1.15% of average net assets until
March 31, 1997 . These agreements are voluntary and may be terminated by
the Manager at any time.
LMCM
LMCM, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to American Leading Companies pursuant to the terms of
an Investment Advisory Agreement with the Manager, which was approved by
the Trust's Board of Directors. LMCM manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays LMCM a fee, computed daily and
payable monthly, at an annual rate equal to 40% of the fee received by the
Manager, or 0.30% of the Fund's average daily net assets attributable to
Navigator Shares.
LMCM has not previously advised a registered investment company.
However, LMCM manages private accounts with a value as of April 30, 1996
of approximately $ million. The address of LMCM is 111 South Calvert
Street, Baltimore, MD 21202.
J. Eric Leo serves as portfolio manager for the Fund and is primarily
responsible for the selection of investments. Mr. Leo has been Executive
Vice President and Chief Investment Officer of LMCM since December 1991.
From October 1986 to December 1991, he served as Managing Director of
Equitable Capital Management, where he managed, among other assets, the
Equitable Account
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#1 -- Growth & Income Commingled Fund.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
BARTLETT & CO.
Bartlett, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to Balanced Trust pursuant to the terms of an
Investment Advisory Agreement with the Manager, which was approved by the
Trust's Board of Directors. Bartlett 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 Bartlett a fee, computed daily
and paid monthly, at an annual rate equal to 66 2/3% of the fee received
by the Manager, or 0.50% of the Fund's average daily net assets. Bartlett
acts as adviser to individuals, corporations, pension and profit sharing
plans and trust accounts, as well as to five investment company portfolios
which had aggregate assets under management of approximately [ ] as of
April 30, 1996. The address of Bartlett is 36 East Fourth Street,
Cincinnati, Ohio 45202.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage the
Fund. Both are senior portfolio managers of Bartlett. Mr. Rabiner has been
employed by Bartlett since 1983 and has served since then as Director of
its Fixed Income Group. He is a member of Bartlett's Management Committee
and Investment Policy Committee. Mr. Uible has been employed by Bartlett
since 1980. He chairs Bartlett's Equity Investment Group, and is
responsible for Bartlett's equity investment processes. He is a member of
Bartlett's Management Committee and Investment Policy Committee.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1995, Legg Mason received from BFDS $222,259, $52,972,
$178,389 and $19,487 for performing such services in connection with Value
Trust, Total Return Trust, Special Investment Trust and American Leading
Companies, respectively.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
is a registered broker-dealer with principal offices located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield may sell Navigator
Shares pursuant to a Dealer Agreement with the Funds' Distributor, Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Funds for selling Navigator Shares.
The Chairman, President and Treasurer of each Fund are employed by
Legg Mason.
DESCRIPTION OF EACH CORPORATION/TRUST AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and Legg
Mason Investors Trust, Inc. were established as Maryland corporations on
January 20, 1982, May 22, 1985, October 31, 1985 and May 5, 1993,
respectively. Value Trust has authorized capital of 200 million shares of
common stock, par value $0.001 per share. Total Return Trust and Special
Investment Trust each has authorized capital of 100 million shares of
common stock, par value $0.001 per share. The Articles of the Trust
authorize issuance of one billion shares of par value $.001 per share of
American Leading Companies and 250 million shares of par value $.001 per
share of Balanced Trust. Each corporation may issue additional series of
shares. Each Fund currently offers two Classes of Shares -- Class A (known
as "Primary Shares") and Class Y (known as "Navigator Shares"). The two
Classes represent interests in the same pool of assets. A separate vote is
taken by a Class of Shares of a Fund if a matter affects just that Class
of Shares. Each Class of Shares may bear certain differing Class-specific
expenses. Salespersons and others entitled to receive compensation for
selling or servicing Fund shares may receive more with respect to one
Class than another.
The initial and subsequent investment minimums for Primary Shares are
$1,000 and $100, respectively. Investments in Primary Shares may
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be made through a Legg Mason or affiliated investment executive, through
the Future First Systematic Investment Plan or through automatic
investment arrangements.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 1.0% of the net assets attributable to Primary
Shares of Special Investment Trust, Total Return Trust and American
Leading Companies and 0.95% of the net assets attributable to Primary
Shares of Value Trust. Investors in Primary Shares may elect to receive
dividends and/or capital gain distributions in cash through the receipt of
a check or a credit to their Legg Mason account. The per share net asset
value of the Navigator Shares, and dividends paid to Navigator
shareholders, are generally expected to be higher than those of Primary
Shares of the Fund, because of the lower expenses attributable to
Navigator Shares. The per share net asset value of the Classes of Shares
will tend to converge, however, immediately after the payment of ordinary
income dividends. Primary Shares of the Funds may be exchanged for the
corresponding Class of Shares of other Legg Mason funds. Investments by
exchange into the Legg Mason funds sold with an initial sales charge are
made at the per share net asset value, plus the sales charge, determined
on the same business day as redemption of the Fund shares the investors in
Primary Shares wish to redeem.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of each Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of each Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the Investment
Company Act of 1940 requires a shareholder vote on certain matters
(including the election of directors, approval of an advisory contract,
and approval of a plan of distribution pursuant to Rule 12b-1). Each Fund
will call a special meeting of the shareholders at the request of 10% or
more of the shares entitled to vote; shareholders wishing to call such a
meeting should submit a written request to the Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon. The address of BFDS is P.O. Box
953, Boston, Massachusetts 02103.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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LEGG MASON VALUE TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON INVESTORS TRUST, INC.
PRIMARY SHARES
NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
July 31, 1996
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other depository institution. Shares are not insured by
the FDIC, the Federal Reserve Board, or any other agency, and are subject to
investment risk, including the possible loss of the principal amount invested.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for Primary Shares or Navigator
Shares (both dated July 31, 1996), as appropriate, which have been filed with
the Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Funds at (410) 539- 0000.
THE LEGG MASON VALUE TRUST, INC. ("Value Trust") is a mutual fund
seeking long-term growth of capital. Value Trust invests principally in those
equity securities which its investment adviser, Legg Mason Fund Adviser, Inc.
("Adviser" or "Manager"), believes are undervalued and therefore offer
above-average potential for capital appreciation. Other investors who seek
capital appreciation may also invest in Value Trust shares.
THE LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
mutual fund seeking capital appreciation and current income in order to achieve
an attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, the Adviser selects a diversified
portfolio, composed of dividend-paying common stocks and securities convertible
into common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common stock
which do not pay current dividends but which offer prospects for capital
appreciation and future income; and debt instruments of various maturities.
Total Return Trust may write covered put and call options.
THE LEGG MASON SPECIAL INVESTMENT TRUST INC. ("Special Investment
Trust") is a mutual fund seeking capital appreciation. Special Investment Trust
invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of the Adviser,
have one or more of the following characteristics: they are not closely followed
by, or are out of favor with, investors generally, and the Adviser believes they
are undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the market
value of the securities will increase; or they are involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code. Special
Investment Trust may also invest in the securities of companies with larger
capitalizations which have one or more of these characteristics.
LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies"), a diversified, professionally managed portfolio, is a separate
series of Legg Mason Investors Trust,
<PAGE>
Inc., an open-end investment company ("Trust"). American Leading Companies seeks
long-term capital appreciation and current income consistent with prudent
investment risk. American Leading Companies normally will seek to achieve its
investment objective by investing not less than 75% of its total assets in the
dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. American Leading Companies' investment
adviser, Legg Mason Capital Management, Inc. ("LMCM"), defines a "Leading
Company" as a company that, in the opinion of LMCM, has attained a major market
share in one or more products or services within its industry(ies), and
possesses the financial strength and management talent to maintain or increase
market share and profit in the future. Such companies typically are well known
as leaders in their respective industries; most are found in the top half of the
Standard & Poor's Composite Index of 500 Stocks ("S&P 500").
LEGG MASON BALANCED TRUST ("Balanced Trust"), a diversified,
professionally managed portfolio, is a separate series of the Trust. Balanced
Trust seeks long-term capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk.
Under normal conditions, Balanced Trust will invest no more than 75% of its
assets in equity securities. The term "equity securities" includes, without
limitation, common stocks, and convertible securities of domestic issuers,
securities of closed-end investment companies and U.S. dollar-denominated
securities of foreign issuers, including American Depositary Receipts ("ADRs")
and Global Depositary Receipts ("GDRs"). Balanced Trust will invest at least 25%
of its portfolio in fixed income securities.
Shares of Navigator Value Trust, Navigator Total Return Trust,
Navigator Special Investment Trust, Navigator American Leading Companies and
Navigator Balanced Trust (collectively referred to as "Navigator Shares")
represent interests in Value Trust, Total Return Trust, Special Investment
Trust, American Leading Companies and Balanced Trust, respectively, that are
currently offered for sale only to institutional clients of the Fairfield Group,
Inc. ("Fairfield") for investment of their own monies and monies for which they
act in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with such Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust. The
Navigator Class of Shares may not be purchased by individuals directly, but
Institutional Clients may purchase shares for Customer Accounts maintained for
individuals.
The Primary Class of shares of Value Trust, Total Return Trust, Special
Investment Trust, American Leading Companies and Balanced Trust (collectively
referred to as "Primary Shares") is offered for sale to all other investors and
may be purchased directly by individuals.
Navigator and Primary Shares of Value Trust, Total Return Trust,
Special Investment Trust, American Leading Companies and Balanced Trust (each
separately referred to as a "Fund" and collectively referred to as the "Funds")
are sold and redeemed without any purchase or redemption charge, although
Institutions may charge their Customer Accounts for services provided in
connection with the purchase or redemption of Navigator Shares. Each Fund pays
management fees to the Adviser/Manager. Primary Shares pay a 12b-1 distribution
fee, but Navigator Shares pay no distribution fees. See "The Funds'
Distributor."
<PAGE>
LEGG MASON WOOD WALKER,
Incorporated
- --------------------------------------------------------------------------------
111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Fund described in the
Prospectus, each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of its shareholders. Value Trust, Total
Return Trust and Special Investment Trust may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes, in an aggregate amount not to exceed 10% of
the value of the total assets of the respective Fund at the time of borrowing;
provided that borrowings, including reverse repurchase agreements, in excess of
5% of such value will be only from banks (although not a fundamental policy
subject to shareholder approval, each Fund will not purchase securities if
borrowings, including reverse purchase agreements, exceed 5% of its total
assets);
2. With respect to 75% of total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, or its agencies and instrumentalities, or purchase more
than 10% of the voting securities of any one issuer;
3. Purchase securities on "margin", except for short-term credits
necessary for clearance of portfolio transactions and except that each Fund may
make margin deposits in connection with the use of futures contracts and options
on futures contracts;
4. Invest more than 25% of its total assets (taken at market value) in
any one industry;
5. Purchase or sell commodities and commodity contracts, but this
limitation shall not prevent each Fund from purchasing or selling options and
futures contracts;
6. Underwrite the securities of other issuers, except insofar as each
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and except to the
extent that the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;
8. Purchase or sell real estate, except that each Fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein (as a
non-fundamental policy changeable without a shareholder vote, each Fund will not
purchase or sell interests in real estate limited partnerships); or
9. Make short sales of securities or maintain a short position, except
that each Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box."
American Leading Companies and Balanced Trust each may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed 5% of the
value of its total assets at the
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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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The foregoing limitations may be changed with respect to a Fund by "the
vote of a majority of the outstanding voting securities" of that Fund, a term
defined in the 1940 Act to mean the vote (a) of 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present, or (b) of more than 50%
of the outstanding voting securities of the Fund, whichever is less.
VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST:
As non-fundamental policies, changeable without shareholder vote, each
Fund will not: (i) not invest more than 5% of its total assets (taken at market
value) in securities of companies that, including their predecessors, have been
in operation less than three years; (ii) purchase or sell interests in oil and
gas or other mineral exploration or development programs or purchase or sell
oil, gas or mineral leases; (iii) invest in securities issued by other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization or by purchase in the open market of securities of
closed-end investment companies where no underwriter or dealer commission or
profit, other than a customary brokerage commission, is involved and only if
immediately thereafter not more than 10% of that Fund's total assets (taken at
market value) would be invested in such securities.
AMERICAN LEADING COMPANIES AND BALANCED TRUST:
The following are some of the non-fundamental limitations which
American Leading Companies and Balanced Trust currently observe. Each Fund may
not:
1. Purchase or sell any oil, gas or mineral exploration or development
programs;
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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 (Neither Fund intends 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. (with
respect to American Leading Companies) and of Bartlett & Co. (with respect to
Balanced Trust) 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 market in which they are traded are not considered restricted,
even it they cannot be sold in the United States.
7. Make investments in warrants if such investments, valued at the
lower of cost or market, exceed 5% of the value of its net assets, which amount
may include warrants that are not listed on the New York or American Stock
Exchanges, provided that such unlisted warrants, valued at the lower of cost or
market, do not exceed 2% of the Fund's net assets, and further provided that
this restriction does not apply to warrants attached to, or sold as a unit with,
other securities. For purposes of this restriction, the term "warrants" does not
include options on securities, stock or bond indices, foreign currencies or
futures contracts.
8. Acquire securities of other open-end investment companies, except in
connection with a merger, consolidation, reorganization or acquisition.
9. Hold more than 10% of the outstanding voting securities of any one
issuer.
10. Purchase or sell interest rate and currency futures contracts,
options on currencies, securities, and securities indexes and options on
interest rate and currency futures contracts, provided, however, that the Fund
may sell covered call options on securities and may purchase options to the
extent necessary to close out its position in one or more call options.
American Leading Companies and Balanced Trust each interprets
fundamental investment limitation (4) to prohibit investment in real estate
limited partnerships.
If a fundamental or non-fundamental percentage limitation set forth
above is complied with at the time an investment is made, a later increase or
decrease in percentage resulting from a
5
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change in value of portfolio securities, in the net asset value of a Fund, or in
the number of securities an issuer has outstanding, will not be considered a
violation of any limitation.
Unless otherwise stated, the investment policies and limitations
contained in this Statement of Additional Information are not fundamental, and
can be changed without shareholder approval.
THE FOLLOWING INFORMATION APPLIES TO EACH FUND UNLESS OTHERWISE STATED:
Foreign Securities
The costs associated with investment in foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, are higher than
those associated with investment in domestic issuers. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause a Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result in losses to a Fund due to subsequent declines in value of the portfolio
security or, if a Fund has entered into a contract to sell the security, could
result in liability to the purchaser.
Since each Fund may invest in securities denominated in currencies
other than the U.S. dollar and since each Fund may hold foreign currencies, a
Fund may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rates between such currencies and the U.S. dollar.
Changes in the currency exchange rates may influence the value of each Fund's
shares, and also may affect the value of dividends and interest earned by that
Fund and gains and losses realized by that Fund. Exchange rates are determined
by the forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other factors.
In addition to purchasing foreign securities, each Fund may invest in
ADRs. Generally, ADRs, in registered form, are denominated in U.S. dollars and
are designed for use in the domestic market. Usually issued by a U.S. bank or
trust company, ADRs are receipts that demonstrate ownership of the underlying
securities. For purposes of each Fund's investment policies and limitations,
ADRs are considered to have the same classification as the securities underlying
them. Balanced Trust may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank evidencing
its ownership of the underlying foreign securities.
Illiquid Securities
Value Trust, Total Return Trust and Special Investment Trust each may
invest up to 10% of its net assets in illiquid securities. American Leading
Companies and Balanced Trust each may invest up to 15% of its net assets in
illiquid securities. For this purpose, "illiquid securities" are those that
cannot be disposed of within seven days for approximately the price at which the
Fund values the security. Illiquid securities include repurchase agreements with
terms of greater than seven days and restricted securities other than those the
Adviser/LMCM or Bartlett & Co.
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("Bartlett"), investment adviser to Balanced Trust, has determined are liquid
pursuant to guidelines established by each Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the Securities
Act of 1933, or pursuant to an exemption from registration. A Fund may be
required to pay part or all of the costs of such registration, and a
considerable period may elapse between the time a decision is made to sell a
restricted security and the time the registration statement becomes effective.
Judgment plays a greater role in valuing illiquid securities than those for
which a more active market exists.
SEC regulations permit the sale of certain restricted securities to
qualified institutional buyers. The investment adviser to each Fund, acting
pursuant to guidelines established by such Fund's Board of Directors, may
determine that certain restricted securities qualified for trading on this
newly developing market are liquid. If the market does not develop as
anticipated, restricted securities in each Fund's portfolio may adversely
affect that Fund's liquidity.
Debt Securities
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's ("S&P") represent the opinions of those agencies. Such ratings are
relative and subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers.
In addition to ratings assigned to individual bond issues, each adviser
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which a Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial conditions of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of principal and interest.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by each Fund's adviser to determine, to
the extent possible, that the planned investment is sound.
If a security rated A or above at the time of purchase by American
Leading Companies is subsequently downgraded to a rating below A, LMCM will
consider that fact in determining whether to dispose of the security, but
will dispose of it if necessary to insure that no more than 5% of net assets
are invested in debt securities rated below A. If one rating agency has rated
a security A or better and another agency has rated it below A, LMCM may
rely on the higher rating in determining to purchase or retain the security.
Bonds rated A may be given a "+" or "-" by the rating agency. The Fund
considers bonds denominated A, A+ or A- to be included in the rating A.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a
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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. American Leading Companies does
not intend to purchase any convertible securities rated below BB by S&P or below
Ba by Moody's or, if unrated, deemed by LMCM to be of comparable quality.
Moody's describes securities rated Ba as having "speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class."
VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST:
If an investment grade security purchased by Value Trust, Total Return
Trust or Special Investment Trust is subsequently given a rating below
investment grade, the Adviser will consider that fact in determining whether to
retain that security in that Fund's portfolio, but is not required to dispose of
it.
AMERICAN LEADING COMPANIES AND BALANCED TRUST:
When-Issued Securities
Each Fund may enter into commitments to purchase securities on a
when-issued basis. When a Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of the purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until they
are delivered to it. This is normally seven to 15 days later, but could be
longer. Use of this practice would have a leveraging effect on the Fund.
American Leading Companies does not currently expect that its
commitment to purchase when-issued securities will at any time exceed, in the
aggregate, 5% of its net assets.
To meet its payment obligation under a when-issued commitment, a Fund
will establish a segregated account with its custodian and maintain cash or
liquid high-quality debt obligations, in an amount at least equal in value to
that Fund's commitments to purchase when-issued securities.
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A Fund may sell the securities underlying a when-issued purchase, which
may result in capital gains or losses.
AMERICAN LEADING COMPANIES:
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 LMCM believes that the premium received by the Fund
will exceed the extent to which the market price of the underlying security will
exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by the Fund declines, the amount of such decline will be offset wholly or in
part by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. The Fund would give up the ability to sell the portfolio
securities used to cover the call option while the call option was outstanding.
In addition, the Fund could lose the ability to participate in an increase in
the value of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of closing
out the call option (or could be negated if the buyer chose to exercise the call
option at an exercise price below the securities' current market value).
If the Fund desires to close out its obligation under a call option it
has sold, it will have to purchase an offsetting option. The value of an option
position will reflect, among other things, the current market price of the
underlying security, futures contract or currency, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, and general market
conditions. Accordingly, when the price of the security rises toward the strike
price of the option, the cost of offsetting the option will negate to some
extent the benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy depends
upon the Adviser's ability to forecast the direction of price fluctuations in
the underlying market or market sector.
The Fund may write exchange-traded options. The ability to establish
and close out positions on the exchange is subject to the maintenance of a
liquid secondary market. Although the Fund intends to write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. With respect to options written by the
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, because the Fund must maintain a covered
position with respect to any call option it writes on a security, the Fund may
not sell the underlying security during the period it is obligated under such
option. This requirement may impair the Fund's ability to sell a portfolio
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
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mutual funds, and, if the guidelines so require, will set aside cash and/or
liquid, high-grade debt securities in a segregated account with its custodian in
the amount prescribed, as marked-to- market daily. Securities positions used for
cover and securities held in a segregated account cannot be sold or closed out
while the strategy is outstanding, unless they are replaced with similar assets.
As a result, there is a possibility that the use of cover or segregation
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
THE FOLLOWING INFORMATION APPLIES TO BALANCED TRUST:
MORTGAGE-RELATED SECURITIES Mortgage-related securities represent an
ownership interest in a pool of residential mortgage loans. These securities are
designed to provide monthly payments of interest, and in most instances,
principal to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed-through" to investors such as the Fund. Most issuers or
poolers provide guarantees of payments, regardless of whether or not the
mortgagor actually makes the payment. The guarantees made by issuers or poolers
are backed by various forms of credit, insurance and collateral. They may not
extend to the full amount of the pool.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The majority of mortgage-related securities currently available are
issued by governmental or government-related organizations formed to increase
the availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is GNMA. GNMA certificates ("GNMAs") are interests
in pools of loans insured by the Federal Housing Administration or by the
Farmer's Home Administration ("FHA"), or guaranteed by the Veterans
Administration ("VA"). The Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") each issue pass-through
securities which are guaranteed as to principal and interest by FNMA and FHLMC,
respectively.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For example,
GNMAs tend to have a longer average life than FHLMC participation certificates
("PCs") because there is a tendency for the conventional and privately-insured
mortgages underlying FHLMC PCs to repay at faster rates than the FHA and VA
loans underlying GNMAs. In addition, the term of a security may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage pre-payments is affected by various
factors, including the level of interest rates, general economic conditions, the
location and age of the mortgaged property and other social and demographic
conditions.
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In determining the dollar-weighted average maturity of the fixed income
portion of the portfolio, Bartlett will follow industry practice in assigning an
average life to the mortgage-related securities of the Fund unless the interest
rate on the mortgages underlying such securities is such that a different
prepayment rate is likely. For example, where a GNMA has a high interest rate
relative to the market, that GNMA is likely to have a shorter overall maturity
than a GNMA with a market rate coupon. Moreover, Bartlett may deem it
appropriate to change the projected average life for a Fund's mortgage-related
security as a result of fluctuations in market interest rates and other factors.
Quoted yields on mortgage-related securities are typically based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
average life yield. Reinvestment of the prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Fund. The compounding effect from the reinvestments of monthly payments received
by the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
Like other debt securities, the value of mortgage-related securities
will tend to rise when interest rates fall, and fall when rates rise. The value
of mortgage-related securities may also change because of changes in the
market's perception of the creditworthiness of the organization that issued or
guaranteed them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
MUNICIPAL OBLIGATIONS
The municipal obligations in which the Fund may invest include
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities, such as fire and sanitation
vehicles, telecommunications equipment and other capital assets. Rather than
holding such obligations directly, the Fund may purchase a participation
interest in a municipal lease obligation from a bank or other third party. A
participation interest gives the Fund a specified, undivided pro-rata interest
in the total amount of the obligation.
Municipal lease obligations have risks distinct from those associated
with general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt. These
may include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "non- appropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
In determining the liquidity of a municipal lease obligation, Bartlett
will distinguish between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond or other investment structure using a municipal
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lease-purchase agreement as its base. While the former may present special
liquidity issues, the latter are based on a well established method of securing
payment of a municipal obligation. The Fund's investment in municipal lease
obligations and participation interests therein will be treated as illiquid
unless Bartlett determines, pursuant to guidelines established by the Board of
Directors, that the security could be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the security.
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Act, and laws that may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power or ability of issuers to meet their
obligations for the payment of interest and principal on their municipal
obligations may be materially and adversely affected.
The United States Supreme Court has held that Congress may subject the
interest on municipal obligations to federal income tax. It can be expected
that, as in the past, proposals will be introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Proposals also may be introduced in state
legislatures which could affect the state tax treatment of the Fund's
distributions. If any such proposals were enacted, the availability of municipal
obligations for investment by the Fund and the value of its assets could be
materially and adversely affected. In such event, the Fund would re-evaluate its
investment objective and policies and consider changes in its structure or
possible dissolution.
THE FOLLOWING INFORMATION APPLIES TO VALUE TRUST, TOTAL RETURN TRUST, SPECIAL
INVESTMENT TRUST AND BALANCED TRUST:
Futures Contracts
Each Fund may from time to time purchase or sell futures contracts. In
the purchase of a futures contract, the purchaser agrees to buy a specified
underlying instrument at a specified future date. In the sale of a futures
contract, the seller agrees to sell the underlying instrument at a specified
future date. The price at which the purchase or sale will take place is fixed at
the time the contract is entered into. Some currently available contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on indexes of securities such as S&P 500. Futures contracts can be held
until their delivery dates, or can be closed out before then, if a liquid
secondary market is available. A futures contract is closed out by entering into
an opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery date as
a contract the party had sold) at the current price as determined on the futures
exchange.
As the purchaser or seller of a futures contract, a Fund would not be
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, the Fund would be required to deposit
with its custodian, in the name of the futures broker (known as a futures
commission merchant, or "FCM"), a percentage of the contract's value. This
amount, which is known as initial margin, generally equals 10% or less of the
value of the futures contract. Unlike margin in securities transactions, initial
margin on futures contracts does not involve
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borrowing to finance the futures transactions. Rather, initial margin is in the
nature of a good faith deposit or performance bond, and would be returned to
that Fund when the futures position is terminated, after all contractual
obligations have been satisfied. Initial margin may be maintained either in cash
or in liquid high-quality debt securities, such as U.S. government securities.
The value of a futures contract tends to increase and decrease with the
value of the underlying instrument. The purchase of a futures contract will tend
to increase exposure to positive and negative price fluctuations in the
underlying instrument in the same manner as if the underlying instrument had
been purchased directly. By contrast, the sale of a futures contract will tend
to offset both positive and negative market price changes.
As the contract's value fluctuates, payments known as variation margin
or maintenance margin are made to or received from the FCM. If the contract's
value moves against the Fund, (i.e., the Fund's futures position declines in
value), the Fund may be required to make payments to the FCM, and, conversely,
the Fund may be entitled to receive payments from the FCM if the value of its
futures position increases. This process is known as "marking-to-market" and
takes place on a daily basis. Variation margin does not involve borrowing to
finance the futures transactions, but rather represents a daily settlement of
the Fund's obligations to or from a clearing organization.
Options on Securities, Indexed Securities and Futures Contracts
PURCHASING PUT OR CALL OPTIONS By purchasing a put (or call) option, a
Fund obtains the right (but not the obligation) to sell (or buy) the underlying
instrument at a fixed strike price. The option's underlying instrument may be a
specific security, an indexed security or a futures contract. The option may
give the Fund the right to sell (or buy) only on the option's expiration date,
or may be exercisable at any time up to and including that date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium).
A Fund may terminate its position in an option it has purchased by
allowing the option to expire, closing it out in the secondary market at its
current price, if a liquid secondary market exists, or by exercising it. If the
option is allowed to expire, the Fund will lose the entire premium paid.
WRITING PUT OR CALL OPTIONS By writing a put (or call) option, a Fund
takes the opposite side of the transaction from the option's purchaser (or
seller). In return for receipt of the premium, the Fund assumes the obligation
to pay the strike price for the option's underlying instrument (or to sell or
deliver the option's underlying instrument) if the other party to the option
chooses to exercise it. When writing an option on a futures contract, a Fund
will be required to make margin payments to an FCM as described above for
futures contracts.
Before exercise, a Fund may seek to terminate its position in an option
it has written by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
Over-the-counter and Exchange-traded Options
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Each Fund may purchase and write both over-the-counter ("OTC") and
exchange-traded options. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between a Fund and its
contra-party with no clearing organization guarantee. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make/take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC market.
Exchange markets for options on debt securities exist, but the ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market.
Value Trust, Total Return Trust and Special Investment Trust each may
invest up to 10% and Balanced Trust may invest up to 15% of its assets in
illiquid securities. The term "illiquid securities" includes purchased OTC
options. Assets used as cover for OTC options written by the Fund also will be
deemed illiquid securities, unless the OTC options are sold to qualified dealers
who agree that the Fund may repurchase any OTC options it writes for a maximum
price to be calculated by a formula set forth in the option agreement. The cover
for an OTC option subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Cover for Options and Futures Strategies
Each Fund will not use leverage in its hedging strategies involving
options and futures contracts. Each Fund will hold securities, options or
futures positions whose values are expected to offset ("cover") its obligations
under the transactions. Each Fund will not enter into hedging strategies
involving options and futures contracts that expose the Fund to an obligation to
another party unless it owns either (i) an offsetting ("covered") position in
securities, options or futures contracts or (ii) has cash, receivables and
liquid debt securities with a value sufficient at all times to cover its
potential obligations. Each Fund will comply with guidelines established by the
SEC with respect to coverage of these strategies by mutual funds and, if the
guidelines so require, will set aside cash and/or liquid, high-grade debt
securities in a segregated account with its custodian in the amount prescribed.
Securities, options or futures contracts used for cover and securities held in a
segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of a Fund's assets could impede the portfolio management or the Fund's ability
to meet redemption requests or other current obligations.
Risks of Futures and Related Options Trading
Successful use of futures contracts and related options depends upon
the ability of the adviser to assess movements in the direction of overall
securities and interest rates, which requires different skills and techniques
than assessing the value of individual securities. Moreover, futures contracts
relate not to the current price level of the underlying instrument, but to the
anticipated price level at some point in the future; trading of stock index
futures may not reflect the trading of the securities that are used to formulate
the index or even actual fluctuations in the index itself. There is, in
addition, the risk that movements in the price of the futures contract will not
correlate with the movements in the prices of the securities being hedged. Price
distortions in the
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marketplace, such as result from increased participation by speculators in the
futures market, may also impair the correlation between movements in the prices
of futures contracts and movements in the prices of the hedged securities. If
the price of the futures contract moves less than the price of securities that
are subject to the hedge, the hedge will not be fully effective; however, if the
price of the securities being hedged has moved in an unfavorable direction, a
Fund normally would be in a better position than if it had not hedged at all. If
the price of securities being hedged has moved in a favorable direction, this
advantage may be partially offset by losses on the futures position.
Options have a limited life and thus can be disposed of only within a
specific time period. Positions in futures contracts may be closed out only on
an exchange or board of trade that provides a secondary market for such futures
contracts. Although each Fund intends to purchase and sell futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market, there is no assurance that such a market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures position and, in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase which, in the event of adverse price movements, could be lost.
Sellers of options on futures contracts must post initial margin and are subject
to additional margin calls that could be substantial in the event of adverse
price movements. In addition, a Fund's activities in the futures markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price of a
futures contract or related option is permitted to change in a single day. If
the price of a contract moves to the limit for several consecutive days, a Fund
may be unable during that time to close its position in that contract and may
have to continue making payments of variation margin. A Fund may also be unable
to dispose of securities or other instruments being used as "cover" during such
a period.
Risks of Options Trading
The success of each Fund's option strategies depends on many factors,
the most significant of which is the adviser's ability to assess movements in
the overall securities and interest rate markets.
The exercise price of the options may be below, equal to or above the
current market value of the underlying securities or indexes. Purchased options
that expire unexercised have no value. Unless an option purchased by a Fund is
exercised or unless a closing transaction is effected with respect to that
position, the Fund will realize a loss in the amount of the premium paid and any
transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although each
Fund intends to purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at
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any specific time. Closing transactions with respect to OTC options may be
effected only by negotiating directly with the other party to the option
contract. Although each Fund will enter into OTC options with dealers capable of
entering into closing transactions with the Fund, there can be no assurance that
a Fund will be able to liquidate an OTC option at a favorable price at any time
prior to expiration. In the event of insolvency of the contra-party, a Fund may
be unable to liquidate or exercise an OTC option, and could suffer a loss of its
premium. Also, the contra-party, although solvent, may refuse to enter into
closing transactions with respect to certain options, with the result that a
Fund would have to exercise those options which it has purchased in order to
realize any profit. With respect to options written by a Fund, the inability to
enter into a closing transaction may result in material losses to that Fund. For
example, because each Fund must maintain a covered position with respect to any
call option it writes on a security or index, a Fund may not sell the underlying
security or currency (or invest any cash, government securities or short-term
debt securities used to cover an index option) during the period it is obligated
under the option. This requirement may impair a Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Options on indexes are settled exclusively in cash. If a Fund writes a
call option on an index, the Fund will not know in advance the difference, if
any, between the closing value of the index on the exercise date and the
exercise price of the call option itself, and thus will not know the amount of
cash payable upon settlement. In addition, a holder of an index option who
exercises it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change.
Each Fund's activities in the options markets may result in higher
portfolio turnover rates and additional brokerage costs.
Additional Limitations on Futures and Options
As a non-fundamental policy, each Fund will write a put or call on a
security only if (a) the security underlying the put or call is permitted by the
investment policies of that Fund, and (b) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined as of the
date the options are sold does not exceed 25% of that Fund's net assets.
Also as a non-fundamental policy, each Fund will purchase and write
puts and calls on securities, stock index futures or options on stock index
futures, or on financial futures, only if: (a) (i) such options or futures are
offered through the facilities of a national securities association approved by
the Commissioner under Rule 260.105.35 of the California Blue Sky Regulations or
are listed on a national securities or commodities exchange or (ii) such options
are OTC options and (A) the OTC options involved are not readily available on an
exchange market, (B) at the time of purchase of any OTC option there is, in the
judgment of the Fund's investment adviser, an active OTC market which will
provide liquidity and pricing for such options and (C) any dealer involved in
the purchase or sale of the OTC option has a net worth of at least $20 million
as reported on its most recent financial statement; (b) the aggregate premiums
paid on all such options which are held by the Fund at any time do not exceed
20% of that Fund's total net assets; and (c) the aggregate margin deposits
required on all such futures or options on futures contracts held at any time do
not exceed 5% of the Fund's total assets.
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Under regulations adopted by the Commodity Futures Trading Commission
("CFTC"), futures contracts and related options may be used by each Fund (a) for
hedging purposes, without quantitative limits, and (b) for other purposes to the
extent that the amount of margin deposit on all such non-hedging futures
contacts owned by the Fund, together with the amount of premiums paid by that
Fund on all such non-hedging options held on futures contracts, does not exceed
5% of the market value of that Fund's net assets.
The foregoing limitations, as well as those set forth in the prospectus
regarding each Fund's use of futures and related options transactions, do not
apply to options attached to, or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options, such as rights, certain debt securities and indexed
securities.
The above limitations on each Fund's investments in futures contracts
and options may be changed as regulatory agencies permit. However, each Fund
will not modify the above limitations to increase its permissible futures and
options activities without supplying additional information, as appropriate, in
a current Prospectus or Statement of Additional Information.
Indexed Securities
Indexed securities are securities whose prices are indexed to the
prices of securities indexes, currencies or other financial statistics. Indexed
securities typically are debt securities or deposits whose value at maturity
and/or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities fluctuates (either directly or
inversely, depending upon the instrument) with the performance of the index,
security, currency or other instrument to which they are indexed and may also be
influenced by interest rate changes in the U.S. and abroad. At the same time,
indexed securities are subject to the credit risks associated with the issuer of
the security, and their value may substantially decline if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations and certain U.S. government agencies. The
Adviser/Bartlett will only purchase indexed securities of issuers which it
determines present minimal credit risks and will monitor the issuer's
creditworthiness during the time the indexed security is held. The
Adviser/Bartlett will use its judgment in determining whether indexed securities
should be treated as short-term instruments, bonds, stock or as a separate asset
class for purposes of each Fund's investment allocations, depending on the
individual characteristics of the securities. Each Fund currently does not
intend to invest more than 5% of its total assets in indexed securities. Indexed
securities may fluctuate according to a multiple of changes in the underlying
instrument and, in that respect, have a leverage-like effect on a Fund.
Forward Currency Contracts
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. Each Fund will not speculate
with forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect to
specific transactions. For example, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock-in" the U.S.
17
<PAGE>
dollar price of the security or the U.S. dollar equivalent of such payment, as
the case may be, by entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. A Fund will thereby be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between the
date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
Each Fund also may use forward currency contracts in connection with
portfolio positions to lock-in the U.S. dollar value of those positions or to
shift the Fund's exposure to foreign currency fluctuations from one country to
another. For example, when the adviser believes that the currency of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another currency, it may enter into a forward currency contract to
sell the amount of the former foreign currency approximating the value of some
or all of a Fund's securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
At or before the maturity date of a forward currency contract requiring
a Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward currency contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Fund would
realize a gain or loss as a result of entering into such an offsetting forward
currency contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and the offsetting contract.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future value
of such securities in a foreign currency will change as a consequence of market
movements in the value of those securities between the date the forward currency
contract is entered into and the date it matures. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot (i.e.,
cash) market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver under the forward contract and the decision is made to sell the security
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of foreign
currency a Fund is obligated to deliver under the forward contract. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward currency contracts involve the risk that anticipated currency movements
will not be accurately predicted, causing a Fund to sustain losses on these
contracts and transaction costs. Each Fund may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or (2) the Fund maintains cash, U.S. government
securities
18
<PAGE>
or other liquid, high-grade debt securities in a segregated account in an amount
not less than the value of the Fund's total assets committed to the consummation
of the contract.
The cost to a Fund of engaging in forward currency contracts varies
with factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. Each Fund will deal only with banks, broker/dealers or other financial
institutions which the adviser deems to be of high quality and to present
minimum credit risk. The use of forward currency contracts does not eliminate
fluctuations in the prices of the underlying securities each Fund owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Warrants
Although not a fundamental policy subject to shareholder vote, so long
as a Fund's shares continue to be registered in certain states, that Fund may
not invest more than 5% of the value of its net assets, taken at the lower of
cost or market value, in warrants or invest more than 2% of the value of such
net assets in warrants not listed on the New York or American Stock Exchanges.
FOR EACH FUND:
Portfolio Lending
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized institutional
borrowers of securities, provided that cash or equivalent collateral, equal to
at least 100% of the market value of the securities loaned, is continuously
maintained by the borrower with the Fund. During the time portfolio securities
are on loan, the borrower will pay the Fund an amount equivalent to any
dividends or interest paid on such securities, and the Fund may invest the cash
collateral and earn income, or it may receive an agreed upon amount of interest
income from the borrower who has delivered equivalent collateral. These loans
are subject to termination at the option of the Fund or the borrower. Each Fund
may pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. Each Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment. The risks of securities lending are similar to those of repurchase
agreements. Each Fund presently does not intend to lend more than 5% of its
portfolio securities at any given time.
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Repurchase Agreements
Repurchase agreements are usually for periods of one week or less, but
may be for longer periods. The Funds will not enter into repurchase agreements
of more than seven days' duration if more than 15% of net assets (with respect
to American Leading Companies and Balanced Trust) or more than 10% of net assets
(with respect to Value Trust, Total Return Trust and Special Investment Trust)
would be invested in such agreements and other illiquid investments. To the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, a Fund might suffer a loss. If
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund could be delayed or limited. However,
each Fund has adopted standards for the parties with whom it may enter into
repurchase agreements, including monitoring by the Adviser/LMCM/Bartlett of the
creditworthiness of such parties which the Fund's Board of Directors believes
are reasonably designed to assure that each party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement.
When a Fund enters into a repurchase agreement, it will obtain as
collateral from the other party securities equal in value to 102% of the amount
of the repurchase agreement (or 100%, if the securities obtained are U.S.
Treasury bills, notes or bonds). Such securities will be held by the Funds'
custodian or an approved securities depository or book-entry system.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting each Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information and for information
regarding any federal, state or local taxes that might be applicable to them.
General
Each Fund intends to qualify (in the case of Balanced Trust) or 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, each Fund must distribute annually to
its shareholders at least 90% of its investment company taxable income
(generally, net investment income plus any net short-term capital gain and any
net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. For each Fund,
these requirements include the following: (1) at least 90% of the Fund's
gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward currency contracts)
derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) the Fund must derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less
than three months -- options or futures contracts, or foreign currencies
(or options, futures or forward contracts thereon) that are not directly
related to that Fund's principal business of investing in securities (or
options and futures with respect thereto) ("Short-Short Limitation"); (3)
at the close of each quarter of 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.
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government securities, securities of other RICs and other securities, with those
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of that Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in the securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Dividends and interest received by each Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
Dividends and Other Distributions
Dividends and other distributions declared by a Fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if the distributions are paid by the Fund during the following
January. Accordingly, those distributions will be taxed to shareholders for the
year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
for any Fund may not exceed the aggregate dividends received by that Fund for
the taxable year from domestic corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax. Distributions
of net capital gain (the excess of net long-term capital gain over net
short-term capital loss) made by each Fund do not qualify for the
dividends-received deduction.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Passive Foreign Investment Companies
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the
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PFIC income will be included in the Fund's investment company taxable income
and, accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders.
Pursuant to proposed regulations, open-end RICs, such as the Funds,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of such a
PFIC's stock over the adjusted basis in that stock (including mark-to-market
gain for each prior year for which an election was in effect).
Options, Futures, Forward Currency Contracts and Foreign Currencies
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses each Fund
realizes in connection therewith.
Gains from the disposition of foreign currencies (except certain gains
that may be excluded by future regulations) -- and gains from options derived
by American Leading Companies or from options, futures and forward currency
contracts derived by Value Trust, Total Return Trust, Special Investment Trust
or Balanced Trust, with respect to its business of investing in securities
or foreign currencies -- will qualify as permissible income under the
Income Requirement. However, income from the disposition of options (other
than those on foreign currencies) (with respect to American Leading Companies),
and options and futures contracts (other than those on foreign currencies)
(with respect to Value Trust, Total Return Trust, Special Investment Trust
and Balanced Trust) will be subject to the Short-Short Limitation if they
are held for less than three months. For Value Trust, Total Return Trust,
Special Investment Trust and Balanced Trust, income from the disposition of
foreign currencies and options, futures and forward contracts thereon also
will be subject to the Short-Short Limitation if they are held for less than
three months and are not directly related to a Fund's principal business
of investing in securities (or options and futures with respect thereto). For
American Leading Companies, income from the disposition of foreign currencies
that are not directly related to its principal business of investing in
securities (or options with respect thereto) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. To the
extent this treatment is not available, a Fund may be forced to defer the
closing out of certain options, futures, forward currency contracts and
foreign currency positions beyond the time when it otherwise would be
advantageous to do so, in order for it to continue to qualify as a RIC.
Regulated futures contracts and options that are subject to section
1256 of the Code (collectively, "Section 1256 contracts") and are held by a Fund
at the end of each taxable year will be required to be "marked-to-market" for
federal income tax purposes (that is, treated as having been sold at that time
at market value). Any unrealized gain or loss recognized under this
mark-to-
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market rule will be added to any realized gains and losses on Section 1256
contracts actually sold by the Fund during the year, and the resulting gain or
loss will be treated (without regard to the holding period) as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. These rules may
operate to increase the amount of dividends, which will be taxable to
shareholders, that must be distributed to meet the Distribution Requirement and
avoid imposition of the Excise Tax, without providing the cash with which to
make the distributions. Each Fund may elect to exclude certain transactions from
section 1256, although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income when
distributed to a Fund's shareholders).
FOR EACH FUND:
When a covered call option written (sold) by a Fund expires, the Fund
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a Fund terminates its obligations under
such an option by entering into a closing transaction, the Fund realizes a
short-term capital gain (or loss), depending on whether the cost of the closing
transaction is less than (or exceeds) the premium received when the option was
written. When a covered call option written by a Fund is exercised, the Fund is
treated as having sold the underlying security, producing long-term or
short-term capital gain or loss, depending on the holding period of the
underlying security and whether the sum of the option price received upon the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the underlying security.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and certain of
its affiliates. Navigator Shares are currently offered for sale only to
Institutional Clients, to clients of Trust Company for which Trust Company
exercises discretionary investment management responsibility, to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
Primary Shares are available to all other investors.
Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future First
Systematic Investment Plan. Under this plan you may arrange for automatic
monthly investments in Primary Shares of $50 or more by authorizing Boston
Financial Data Services ("BFDS"), each Fund's transfer agent, to prepare a check
each month drawn on your checking account. Each month the transfer agent will
send a check to your bank for collection, and the proceeds of the check will be
used to buy Primary Shares at the per share net asset value determined on the
day the check is sent to your bank. You will receive a quarterly account
statement. You may terminate the Future First Systematic Investment Plan at any
time without charge or penalty. Forms to enroll in the Future First Systematic
Investment Plan are available from any Legg Mason or affiliated office.
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Investors in Primary Shares may also buy additional Primary Shares
through a plan permitting transfers of funds from a financial institution.
Certain financial institutions may allow the investor, on a pre-authorized
basis, to have $50 or more automatically transferred monthly for investment in
shares of a Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn
on, the investor may be subject to extra charges in order to cover collection
costs. These charges may be deducted from the investor's shareholder account.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more,
you may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Self- Employed Individual Retirement Plan ("Keogh Plan"), Simplified Employee
Pension Plan ("SEP") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value per share
determined as of the close of regular trading of the New York Stock Exchange
("Exchange") (normally 4:00 p.m., eastern time) ("close of the Exchange") on the
first day of each month. If the Exchange is not open for business on that day,
the shares will be redeemed at the per share net asset value determined as of
the close of regular trading of the Exchange on the preceding business day. The
check for the withdrawal payment will usually be mailed to you on the next
business day following redemption. If you elect to participate in the Systematic
Withdrawal Plan, dividends and other distributions on all Primary Shares in your
account must be automatically reinvested in Primary Shares. You may terminate
the Systematic Withdrawal Plan at any time without charge or penalty. Each Fund,
its transfer agent, and Legg Mason Wood Walker, Incorporated ("Legg Mason") also
reserve the right to modify or terminate the Systematic Withdrawal Plan at any
time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan, because
you may incur tax liabilities in connection with such purchases and withdrawals.
Each Fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase is
equal to at least one year's scheduled withdrawals. In addition, if you maintain
a Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
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Other Information Regarding Redemption
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, by a Fund or its
distributor except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in markets
the Fund normally utilizes is restricted, or an emergency, as defined by rules
and regulations of the SEC, exists, making disposal of the Fund's investments or
determination of its net asset value not reasonably practicable, or (iii) for
such other periods as the SEC by regulation or order may permit for protection
of each Fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
Each Fund reserves the right, under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part by securities valued in
the same way as they would be valued for purposes of computing the Fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
will be subject to fluctuation in the market price of those securities until
they are sold. Each Fund does not redeem "in kind" under normal circumstances,
but would do so where the adviser determines that it would be in the best
interests of the shareholders as a whole.
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily for each Class as
of the close of the Exchange, on every day the Exchange is open, by dividing the
value of the total assets attributable to that Class, less liabilities
attributable to that Class, by the number of shares of that Class outstanding.
Pricing will not be done on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
As described in the Prospectuses, securities for which market quotations are
readily available are valued at current market value. Securities traded on an
exchange or NASD National Market System securities are normally valued at last
sale prices. Other over-the-counter securities, and securities traded on
exchanges for which there is no sale on a particular day (including debt
securities), are valued at the mean of latest closing bid and asked prices.
Short-term securities, except commercial paper, are valued at cost. Commercial
paper is valued at amortized cost. Securities and other assets quoted in foreign
currencies will be valued in U.S. dollars based on the currency exchange rates
prevailing at the time of the valuation. All other securities are valued at fair
value as determined by or under the direction of the appropriate Fund's Board of
Directors. Premiums received on the sale of call options are included in the net
asset value of each Class, and the current market value of options sold by a
Fund will be subtracted from net assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in each Fund at commencement of
operations of each class of Fund shares. The tables assume that all dividends
and other distributions are reinvested in each respective Fund. They include the
effect of all charges and fees applicable to the respective class
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of shares the Fund has paid. (There are no fees for investing or reinvesting in
the Funds, and there are no redemption fees.) They do not include the effect of
any income tax that an investor would have to pay on distributions.
VALUE TRUST:
PRIMARY SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1983* $16,160 $ 241 $16,401
1984 18,870 555 19,425
1985 23,583 1,100 24,683
1986 32,556 1,954 34,510
1987 35,503 2,421 37,924
1988 32,268 2,461 34,729
1989 37,650 3,459 41,109
1990 39,891 4,399 44,290
1991 37,701 5,313 43,014
1992 44,210 7,204 51,414
1993 50,184 8,819 59,003
1994 52,789 9,548 62,337
1995 57,817 10,610 68,427
* April 16, 1982 (commencement of operations) to March 31, 1983.
NAVIGATOR SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,805 $6 $10,811
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1995 would have been
26
<PAGE>
$40,420, and the investor would have received a total of $13,797 in
distributions. If the Adviser had not waived or reimbursed certain Fund expenses
in the 1983-1995 fiscal years, returns would have been lower.
TOTAL RETURN TRUST:
PRIMARY SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1986* $10,780 - $10,780
1987 11,673 $ 211 11,884
1988 10,295 380 10,675
1989 11,690 603 12,293
1990 11,875 846 12,721
1991 11,499 1,216 12,715
1992 13,885 1,830 15,715
1993 16,234 2,605 18,839
1994 16,637 3,064 19,701
1995 16,593 3,482 20,075
* November 21, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,203 $160 $10,363
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1995 would have been $12,790, and the investor would
have received a total of $4,940 in distributions. If the Adviser had not waived
or reimbursed certain Fund expenses in the 1986-1995 fiscal years, returns would
have been lower.
27
<PAGE>
SPECIAL INVESTMENT TRUST:
PRIMARY SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1986* $11,530 - $11,530
1987 13,051 $ 23 13,074
1988 11,107 113 11,220
1989 12,982 144 13,126
1990 14,890 253 15,143
1991 17,777 615 18,392
1992 21,249 905 22,154
1993 23,528 953 24,481
1994 28,511 1,197 29,708
1995 26,707 1,108 27,815
* December 30, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,481 - $10,481
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1995 would have been $19,960, and the investor would
have received a total of $4,605 in distributions. If the Adviser had not waived
or reimbursed certain Fund expenses in the 1986-1995 fiscal years, returns would
have been lower.
28
<PAGE>
AMERICAN LEADING COMPANIES:
PRIMARY SHARES
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1994* $9,690 $ 24 $9,714
1995 10,180 140 10,320
* September 1, 1993 (commencement of operations) to March 31, 1994.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1995 would have
been $10,180, and the investor would have received a total of $135 in
distributions. If the Adviser had not waived or reimbursed certain Fund expenses
in the 1994 and 1995 fiscal years, returns would have been lower.
The table above is based only on Primary Shares of American Leading
Companies. As of the date of this Statement of Additional Information, Navigator
Shares of American Leading Companies have no performance history of their own.
Total Return Calculations
Average annual total return quotes used in each Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
separately for each Class according to the following formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by a Fund are assumed to have been reinvested
at net asset value on the reinvestment dates during the period.
From time to time each Fund may compare the performance of a Class of
Shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all
29
<PAGE>
dividends. It takes no account of the costs of investing or the tax
consequences of distributions. The Funds invest in many securities that are not
included in the S&P 500.
Each Fund may also cite rankings and ratings, and compare the return of
a Class with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. Each Fund may also refer in
such materials to mutual fund performance rankings, ratings, comparisons with
funds having similar investment objectives, and other mutual funds reported in
independent periodicals, including, but not limited to, FINANCIAL WORLD, MONEY
Magazine, FORBES, BUSINESS WEEK, BARRON'S, FORTUNE, THE KIPLINGER LETTERS, THE
WALL STREET JOURNAL, and THE NEW YORK TIMES.
Each Fund may compare the investment return of a Class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on many certificates
of deposit, which remains at a specified rate for a specified period of time,
the return of each Class of Shares will vary.
Fund advertisements may reference the history of the distributor and
its affiliates, the education and experience of the portfolio manager, and the
fact that the portfolio manager engages in value investing. With value
investing, the Adviser invests in those securities it believes to be undervalued
in relation to the long-term earning power or asset value of their issuers.
Securities may be undervalued because of many factors, including market decline,
poor economic conditions, tax-loss selling, or actual or anticipated unfavorable
developments affecting the issuer of the security. The Adviser believes that the
securities of sound, well-managed companies that may be temporarily out of favor
due to earnings declines or other adverse developments are likely to provide a
greater total return than securities with prices that appear to reflect
anticipated favorable developments and that are therefore subject to correction
should any unfavorable developments occur.
In advertising, each Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Fund may use other recognized
sources as they become available.
Each Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
Each Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
30
<PAGE>
Each Fund may also include in advertising biographical information on
key investment and managerial personnel.
Each Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through low price levels.
Each Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $[ ] billion as of June 30,
1996.
In advertising, each Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
Lipper Analytical Services, Inc., an independent rating service which
measures the performance of most U.S. mutual funds, reported that Value Trust's
total return ranked [ ] among 1536 general equity funds it measured during the
one year ended June 30, 1996. For the five years ended June 30, 1996, Value
Trust's total return ranked [ ] among [ ] general equity funds and for the ten
years ended June 30, 1996, Value Trust's total return ranked [ ] among [ ]
general equity funds. Of course, there can be no assurance that results similar
to those achieved by Value Trust in the past will be realized in future periods.
From time to time, performance rankings and ratings as reported in national
financial publications such as Money Magazine, Forbes and Barron's may be used
in describing Value Trust's performance.
TAX-DEFERRED RETIREMENT PLANS -- PRIMARY SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of such plans until the
income is distributed to them. Primary Share investors who are considering
establishing an IRA, Keogh Plan, SEP or other qualified retirement plan should
consult their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in these plans with respect to Primary Shares
through regular payroll deductions may be arranged with a Legg Mason or
affiliated investment executive and your employer. Additional information with
respect to these plans is available upon request from any Legg Mason or
affiliated investment executive.
Individual Retirement Account -- IRA
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, if neither you nor your spouse is an active
participant in a qualified employer or government retirement plan, or if either
you or your spouse is an active participant and your adjusted gross income does
not exceed a certain level, you may deduct cash contributions made
31
<PAGE>
to an IRA in an amount for each taxable year not exceeding the lesser of 100% of
your earned income or $2,000. In addition, if your spouse is not employed and
you file a joint return, you may establish a separate IRA for your spouse and
contribute up to a total of $2,250 to the two IRAs, provided that the
contribution to either does not exceed $2,000. If you and your spouse are both
employed and neither of you is an active participant in a qualified employer or
government retirement plan and you establish separate IRAs, you each may
contribute all of your earned income, up to $2,000 each and thus may together
receive tax deductions of up to $4,000 for contributions to your IRAs. If your
employer's plan permits voluntary contributions and meets certain requirements,
you may make voluntary contributions to that plan that are treated as deductible
IRA contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through IRA
contributions, up to certain limits, because all dividends and other
distributions on your Fund shares are then not immediately taxable to you or the
IRA; they become taxable only when distributed to you. To avoid penalties, your
interest in an IRA must be distributed, or start to be distributed, to you not
later than the end of the taxable year in which you attain age 70 1/2.
Distributions made before age 59 1/2, in addition to being taxable, generally
are subject to a penalty equal to 10% of the distribution, except in the case of
death or disability or where the distribution is rolled over into another
qualified plan or certain other situations.
Self-Employed Individual Retirement Plan -- Keogh Plan
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. Primary Share investors have the right to use a bank of their own
choice to provide these services at their own cost. There are penalties for
distributions from a Keogh Plan prior to age 59 1/2, except in the case of death
or disability.
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding at the
rate of 10% (depending on the type and amount of the distribution), unless the
recipient elects not to have any withholding apply.
THE FUNDS' DIRECTORS AND OFFICERS
Each Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and directors of the
Funds and their principal occupations during the past five years are set forth
below. An asterisk (*) indicates officers and/or directors who are "interested
persons" of the Funds as defined by the 1940 Act. The business address of
each officer and director is 111 South Calvert Street, Baltimore, Maryland
21202, unless otherwise indicated.
32
<PAGE>
RAYMOND A. MASON* [59], Chairman of the Board and Director of Value
Trust, Total Return Trust and Special Investment Trust; Chairman of the Board
and President of Legg Mason, Inc. (financial services holding company); Director
of Environmental Elements Corporation (manufacturer of pollution control
equipment); Officer and/or Director of various other affiliates of Legg Mason.
JOHN F. CURLEY, JR.* [57], President and Director of Value Trust, Total
Return Trust and Special Investment Trust; Chairman of the Board and Director of
the Trust; Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood
Walker, Incorporated; Director of Legg Mason Fund Adviser, Inc. and Western
Asset Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.; Chairman of the Board
and Director of three Legg Mason funds; Chairman of the Board, President and
Trustee of one Legg Mason fund; Chairman of the Board and Trustee of one Legg
Mason fund.
RICHARD G. GILMORE [69], Director of each Fund; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in the manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia Electric
Company); Director of four other Legg Mason funds; and Trustee of two Legg Mason
funds. Formerly: Senior Vice President and Chief Financial Officer of
Philadelphia Electric Company (now PECO Energy Company); Executive Vice
President and Treasurer, Girard Bank, and Vice President of its parent holding
company, the Girard Company; and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH [71], Director of each Fund; 14201 Laurel Park Drive,
Suite 104, Laurel, Maryland. Real Estate Developer and Investor; President and
Director of Resource Enterprises, Inc. (real estate brokerage); Chairman of
Resource Realty LLC (management of retail and office space); Partner in Greater
Laurel Health Park Ltd. Partnership (real estate investment and development);
Director of four other Legg Mason funds; and Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN [53], Director of each Fund; The Baltimore Museum of
Art, Art Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of
Art; Director of four other Legg Mason funds; Trustee of two Legg Mason funds.
JILL E. McGOVERN [52], Director of each Fund; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation. Director
of four other Legg Mason funds; Trustee of two Legg Mason funds. Formerly:
Executive Director of the Baltimore International Festival (January 1991 -
March 1993); and Senior Assistant to the President of The Johns Hopkins
University (1986-1991).
T. A. RODGERS [62], Director of each Fund; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director of four other Legg Mason funds; Trustee of two Legg Mason
funds. Formerly: Director and Vice President of Corporate Development, Polk
Audio, Inc. (manufacturer of audio components).
EDWARD A. TABER, III* [53], Director of each Fund; President of the
Trust; Executive Vice President of Legg Mason, Inc. and Legg Mason Wood Walker,
Inc.; Vice Chairman and Director of Legg Mason Fund Adviser, Inc.; President
and Director of two Legg Mason funds; Trustee of two Legg Mason funds; Vice
President of Worldwide Value Fund, Inc. Formerly: Executive Vice
33
<PAGE>
President of T. Rowe Price-Fleming International, Inc. (1986-1992) and Director
of the Taxable Fixed Income Division at T. Rowe Price Associates, Inc.
(1973-1992).
The executive officers of the Funds, other than those who also serve as
directors, are:
MARIE K. KARPINSKI* [47], Vice President and Treasurer of each Fund;
Treasurer of the Adviser; Vice President and Treasurer of six other Legg Mason
funds; and Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice President of
Legg Mason.
KATHI D. GLENN* [31], Secretary / Assistant Treasurer / Assistant
Secretary; Secretary/Assistant Treasurer/Assistant Secretary of four other Legg
Mason funds.
STEFANIE L. WONG* [28], Secretary of the Trust; Secretary of one Legg
Mason fund; employee of Legg Mason since 1990.
BLANCHE P. ROCHE* [47], Assistant Secretary and Assistant Vice
President of each Fund; Assistant Secretary and Assistant Vice President of five
other Legg Mason funds; employee of Legg Mason since 1991. Formerly: Manager
of Consumer Financial Services, Primerica Corporation (1989-1991).
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Haugh, Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of a Fund who are "interested persons" of the
Fund receive no salary or fees from the Fund. Each Director of a Fund who is not
an interested person of the Fund ("Independent Directors")receives a fee of $400
annually for serving as a director, and a fee of $400 for each meeting of the
Board of Directors attended by him or her.
On April 30, 1996, the directors and officers of each Fund beneficially
owned in the aggregate less than 1% of that Fund's outstanding shares.
On April 30, 1996, the Legg Mason Profit Sharing Plan and Trust, 7 East
Redwood Street, Baltimore, MD 21202 owned of record and beneficially the
following percentages of the outstanding shares of the Navigator Classes:
Navigator Class of Value Trust [ ]%
Navigator Class of Total Return Trust [ ]%
Navigator Class of Special Investment Trust [ ]%
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31, 1996.
34
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Aggregate Compensation From Each
Aggregate Aggregate Compensation From Fund and
Name of Compensation Compensation From Special American Fund Complex
Person and From Value From Total Investment Leading Paid to
Position Trust* Return Trust* Trust* Companies* Directors**
<S> <C> <C> <C> <C> <C>
Raymond A.
Mason -
Chairman of
the Board
and Director None None None None None
John F.
Curley, Jr. -
President and
Director None None None None None
Edward A.
Taber, III -
Director None None None None None
Richard G.
Gilmore - $3,600 $2,000 $2,000 $2,000 $21,600
Director
Charles F.
Haugh - $3,600 $2,000 $2,000 $2,000 $23,600
Director
Arnold L.
Lehman - $3,600 $2,000 $2,000 $2,000 $23,600
Director
Jill E.
McGovern - $3,200 $2,000 $2,000 $2,000 $23,200
Director
T. A. Rodgers-
Director $3,600 $2,000 $2,000 $2,000 $21,600
============== =============== ============== ============== =============== ============
</TABLE>
* Represents fees paid to each director during the fiscal year ended
March 31, 1996.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1995.
THE FUNDS' INVESTMENT ADVISER/MANAGER
The Adviser, a Maryland Corporation, is located at 111 South Calvert
Street, Baltimore, Maryland 21202. The Adviser is a wholly owned subsidiary of
Legg Mason, Inc., which is also the parent of Legg Mason. The Adviser serves as
investment adviser to Value Trust, Total Return Trust and Special Investment
Trust and as manager to American Leading Companies and Balanced Trust under
separate Investment Advisory and Management Agreements with each Fund ("Advisory
Agreement" with respect to Value Trust, Total Return Trust and Special
Investment Trust and "Management Agreement" with respect to American Leading
Companies and Balanced
35
<PAGE>
Trust). The Advisory Agreement for Value Trust originally became effective as of
April 19, 1982 and was most recently approved by the shareholders of Value Trust
on July 20, 1984. The Advisory Agreement for Total Return Trust originally
became effective as of August 5, 1985 and was most recently approved by the
shareholders of Total Return Trust on July 17, 1986. The Advisory Agreement for
Special Investment Trust originally became effective as of December 10, 1985 and
was most recently approved by the shareholders of Special Investment Trust on
July 17, 1986. The Management Agreement for American Leading Companies
originally became effective as of August 2, 1993. The Management Agreement for
Balanced Trust will become effective on [ ].
The Advisory Agreement (for Value Trust, Total Return Trust and Special
Investment Trust) and the Management Agreement (for American Leading Companies)
were most recently approved by each Fund's Board of Directors, including a
majority of the directors who are not "interested persons" of the Fund or the
Adviser/Manager, on October 27, 1995.
Each Advisory Agreement and Management Agreement provides that, subject
to overall direction by the Fund's Board of Directors, the Adviser/Manager
manages the investment and other affairs of each Fund. The Adviser/Manager is
responsible for managing each Fund consistent with the Fund's investment
objective and policies described in its Prospectuses and this Statement of
Additional Information. The Adviser/Manager also is obligated to (a) furnish the
Fund with office space and executive and other personnel necessary for the
operation of each Fund; (b) supervise all aspects of each Fund's operations; (c)
bear the expense of certain informational and purchase and redemption services
to each Fund's shareholders; (d) arrange, but not pay for, the periodic updating
of prospectuses, proxy material, tax returns and reports to shareholders and
state and federal regulatory agencies; and (e) report regularly to each Fund's
officers and directors. In addition, the Adviser paid Value Trust's, Total
Return Trust' s and Special Investment Trust's organizational expenses and has
agreed to reimburse Value Trust and Special Investment Trust for auditing fees
and compensation of those Funds' independent directors. The Adviser/Manager and
its affiliates pay all compensation of directors and officers of each Fund who
are officers, directors or employees of the Adviser. Each Fund pays all of its
expenses which are not expressly assumed by the Adviser/Manager. These expenses
include, among others, interest expense, taxes, brokerage fees and commissions,
expenses of preparing and printing prospectuses, proxy statements and reports to
shareholders and of distributing them to existing shareholders, custodian
charges, transfer agency fees, distribution fees to Legg Mason, each Fund's
distributor, compensation of the independent directors, legal and audit
expenses, insurance expense, shareholder meetings, proxy solicitations, expenses
of registering and qualifying Fund shares for sale under federal and state law,
governmental fees and expenses incurred in connection with membership in
investment company organizations. Each Fund also is liable for such nonrecurring
expenses as may arise, including litigation to which the Fund may be a party.
Each Fund may also have an obligation to indemnify its directors and officers
with respect to litigation.
The Adviser/Manager receives for its services to each Fund a management
fee, calculated daily and payable monthly. The Adviser receives from Value Trust
a management fee at an annual rate of 1% of the average daily net assets of that
Fund for the first $100 million of average daily net assets, 0.75% of average
daily net assets between $100 million and $1 billion, and 0.65% of average daily
net assets exceeding $1 billion. The Adviser receives from Total Return Trust a
management fee at an annual rate of 0.75% of the average daily net assets of
that Fund. The Adviser receives from Special Investment Trust a management fee
at an annual rate of 1% of the average daily net assets of that Fund for the
first $100 million of average daily net assets and 0.75% of average daily net
assets exceeding $100 million. The Manager receives from American Leading
Companies and Balanced Trust management fees at an annual rate of 0.75% of the
36
<PAGE>
average daily net assets of each Fund. The Manager has agreed to waive its fees
and to reimburse American Leading Companies and Balanced Trust for expenses
related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) as follows: for American Leading Companies, 1.95% of
average net assets indefinitely; and for Balanced Trust, 2.25% of average net
assets until March 31, 1997. The Manager has agreed to waive its fees and to
reimburse American Leading Companies and Balanced Trust for expenses related to
Navigator Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) as follows: for American Leading Companies, 0.95% of average net
assets indefinitely; and for Balanced Trust, 1.25% of average net assets until
March 31, 1997.
The management fee for each Fund is higher than fees paid by most other
funds to their investment advisers. The advisory fee of each Fund may be reduced
under regulations of various states where Fund shares are qualified for sale
which impose limitations on the annual expense ratio of each Fund. The most
restrictive annual expense limitation currently requires that the Adviser
reimburse each Fund for certain expenses, including the advisory fees received
by it (but, excluding interest, taxes, brokerage fees and commissions,
distribution fees, certain other expenses and extraordinary charges) in any
fiscal year in which a Fund's expenses exceed 2.5% of the first $30 million of
that Fund's average net assets, 2.0% of the next $70 million of average net
assets, and 1.5% of average net assets in excess of $100 million. During the
fiscal years ended March 31, 1995, 1994 and 1993, management fees of $7,519,155,
$6,847,679 and $6,124,621, respectively were received from Value Trust;
$1,502,358, $1,219,883 and $677,278, respectively were received from Total
Return Trust; and $4,849,166, $3,581,718 and $2,066,295, respectively were
received from Special Investment Trust. For the period September 1, 1993
(commencement of operations) to March 31, 1994, the Manager received management
fees of $188,619 (prior to fees waived of $82,244). For the fiscal year ended
March 31, 1995, the Manager received management fees of $431,577 (prior to fees
waived of $94,444).
Under each Advisory Agreement or (with respect to American Leading
Companies) Management Agreement, each Fund has the non-exclusive right to use
the name "Legg Mason" until that Agreement is terminated, or until the right is
withdrawn in writing by the Adviser/Manager.
LMCM, 111 South Calvert Street, Baltimore, MD 21202, an affiliate of
Legg Mason, serves as investment adviser to American Leading Companies pursuant
to an Investment Advisory Agreement dated August 2, 1993, between LMCM and the
Manager ("Advisory Agreement"). The Advisory Agreement was most recently
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" (as that term is defined in the 1940 Act) of the
Trust, the Adviser or the Manager, on October 27, 1995. The Advisory Agreement
was approved by Legg Mason Fund Adviser, Inc., as the Fund's sole shareholder,
on August 2, 1993.
Under the Advisory Agreement, LMCM is responsible, subject to the
general supervision of the Manager and the Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
LMCM's services to the Fund, the Manager (not the Fund) pays LMCM a fee,
computed daily and payable monthly, at an annual rate equal to 40% of the fee
received by the Manager from the Fund. For the period September 1, 1993
(commencement of operations) to March 31, 1994, the Manager paid $42,550 to LMCM
on behalf of the Fund. For the fiscal year ended March 31, 1995, the Manager
paid $134,853 to LMCM on behalf of the Fund.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, an affiliate
of Legg Mason, serves as investment adviser to Balanced Trust pursuant to an
Investment Advisory Agreement dated [
37
<PAGE>
], between Bartlett 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, Bartlett or the Manager, on May 10, 1996. The
Advisory Agreement was approved by Legg Mason Fund Adviser, Inc., as the Fund's
sole shareholder, on [ ].
Under the Advisory Agreement, Bartlett 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
Bartlett's services to the Fund, the Manager (not the Fund) pays Bartlett a fee,
computed daily and payable monthly, at an annual rate equal to 662/3% of the fee
received by the Manager from the Fund.
Under each Advisory Agreement and (with respect to American Leading
Companies and Balanced Trust) Management Agreement, the
Adviser/Manager/LMCM/Bartlett will not be liable for any error of judgment or
mistake of law or for any loss by a Fund in connection with the performance of
the Advisory Agreement or Management Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties under the respective Agreement.
Each Advisory Agreement or (with respect to American Leading Companies
and Balanced Trust) Management Agreement terminates automatically upon
assignment and is terminable at any time without penalty by vote of each Fund's
Board of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser/Manager/LMCM/Bartlett, on not less than 60 days'
notice to the other party to the Agreement, and may be terminated immediately
upon the mutual written consent of all parties to the Agreement.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, each Corporation and the Adviser/Manager have adopted
policies that restrict securities trading in the personal accounts of portfolio
managers and others who normally come into advance possession of information on
portfolio transactions. These policies comply, in all material respects, with
the recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the fiscal years ended March 31, 1995 and 1994, the
portfolio turnover rates for Value Trust were 20.1% and 25.5%, respectively; the
portfolio turnover rates for Total Return Trust were 61.9% and 46.6%,
respectively; and the portfolio turnover rates for Special Investment Trust were
27.5% and 16.7%, respectively. For the period September 1, 1993 (commencement of
operations) to March 31, 1994 and the fiscal year ended March 31, 1995, American
Leading Companies' annualized portfolio turnover rates were 21.0% and 30.5%,
respectively.
Under the Advisory Agreement with each Fund, the Adviser/LMCM/Bartlett
is responsible for the execution of the Fund's portfolio transactions and must
seek the most favorable price and execution for such transactions, subject to
the possible payment, as described below, of higher brokerage commissions to
brokers who provide research and analysis. Each Fund may not always
38
<PAGE>
pay the lowest commission or spread available. Rather, in placing orders for a
Fund the Adviser/LMCM/Bartlett also takes into account such factors as size of
the order, difficulty of execution, efficiency of the executing broker's
facilities (including the services described below), and any risk assumed by the
executing broker.
Consistent with the policy of most favorable price and execution, the
Adviser/LMCM/Bartlett may give consideration to research, statistical and other
services furnished by brokers or dealers to the Adviser/LMCM/Bartlett for its
use, may place orders with brokers who provide supplemental investment and
market research and securities and economic analysis and may pay to these
brokers a higher brokerage commission than may be charged by other brokers. Such
services include, without limitation, advice as to the value of securities; the
advisability of investing in, purchasing, or selling securities; advice as to
the availability of securities or of purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Such research and analysis may be useful to the Adviser/LMCM/Bartlett in
connection with services to clients other than the Fund whose brokerage
generated the service. The Adviser's/LMCM's/Bartlett's fee is not reduced by
reason of its receiving such brokerage and research services.
From time to time each Fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. Commissions
paid to Legg Mason will not exceed "usual and customary brokerage commissions."
Rule 17e-1 under the 1940 Act defines "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the over-the-counter
market, each Fund generally deals with responsible primary market-makers unless
a more favorable execution can otherwise be obtained. For the fiscal years ended
March 31, 1995, 1994 and 1993, Legg Mason received no brokerage commissions from
Value Trust, no brokerage commissions from Total Return Trust, and $0, $2,000
and $0, respectively, from Special Investment Trust. Value Trust paid total
brokerage commissions of $397,268, $518,233 and $520,231, respectively; Total
Return Trust paid total brokerage commissions of $360,860, $349,967 and
$176,123, respectively; and Special Investment Trust paid total brokerage
commissions of $883,607, $410,115 and $262,020, respectively, during the fiscal
years ended March 31, 1995, 1994 and 1993. For the period September 1, 1993
(commencement of operations) to March 31, 1994 and the fiscal year ended March
31, 1995, American Leading Companies paid total brokerage commissions of $75,165
and 61,067, respectively. Legg Mason received no brokerage commissions from
American Leading Companies for the same periods.
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. Each Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. These procedures, among other things, limit
each Fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so that: (i) a Fund together with all other registered
investment companies advised by the Adviser/LMCM/Bartlett, may not purchase more
than 4% of the principal amount of the offering of such class or $500,000 in
principal amount, whichever is greater, but in no event greater than 10% of the
principal amount of the offering; and (ii) the consideration to be paid by a
Fund in purchasing the securities being offered may not
39
<PAGE>
exceed 3% of the total assets of that Fund. In addition, a Fund may not purchase
securities during the existence of an underwriting if Legg Mason is the sole
underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from executing transactions on an exchange for its affiliates, such as the
Funds, unless the affiliate expressly consents by written contract. The Advisory
Agreement expressly provides such consent.
Among the brokers regularly used by each Fund during the fiscal year
ended March 31, 1995, Value Trust at that date owned shares of the following
parent companies: 1,201,000 shares of The Bear Stearns Companies, Inc. at a
market value of $22,218,500 and 415,000 shares of Salomon, Inc. at a market
value of $14,058,125; Total Return Trust at that date owned shares of the
following parent companies: 365,643 shares of The Bear Stearns Companies, Inc.
at a market value of $6,764,396; Special Investment Trust at that date owned
shares of the following parent companies: 367,500 shares of The Bear Stearns
Companies, Inc. at a market value of $6,798,750 and 318,800 shares of Piper
Jaffray Incorporated at a market value of $3,706,050; and American Leading
Companies at that date owned shares of the following parent companies: 25,000
shares of J.P. Morgan & Co. Incorporated at a market value of $1,525,000.
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by the Adviser, LMCM or Bartlett. However, the
same security may be held in the portfolios of more than one fund or account.
When two or more accounts simultaneously engage in the purchase or sale of the
same security, the prices and amounts will be equitably allocated to each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large-volume transactions may
produce better executions and prices.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to a
separate Underwriting Agreement with each Fund. The Underwriting Agreement
obligates Legg Mason to promote the sale of Fund shares and to pay certain
expenses in connection with its distribution efforts, including expenses for the
printing and distribution of prospectuses and periodic reports used in
connection with the offering to prospective investors (after the prospectuses
and reports have been prepared, set in type and mailed to existing shareholders
at the Fund's expense), and for supplementary sales literature and advertising
costs.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
with principal offices at 200 Gibraltar Road, Horsham, Pennsylvania, may act as
a dealer for Navigator Shares pursuant to a Dealer Agreement with Legg Mason.
Neither Legg Mason nor Fairfield receives any compensation from the Fund for its
activities in selling Navigator Shares.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits the Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. Under the Plans, the aggregate
fees may not exceed an annual rate of 1.00% of Total Return Trust's, Special
Investment Trust's, American Leading Companies' or Balanced Trust's average
daily net assets attributable to Primary Shares or 0.95% of Value Trust's
average daily net assets attributable to Primary Shares. Distribution activities
for which such payments may be made include, but are not
40
<PAGE>
limited to, compensation to persons who engage in or support distribution and
redemption of Shares, printing of prospectuses and reports for persons other
than existing shareholders, advertising, preparation and distribution of sales
literature, overhead, travel and telephone expenses, all with respect to Primary
Shares only. The Plan was most recently approved by the shareholders of Value
Trust on July 20, 1984 and on July 17, 1986 for both the Total Return Trust and
Special Investment Trust. The Plan was approved by Legg Mason Fund Adviser,
Inc., as sole shareholder of American Leading Companies, on August 2, 1993.
The Plan has been amended, effective July 1, 1993, to make clear that, of the
aggregate 1.00% fees with respect to Total Return Trust, Special Investment
Trust, American Leading Companies and Balanced Trust, 0.75% is paid for
distribution services and 0.25% is paid for ongoing services to shareholders;
and with respect to Value Trust, 0.70% is paid for distribution services and
0.25% is paid for ongoing services to shareholders. The amendments also specify
that each Fund may not pay more in cumulative distribution fees than 6.25% of
total new gross assets attributable to Primary Shares, plus interest, as
specified in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Legg Mason may pay all or a portion of the
fee to its investment executives. Continuation of the Plans was most
recently approved on October 27, 1995 by the Board of Directors of each
respective Fund including a majority of the directors who are not "interested
persons" of each Fund as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plan or the
Underwriting Agreement ("12b-1 Directors").
In approving the continuation of the Plan, in accordance with the
requirements of Rule 12b- 1, the directors determined that there was a
reasonable likelihood that each Plan would benefit the respective Fund and its
Primary Class shareholders. The directors considered, among other things, the
extent to which the potential benefits of the Plan to the Fund's Primary Class
shareholders outweighed the costs of the Plan; the likelihood that the Plan
would succeed in producing such potential benefits; the merits of certain
possible alternatives to the Plan; and the extent to which the retention of
assets and additional sales of each Fund's Primary Shares would be likely to
maintain or increase the amount of compensation paid by that Fund to the
Adviser/Manager.
In considering the costs of the Plans, the directors gave particular
attention to the fact that any payments made by a Fund to Legg Mason under the
Plan would increase the Fund's level of expenses in the amount of such payments.
Further, the directors recognized that the Adviser/Manager would earn greater
management fees if a Fund's assets were increased, because such fees are
calculated as a percentage of a Fund's assets and thus would increase if net
assets increase. The directors further recognized that there can be no assurance
that any of the potential benefits described below would be achieved if the
Plans were implemented.
Among the potential benefits of the Plans, the directors noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
each Fund's Primary Shares and to maintain and enhance the level of services
they provide to each Fund's Primary Class shareholders. These efforts, in turn,
could lead to increased sales and reduced redemptions, eventually enabling each
Fund to achieve economies of scale and lower per share operating expenses. Any
reduction in such expenses would serve to offset, in whole or in part, the
additional expenses incurred by each Fund in connection with its Plan.
Furthermore, the investment management of each Fund could be enhanced, as net
inflows of cash from new sales might enable its portfolio manager to take
advantage of attractive investment opportunities, and reduced redemptions could
eliminate the potential need to liquidate attractive securities positions in
order to raise the funds necessary to meet the redemption requests.
41
<PAGE>
Each Plan will continue in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. Each Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting Primary Shares. Any change in a Plan that would materially increase the
distribution cost to a Fund requires shareholder approval; otherwise the Plan
may be amended by the directors, including a majority of the 12b-1 Directors, as
previously described.
In accordance with Rule 12b-1, each Plan provides that Legg Mason will
submit to the Fund's Board of Directors, and the directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
For the fiscal years ended March 31, 1995, 1994 and 1993, Value Trust
paid Legg Mason $8,917,520, $7,351,819 and $8,243,638, respectively in
distribution and service fees under the Plan, from assets attributable to
Primary Shares. For the same fiscal years, Total Return Trust paid Legg Mason
$1,964,257, $1,601,941 and $886,614 (prior to fees waived of $100,984),
respectively and Special Investment Trust paid Legg Mason $5,917,557, $4,294,605
and $2,325,639, respectively. For the fiscal years ended March 31, 1994 and
1995, American Leading Companies paid Legg Mason $251,492 and $575,436,
respectively, in fees under the Plan.
During the year ended March 31, 1995, Legg Mason incurred the following
expenses with respect to Primary Shares:
Special American
Total Return Investment Leading
Value Trust Trust Trust Companies
----------- ------------ ------------ -----------
Compensation to sales
personnel $6,194,000 $1,362,000 $3,898,000 $405,000
Advertising 948,000 224,000 387,000 76,000
Printing and mailing of
prospectuses to prospective
shareholders 117,000 68,000 200,000 40,000
Other 1,185,000 418,000 1,977,000 626,000
----------- ------------ ------------ -----------
Total expenses $8,444,000 $2,072,000 $6,462,000 $1,147,000
=========== ============ ============ ===========
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
Shares.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of each Fund's assets. Boston Financial
Data Services, P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent, and administrator of various shareholder services.
Legg Mason assists BFDS with certain of its duties as transfer agent
42
<PAGE>
and receives compensation from BFDS for its services. Shareholders who request
an historical transcript of their account will be charged a fee based upon the
number of years researched. Each Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative costs.
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, Maryland
21202, has been selected by the Directors to serve as independent accountants
for Value Trust, Total Return Trust and Special Investment Trust. [ ], has been
selected by the Directors to serve as independent auditors for American Leading
Companies and Balanced Trust.
FINANCIAL STATEMENTS
The Statement of Net Assets (with respect to Value Trust, Total Return
Trust and American Leading Companies), and the Portfolio of Investments (with
respect to Special Investment Trust) as of March 31, 1995; the Statement of
Assets and Liabilities (with respect to Special Investment Trust) as of March
31, 1995; the Statement of Operations for the year ended March 31, 1995; the
Statement of Changes in Net Assets for the years ended March 31, 1995 and 1994;
the Financial Highlights for all periods; the Notes to Financial Statements and
the Report of the Independent Accountants/Auditors, all of which are included in
the respective Fund's annual report for the year ended March 31, 1995, are
hereby incorporated by reference in this Statement of Additional Information.
43
<PAGE>
TABLE OF CONTENTS
Page
Additional Information About
Investment Limitations and Policies 2
Additional Tax Information 17
Additional Purchase and Redemption
Information 20
Valuation of Fund Shares 22
Performance Information 22
Tax-Deferred Retirement Plans 28
The Funds' Directors and Officers 29
The Funds' Investment Adviser/Manager 33
Portfolio Transactions and Brokerage 35
The Funds' Distributor 37
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent 39
The Funds' Legal Counsel 40
The Funds' Independent Accountants/Auditors 40
Financial Statements 40
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any Fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by the
Funds or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
LEGG MASON WOOD WALKER, INCORPORATED
- --------------------------------------------------------------------------------
111 SOUTH CALVERT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
Legg Mason Investors Trust, Inc.
Part C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The financial statements of Legg Mason
American Leading Companies Trust for the period ended March
31, 1995 and the report of the independent auditors thereon
are incorporated into the Statement of Additional Information
by reference to the Annual Report to Shareholders for the same
period.
The Financial Data Schedule with respect to the above series
is included as Exhibit 27.1.
(b) Exhibits
(1) (a) Articles of Incorporation1/
(b) Articles Supplementary5/
(c) Articles Supplementary -- filed herewith
(2) By-Laws as amended July 19, 19933/
(3) Voting trust agreement -- none
(4) Specimen security3/
(5) (a) Investment Advisory and Management Agreement
-- American Leading Companies Trust4/
(b) Investment Advisory Agreement -- Balanced
Trust -- (Form of) filed herewith
(c) Advisory Agreement -- American Leading
Companies Trust4/
(d) Management Agreement -- Balanced Trust --
(Form of) filed herewith
(6) (a) Underwriting Agreement -- American Leading
Companies Trust4/
(b) Amended Underwriting Agreement -- American
Leading Companies Trust -- (Form of) filed
herewith
(c) Underwriting Agreement -- Balanced Trust
--(Form of) filed herewith
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian agreement -- filed herewith
(9) Transfer Agent Agreement -- filed herewith
(10) Opinion and consent of counsel4/
(11) Other opinions, appraisals, rulings and consents
--Accountants' consent -- none
(12) Financial statements omitted from Item 23 -- none
(13) Agreement for providing initial capital3/
(14) (a) Prototype Retirement Plan2/
(b) Prototype corporate Simplified Employee
Pension Plan2/
(c) Prototype Keogh Plan2/
(15) (a) Plan pursuant to Rule 12b-1 -- American
Leading Companies Trust4/
(b) Amended Plan pursuant to Rule 12b-1 --
American Leading Companies Trust -- (Form of)
filed herewith
(c) Plan pursuant to Rule 12b-1 -- Balanced Trust
-- (Form of) filed herewith
<PAGE>
(16) Schedule for computation of performance quotations
-- none
(17) Financial Data Schedule --filed herewith
(18) Plan Pursuant to Rule 18f-3 -- none
1/Incorporated by reference from the initial registration statement, SEC File
No. 33-62174, filed May 5, 1993.
2/Incorporated by reference from the corresponding exhibit of Post-Effective
Amendment No. 8 to the registration statement of Legg Mason Income Trust, Inc.,
SEC File No. 33-12092, filed April 28, 1991.
3/Incorporated by reference from Pre-Effective Amendment No. 1 to the
registration statement, SEC File No. 33-62174, filed July 30, 1993.
4/Incorporated by reference from the corresponding exhibit of Pre-Effective
Amendment No. 2 to the registration statement, SEC File No. 33-62174, filed
August 4, 1993.
5/Incorporated by reference from the corresponding exhibit of Post-Effective
Amendment No. 3 to the registration statement, SEC File No. 33-62174, filed June
15, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
Number of Recordholders
Title of Class (as of April 30, 1996)
-------------- ----------------------
Capital Stock
par value $.001
Legg Mason American Leading
Companies Trust -- Primary Shares 7,344
Navigator American Leading Companies
Trust 0
Legg Mason Balanced Trust -- Primary Shares 0
Navigator Balanced Trust 0
Item 27. Indemnification
This item is incorporated by reference from Item 27 of Part C
of Post-Effective Amendment No. 1 to the registration statement, SEC File No.
33-62174, filed February 15, 1994.
Item 28. Business and other Connections of Investment Adviser and Subadviser
<PAGE>
I. Legg Mason Fund Adviser, Inc. ("Manager"), the Registrant's
Manager, is a registered investment adviser incorporated on January 20, 1982.
The Manager is engaged primarily in the investment advisory business. It serves
as manager and/or investment adviser to sixteen open-end investment companies or
portfolios and as investment consultant for one closed-end investment company.
Information as to the officers and directors of the Manager is included in its
Form ADV-S filed June 30, 1995 with the Securities and Exchange Commission
(Registration Number 801-16958) and is incorporated herein by reference.
II. Legg Mason Capital Management, Inc. ("LMCM"), adviser to
American Leading Companies, is a registered investment adviser incorporated on
October 4, 1982. Information as to the officers and directors of LMCM is
included in its Form ADV-S filed June 29, 1995 with the Securities and Exchange
Commission (Registration Number 801-18115) and is incorporated herein by
reference.
III. Bartlett & Co. ("Bartlett"), adviser to Balanced Trust, is a
registered investment adviser incorporated on January 4, 1988. Information as
to the officers and directors of Bartlett is included in its Form ADV filed May
3, 1996 with the Securities and Exchange Commission (Registration Number 801-21)
and is incorporated herein by reference.
Item 29. Principal Underwriters
(a) 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 Cash Reserve Trust
Legg Mason Income Trust, Inc.
Legg Mason Global Trust, Inc.
Legg Mason Tax-Free Income Fund
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal
underwriter, Legg Mason Wood Walker, Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman Chairman of the Board
and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
<PAGE>
Director
Richard J. Himelfarb Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Edward A. Taber, III Executive Vice President and
President and Director
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
1100 Poydras St. President and
New Orleans, LA 70163 Director
Robert G. Donovan Senior Vice None
7 E. Redwood St. President and
Baltimore, MD 21202 Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market St. President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
Two Oliver Plaza President and
Pittsburgh, PA 15222 Director
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
<PAGE>
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Ave., NW Director
Washington, DC 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
President
Theodore S. Kaplan Senior Vice None
President &
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President & Asst.
Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
John A. Pliakas Senior Vice None
President
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President &
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
<PAGE>
President
Eileen M. O'Rourke Vice President None
and Controller
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Scott Cousino Vice President None
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Seth J. Lehr Vice President None
Edward W. Lister, Jr. Vice President None
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002
Lawrence D. Shubnell Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
<PAGE>
Joseph F. Zunic Vice President None
* All addresses are 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
(c)The Registrant has no principal underwriter which is not an affiliated person
of the Registrant or an affiliated person of such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105-1713
Item 31. Management Services
None.
Item 32. Undertakings
Registrant hereby undertakes to provide each person to whom a prospectus is
delivered with a copy of its latest annual report to shareholders upon request
and without charge.
Registrant hereby undertakes to file a post-effective amendment containing
unaudited financial statements of the Legg Mason Balanced Trust, within four to
six months from the effective date of this Registration Statement.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Investors Trust,
Inc., has duly caused this Post- Effective Amendment No. 4 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore and State of Maryland, on the 15th day of
May, 1996.
Legg Mason Investors Trust, Inc.
By: /s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman of the Board and
Director
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
/s/ John F. Curley, Jr. Chairman of the Board May 15, 1996
John F. Curley, Jr. and Director
/s/ Edward A. Taber, III President and Director May 15, 1996
Edward A. Taber, III
/s/ Charles F. Haugh Director May 15, 1996
Charles F. Haugh*
/s/ Richard G. Gilmore Director May 15, 1996
Richard G. Gilmore*
/s/ Arnold L. Lehman Director May 15, 1996
Arnold L. Lehman*
/s/ Jill E. McGovern Director May 15, 1996
Jill E. McGovern*
/s/ T. A. Rodgers Director May 15, 1996
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President May 15, 1996
Marie K. Karpinski and Treasurer
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
May 14, 1993, incorporated by reference to Pre-Effective Amendment No. 1, SEC
File No. 33-62174, filed July 30, 1993.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON INVESTORS TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Investors Trust,
Inc., a Maryland Corporation ("Corporation") organized on May 5, 1993, has, by
action on May 10, 1996, classified two hundred fifty million (250,000,000)
shares of authorized, but previously unissued and unclassified, capital stock of
the Corporation as a series to be known as Legg Mason Balanced Trust. Of these
two hundred fifty million (250,000,000) shares, the Board has designated one
hundred twenty-five million (125,000,000) shares as Legg Mason Balanced Trust,
Class A shares and one hundred twenty-five million (125,000,000) shares as Legg
Mason Balanced Trust, Class Y shares.
The previous designation of shares of capital stock of the series known
as Legg Mason American Leading Companies Trust into Class A and Class Y shares
remains the same.
The par value of the shares of capital stock of the Corporation remains
one tenth of one cent ($0.001) per share. Before the classification and
designation described herein, the
<PAGE>
aggregate par value of all of the authorized shares was one million (1,000,000)
dollars and so remains.
The Class A and Class Y shares of Legg Mason Balanced Trust shall
represent investment in the same pool of assets and shall have the same
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, except as provided in the Corporation's Articles of Incorporation
and as set forth below:
(1) The net asset values of Class A shares and Class Y
shares shall be calculated separately. In calculating the
net asset values,
(a) Each class shall be charged with the transfer agency fees
and Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 fees (or equivalent fees by any other
name) attributable to any other class; (b) Each class shall be
charged separately with such other expenses as may be
permitted by SEC rule or order and as the board of directors
shall deem appropriate; (c) All other fees and expenses shall
be charged to both classes, in the proportion that the net
asset
<PAGE>
value of that class bears to the net asset value of the Legg
Mason Balanced Trust, except as the Securities and Exchange
Commission may otherwise require;
(2) Dividends and other distributions shall be paid on Class A shares
and Class Y shares at the same time. The amounts of all dividends and
other distributions shall be calculated separately for Class A shares
and Class Y shares. In calculating the amount of any dividend or other
distribution,
(a) Each class shall be charged with the transfer agency fees
and Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 fees (or equivalent fees by any other
name) attributable to any other class; (b) Each class shall be
charged separately with such other expenses as may be
permitted by SEC rule or order and as the board of directors
shall deem appropriate; (c) All other fees and expenses shall
be charged to both classes, in the proportion that the net
asset value of that class bears to the net asset value of the
<PAGE>
Legg Mason Balanced Trust, except as the Securities and
Exchange Commission may otherwise require;
(3) Each class shall vote separately on matters pertaining only to that
class, as the directors shall from time to time determine. On all other
matters, all classes shall vote together, and every share, regardless
of class, shall have an equal vote with every other share.
SECOND: The Corporation is registered with the U.S.
Securities and Exchange Commission as an open-end investment
company under the Investment Company Act of 1940.
THIRD: The total number of shares of capital stock that
the Corporation has authority to issue remains unchanged.
FOURTH: The reclassification described herein was effected
by the Board of Directors of the Corporation pursuant to a power
contained in Sections 6.1 and 6.2 of the Corporation's Articles
of Incorporation.
IN WITNESS WHEREOF, the undersigned Vice President of Legg
Mason Investors Trust, Inc. hereby executes these Articles
<PAGE>
Supplementary on behalf of the Corporation, and hereby acknowledges these
Articles Supplementary to be the act of the Corporation and further states under
the penalties for perjury that, to the best of her knowledge, information and
belief, the matters and facts set forth herein are true in all material
respects.
Date: May 15, 1996 /s/Marie K. Karpinski
---------------------
Marie K. Karpinski
Vice President
Attest: /s/ Stefanie L. Wong
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 15th day of May, 1996.
/s/ Harriet W. Taylor
Notary Public
FORM OF
INVESTMENT ADVISORY AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
AGREEMENT made this ______ day of __________, 1996 by and between Legg
Mason Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Bartlett & Co.
("Adviser"), an [Ohio] corporation, each of which is registered as an investment
adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Investors Trust, Inc.
(the "Corporation"), an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and
WHEREAS, Manager wishes to retain Adviser to provide it with certain
investment advisory services in connection with Manager's management of the Legg
Mason Balanced Trust ("Fund"), a series of shares of the Corporation; and
WHEREAS, Adviser is willing to furnish such services on the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. Appointment. Manager hereby appoints Bartlett & Co. as
investment adviser for the Fund for the period and on the terms set forth in
this Agreement. Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. Manager has furnished the Adviser
with copies properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on May 5, 1993 and all amendments thereto (such Articles of
Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Manager as the manager and Bartlett &
Co. as investment adviser and approving the Management Agreement
between Manager and the
<PAGE>
Fund dated ___________ __, 1996 (the "Management Agreement") and this
Agreement;
(d) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act (File
No. 33-62174) as filed with the Securities and Exchange Commission on
___________ __, 1996, including all exhibits thereto, relating to
shares of common stock of the Fund, par value $.001 per share (herein
called "Shares") and all amendments thereto;
(e) The Fund's most recent prospectus (such prospectus,
as presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"); and
(f) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
The Manager will furnish Adviser from time to time with copies of all amendments
of or supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the supervision of the
Corporation's Board of Directors and the Manager, Adviser shall regularly
provide the Fund with investment research, advice, management and supervision
and shall furnish a continuous investment program for the Fund's portfolio of
securities consistent with the Fund's investment objective, policies, and
limitations as stated in the Fund's current Prospectus and Statement of
Additional Information. The Adviser shall determine from time to time what
securities will be purchased, retained or sold by the Fund, and shall implement
those decisions, all subject to the provisions of the Corporation's Articles of
Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of
the Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment objective, policies, and limitations of the Fund.
The Adviser will place orders pursuant to its investment determinations for the
Fund either directly with the issuer or with any broker or dealer. In placing
orders with brokers and dealers, Adviser will attempt to obtain the best net
price and the most favorable execution of its orders; however, the Adviser may,
in its discretion, purchase and sell portfolio securities from and to brokers
and dealers who provide the Fund with research, analysis, advice and similar
services, and Adviser may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers. In no
instance will portfolio securities be purchased from or sold to the Adviser or
any affiliated person thereof except in accordance
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<PAGE>
with the rules, regulations or orders promulgated by the Securities and Exchange
Commission pursuant to the 1940 Act. The Adviser shall also perform such other
functions of management and supervision as may be requested by the Manager and
agreed to by Adviser.
(b) The Adviser will oversee the maintenance of all books and records
with respect to the securities transactions of the Fund in accordance with all
applicable federal and state laws and regulations, and will furnish the Board of
Directors of the Corporation with such periodic and special reports as the Board
or the Manager reasonably may request.
(c) The Corporation hereby authorizes any entity or person associated
with the Adviser which is a member of a national securities exchange to effect
any transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder, and the Corporation hereby consents to the retention by
such person associated with the Adviser of compensation for such transactions in
accordance with Rule 11a2-2(T)(a)(2)(iv).
4. Services Not Exclusive. The Adviser's services hereunder are not
deemed to be exclusive, and Adviser shall be free to render similar services to
others. It is understood that persons employed by Adviser to assist in the
performance of its duties hereunder might not devote their full time to such
service. Nothing herein contained shall be deemed to limit or restrict the right
of the Adviser or any affiliate of Adviser to engage in and devote time and
attention to other businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Adviser hereby agrees that all books and records which it
maintains for the Fund are property of the Fund and further agrees to surrender
promptly to the Fund or its agents any of such records upon the Fund's request.
The Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act, any such records required to be maintained by Rule 31a-1
under the 1940 Act.
6. Expenses. During the term of this Agreement, Adviser will pay
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions, if
any) purchased for the Fund.
7. Compensation. For the services which Adviser will render to
Manager and the Fund under this Agreement, Manager will pay Adviser a fee,
computed daily and paid monthly, at an annual rate equal to ____% of the fee
received by the Manager from the Fund, net of any waivers or reimbursements by
the Manager of its
- 3 -
<PAGE>
fee. Fees due to the Adviser hereunder shall be paid promptly to Adviser by the
Manager following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
8. Limitation of Liability. The Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by Manager or by
the Fund in connection with the performance of this 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 under this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
10. Duration and Termination. This Agreement will become effective
________________, 1996, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner terminated
as provided for herein, shall continue in effect until _____________ __, 1998.
Thereafter, if not terminated, this Agreement shall continue in effect for
successive annual periods, provided that such continuance is specifically
approved at least annually (i) by the Corporation's Board of Directors or (ii)
by a vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund, provided that in either event the continuance is also
approved by a majority of the Corporation's Directors who are not interested
persons (as defined in the 1940 Act) of the Corporation or of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable without penalty, by vote of the
Corporation's Board of Directors, by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, by the Manager or by the
Adviser, on not less than 60 days' notice to the Fund and/or the other
party(ies) and will be terminated immediately upon any termination of the
Management Agreement with respect to the Fund or upon the mutual written consent
of the Adviser, the Manager, and the Fund. Termination
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<PAGE>
of this Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Corporation. This
Agreement will automatically and immediately terminate in the event of its
assignment.
11. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
12. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By:______________________ By:_______________________________
[SEAL] BARTLETT & CO.
Attest:
By:______________________ By:_______________________________
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FORM OF MANAGEMENT AGREEMENT
This INVESTMENT MANAGEMENT AGREEMENT, made this ___ day of
_____________, 1996, by and between Legg Mason Investors Trust, Inc., a Maryland
corporation (the "Corporation"), on behalf of Legg Mason Balanced Trust
("Fund"), and Legg Mason Fund Adviser, Inc., a Maryland corporation (the
"Manager").
WHEREAS, the Corporation is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act") currently consisting of one other portfolio; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
WHEREAS, the Manager is willing to furnish such services on
the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Corporation hereby appoints Legg Mason Fund Adviser, Inc.
as Manager of the Fund for the period and on the terms set forth in this
Agreement. The Manager accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Manager fully informed with
regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Manager with such other documents and information with regard
to its affairs as the Manager may from time to time reasonably request.
3. (a) Subject to the supervision of the Corporation's Board of
Directors, the Manager shall regularly provide the Fund with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's portfolio of securities consistent with the
Fund's investment goals and policies. The Manager shall determine from time to
time what securities will be purchased, retained or sold by the Fund, and shall
implement those decisions, all subject to the provisions of the Corporation's
Articles of Incorporation and Bylaws, the 1940 Act, the applicable rules and
regulations of the Securities and Exchange Commission, and other applicable
federal and state law, as well as the investment goals and policies of the Fund.
The Manager will place orders pursuant to its
<PAGE>
investment determinations for the Fund either directly with the issuer or with
any broker or dealer. In placing orders with brokers and dealers the Manager
will attempt to obtain the best net price and the most favorable execution of
its orders; however, the Manager may, in its discretion, purchase and sell
portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services, and the Manager may pay to these brokers,
in return for research and analysis, a higher commission or spread than may be
charged by other brokers. The Manager is authorized to combine orders on behalf
of the Fund with orders on behalf of other clients of the Manager, consistent
with guidelines adopted by the Board of Directors of the Corporation. The
Manager shall also provide advice and recommendations with respect to other
aspects of the business and affairs of the Fund, and shall perform such other
functions of management and supervision as may be directed by the Board of
Directors of the Corporation.
(b) The Fund hereby authorizes any entity or person associated with the
Manager which is a member of a national securities exchange to effect any
transaction on the exchange for the account of the Fund which is permitted by
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Fund hereby consents to the retention by such person
associated with the Manager of compensation for such transactions in accordance
with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Investment Advisory
Agreement") with an investment adviser in which the Manager delegates to such
investment adviser any or all its duties specified in Paragraph 3 hereunder,
provided that such Investment Advisory Agreement imposes on the investment
adviser bound thereby all duties and conditions to which the Manager is subject
hereunder, and further provided that such Investment Advisory Agreement meets
all requirements of the 1940 Act and rules thereunder.
5. (a) The Manager, at its expense, shall supply the Board of Directors
and officers of the Corporation with all statistical information and reports
reasonably required by them and reasonably available to the Manager and shall
furnish the Fund with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Fund.
The Manager shall oversee the maintenance of all books and records with respect
to the Fund's securities transactions and the keeping of the Fund's books of
account in accordance with all applicable federal and state laws and
regulations. In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Manager hereby agrees that any records which it maintains for the Fund
are the property of the Corporation, and further agrees to surrender promptly to
the Fund or its agents any of such records upon the Fund's request. The
- 2 -
<PAGE>
Manager further agrees to arrange for the preservation of the records required
to be maintained by Rule 31a-1 under the 1940 Act for the periods prescribed by
Rule 31a-2 under the 1940 Act. The Manager shall authorize and permit any of its
directors, officers and employees, who may be elected as directors or officers
of the Fund, to serve in the capacities in which they are elected.
(b) Other than as herein specifically indicated, the Manager shall not
be responsible for the Fund's expenses. Specifically, the Manager will not be
responsible, except to the extent of the reasonable compensation of employees of
the Fund whose services may be used by the Manager hereunder, for any of the
following expenses of the Fund, which expenses shall be borne by the Fund:
advisory fees; distribution fees; interest, taxes, governmental fees, fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations; the cost (including brokerage commissions
or charges, if any) of securities purchased or sold by the Fund and any losses
in connection therewith; fees of custodians, transfer agents, registrars or
other agents; legal expenses; expenses of preparing share certificates; expenses
relating to the redemption or repurchase of the Fund's shares; expenses of
registering and qualifying shares of the Fund for sale under applicable federal
and state law; expenses of preparing, setting in print, printing and
distributing prospectuses, reports, notices and dividends to Fund shareholders;
costs of stationery; costs of stockholders' and other meetings of the Fund;
directors' fees; audit fees; travel expenses of officers, directors and
employees of the Corporation if any; and the Corporation's pro rata portion of
premiums on any fidelity bond and other insurance covering the Corporation and
its officers and directors.
6. No director, officer or employee of the Corporation or Fund shall
receive from the Corporation any salary or other compensation as such director,
officer or employee while he or she is at the same time a director, officer, or
employee of the Manager or any affiliated company of the Manager. This paragraph
shall not apply to directors, executive committee members, consultants and other
persons who are not regular members of the Manager's or any affiliated company's
staff.
7. As compensation for the services performed and the facilities
furnished and expenses assumed by the Manager, including the services of any
consultants or sub-advisers retained by the Manager, the Fund shall pay the
Manager, as promptly as possible after the last day of each month, a fee,
computed daily at an annual rate of 0.__% of the average daily net assets of the
Fund. The first payment of the fee shall be made as promptly as possible at the
end of the month succeeding the effective date of this Agreement. If this
Agreement is terminated as of any date not the last day of a month, such fee
- 3 -
<PAGE>
shall be paid as promptly as possible after such date of termination, shall be
based on the average daily net assets of the Fund in that period from the
beginning of such month to such date of termination, and shall be based on that
proportion of such average daily net assets as the number of business days in
such period bears to the number of business days in such month. The average
daily net assets of the Fund shall in all cases be based only on business days
and be computed as of the time of the regular close of business of the New York
Stock Exchange, or such other time as may be determined by the Board of
Directors of the Corporation. Each such payment shall be accompanied by a report
prepared either by the Fund or by a reputable firm of independent accountants,
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof.
8. The Manager assumes no responsibility under this Agreement other
than to render the services called for hereunder, in good faith, and shall not
be responsible for any action of the Board of Directors of the Corporation in
following or declining to follow any advice or recommendations of the Manager;
provided, that nothing in this Agreement shall protect the Manager against any
liability to the Fund or its shareholders to which it would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties hereunder.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Corporation or the Fund, to engage in any other
business or to devote his time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature, or limit or restrict the right of the Manager to engage in any other
business or to render services of any kind, including investment advisory and
management services, to any other corporation, firm, individual or association.
10. As used in this Agreement, the terms "assignment", "interested
persons", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions and interpretations as may be granted by the Securities and Exchange
Commission by any rule, regulation or order.
11. This Agreement will become effective with respect to the Fund on
the date first written above, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner terminated
as provided herein, will continue in effect for two years from the above written
- 4 -
<PAGE>
date. Thereafter, if not terminated, this Agreement shall continue in effect
with respect to the Fund for successive annual periods ending on the same date
of each year, provided that such continuance is specifically approved at least
annually (i) by the Corporation's Board of Directors or (ii) by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act), provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval.
12. This Agreement is terminable with respect to the Fund without
penalty by the Corporation's Board of Directors, by vote of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act), or by
the Manager, on not less than 60 days' notice to the other party and will be
terminated upon the mutual written consent of the Manager and the Corporation.
This Agreement shall terminate automatically in the event of its assignment by
the Manager and shall not be assignable by the Corporation without the consent
of the Manager.
13. In the event this Agreement is terminated by either party or upon
written notice from the Manager at any time, the Corporation hereby agrees that
it will eliminate from its corporate name any reference to the name of "Legg
Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
14. The Manager agrees that for services rendered to the Fund, or
indemnity due in connection with service to the Fund, it shall look only to
assets of the Fund for satisfaction and that it shall have no claim against the
assets of any other fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INVESTORS TRUST, INC.
By: ______________________ By: _____________________________
Attest: LEGG MASON FUND ADVISER, INC.
By: ______________________ By: _____________________________
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FORM OF
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this ____ day of ____________, 1996,
by and between Legg Mason Investors Trust, Inc., a Maryland corporation
("Corporation"), and Legg Mason Wood Walker, Incorporated, a Maryland
corporation (the "Distributor").
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and has registered its shares of common stock
for sale to the public under the Securities Act of 1933 (the "1933 Act") and
various state securities laws; and
WHEREAS, the Corporation intends to offer for public sale distinct
series of shares of common stock, each corresponding to a distinct portfolio
("Series"); and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the shares of
common stock of each Series as now exists and as hereafter may be established
("Shares") and to furnish certain other services to the Corporation as specified
in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under, the
1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of each Series. The
Distributor, as exclusive agent for the Corporation, upon the commencement of
operations of any Series and subject to applicable federal and state law and the
Articles of Incorporation and By-Laws of the Corporation, shall: (i) promote the
Series; (ii) solicit orders for the purchase of the Shares subject to such terms
and conditions as the Corporation may specify; and (iii) accept orders for the
purchase
<PAGE>
of the Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and state
laws and offer the Shares of each Series on an agency or "best efforts" basis
under which the Corporation shall issue only such Shares as are actually sold.
The Distributor shall have the right to use any list of shareholders of the
Corporation or any Series or any other list of investors which it obtains in
connection with its provision of services under this Agreement; provided,
however, that the Distributor shall not sell or knowingly provide such list or
lists to any unaffiliated person without the consent of the Corporation's Board
of Directors.
(b) The Distributor shall provide ongoing shareholder liaison services,
including responding to shareholder inquiries, providing shareholders with
information on their investments, and any other services now or hereafter deemed
to be appropriate subjects for the payments of "service fees" under Article III,
Section 26 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (collectively, "Shareholder Services").
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services and may enter into agreements with qualified dealers
and other qualified entities to perform recordkeeping and subaccounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Corporation and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Corporation. No
such dealer or other entity is authorized to act as agent for the Corporation in
connection with the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of each Series shall be the
net asset value per share (as determined by the Corporation) of the outstanding
Shares of the Series plus any applicable sales charge as described in the
Registration Statement of the Corporation. The Corporation shall furnish the
Distributor with a statement of each computation of public offering price and of
the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect the gross proceeds derived from the sale of the Shares,
remit the net asset value thereof to the Corporation upon receipt of the
proceeds and retain the sales charge, if any. The Distributor shall receive from
each Series a distribution
- 2 -
<PAGE>
fee and a service fee at the rates and under the terms and conditions of the
Plan of Distribution ("Plan") adopted by the Corporation with respect to the
Series, as such Plan is in effect from time to time, and subject to any further
limitations on such fees as the Corporation's Board of Directors may impose. The
Distributor may reallow any or all of the sales charge, distribution fee and
service fee that it has received under this Agreement to such dealers or sub-
accountants as it may from time to time determine; provided, however, that the
Distributor may not reallow to any dealer for Shareholder Services an amount in
excess of .25% of the average annual net asset value of the shares with respect
to which said dealer provides Shareholder Services.
5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to each Series filed by the Corporation as
part of the Registration Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or sub-accountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Corporation, and the Corporation shall not be responsible in
any way for any other information, statements or representations given or made
by the Distributor, any dealer or sub-accountant, or their representatives or
agents. Except as specifically provided in this Agreement, the Corporation shall
bear none of the expenses of the Distributor in connection with its offer and
sale of the Shares.
7. The Corporation agrees at its own expense to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies,
and to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the
- 3 -
<PAGE>
Registration Statement. Each Series shall bear all expenses related to preparing
and typesetting such Prospectuses, Statements of Additional Information, and
other materials required by law and such other expenses, including printing and
mailing expenses, related to such Series' communications with persons who are
shareholders of that Series.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of or
based upon any alleged untrue statement of a material fact contained in the
Registration Statement or arising out of or based upon any alleged omission to
state a material fact required to be stated or necessary to make the
Registration Statement not misleading, provided that in no event shall anything
contained in this Agreement be construed so as to protect the Distributor
against any liability to the Corporation or its shareholders to which the
Distributor would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement, and
further provided that the Corporation shall not indemnify the Distributor for
conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Corporation, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, on account of any
wrongful act of the Distributor or any of its employees or arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Corporation for use
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading. As used in this paragraph, the term "employee" shall not include
a corporate entity under contract to provide services to the Corporation or any
Series,
- 4 -
<PAGE>
or any employee of such a corporate entity, unless such person is otherwise an
employee of the Corporation.
10. The Corporation reserves the right at any time to withdraw
all offerings of the Shares of any or all Series by written notice to
the Distributor at its principal office.
11. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by telex or in writing, the
Corporation and State Street Bank and Trust Company, the Corporation's transfer
agent, of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the identity of
the shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by the
Distributor for the repurchase of such Shares in cash or in the form of a credit
against moneys due the Corporation from the Distributor as proceeds from the
sale of Shares. The Corporation reserves the right to suspend such repurchase
right upon written notice to the Distributor. The Distributor further agrees to
act as agent for the Corporation to receive and transmit promptly to the
Corporation's transfer agent shareholder and dealer requests for redemption of
Shares.
13. The Distributor is an independent contractor and shall be
agent for the Corporation only in respect to the sale and redemption of the
Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's
Board of Directors on a quarterly basis showing such information
- 5 -
<PAGE>
concerning expenditures related to this Agreement as from time to time shall be
reasonably requested by the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective with respect to each Series on
the date first written above and, unless sooner terminated as provided herein,
will continue in effect for one year from the above written date. Thereafter, if
not terminated, this Agreement shall continue in effect with respect to each
Series for successive annual periods ending on the same date of each year,
provided that such continuance is specifically approved at least annually (i) by
the Corporation's Board of Directors or (ii) by a vote of a majority of the
outstanding voting securities of the Series (as defined in the 1940 Act),
provided that in either event the continuance is also approved by a majority of
the Corporation's Directors who are not interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval.
18. This Agreement is terminable with respect to any Series or in its
entirety without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of each affected Series (as
defined in the 1940 Act), or by the Distributor, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written consent
of the Distributor and the Corporation. This Agreement will also automatically
and immediately terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharged
or terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INVESTORS TRUST, INC.
By: By:
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By: By:
- 7 -
FORM OF UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this ___ day of__________, 1996, by and
between Legg Mason Investors Trust, Inc., a Maryland corporation ("Corporation")
on behalf of the Legg Mason Balanced Trust ("Fund"), and Legg Mason Wood Walker,
Incorporated, a Maryland corporation (the "Distributor").
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and has registered shares of common stock of
the Fund for sale to the public under the Securities Act of 1933 (the "1933
Act") and various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of the shares of common
stock of the Fund ("Shares") and to furnish certain other services to the
Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under, the
1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of shares of the Fund. The
Distributor, as exclusive agent for the Corporation, upon the commencement of
operations of the Fund and subject to applicable federal and state law and the
Articles of Incorporation and By-Laws of the Corporation, shall: (i) promote the
Fund; (ii) solicit orders for the purchase of the Shares subject to such terms
and conditions as the Corporation may specify; and (iii) accept orders for the
purchase of the Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and state
laws and offer the Shares of the Fund on an agency or "best efforts" basis under
which the Corporation shall issue only such Shares of the Fund as are actually
sold. The
- 1 -
<PAGE>
Distributor shall have the right to use any list of shareholders of the
Corporation or the Fund or any other list of investors which it obtains in
connection with its provision of services under this Agreement; provided,
however, that the Distributor shall not sell or knowingly provide such list or
lists to any unaffiliated person without the consent of the Corporation's Board
of Directors.
(b) The Distributor shall provide ongoing shareholder liaison services,
including responding to shareholder inquiries, providing shareholders with
information on their investments, and any other services now or hereafter deemed
to be appropriate subjects for the payments of "service fees" under Article III,
Section 26 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (collectively, "Shareholder Services").
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services, and may enter into agreements with qualified dealers
and other qualified entities to perform recordkeeping and sub-accounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Corporation and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Corporation. No
such dealer or other entity is authorized to act as agent for the Corporation in
connection with the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Fund shall be the net
asset value per share (as determined by the Corporation) of the outstanding
Shares of the Fund plus any applicable sales charge as described in the
Registration Statement of the Corporation. The Corporation shall furnish the
Distributor with a statement of each computation of public offering price and of
the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect the gross proceeds derived from the sale of the Shares,
remit the net asset value thereof to the Corporation upon receipt of the
proceeds and retain the sales charge, if any. The Distributor shall receive from
the Fund a distribution fee and a service fee at the rates and under the terms
and conditions of the Plan of Distribution ("Plan") adopted by the Corporation
with respect to the Fund, as such Plan is in effect from time to time, and
subject to any further limitations on such fees as the Corporation's Board of
Directors may impose. The Distributor may reallow any or all of the sales
charge, distribution fee and service fee that it has received under this
Agreement to such
- 2 -
<PAGE>
dealers or sub-accountants as it may from time to time determine; provided,
however, that the Distributor may not reallow to any dealer for Shareholder
Services an amount in excess of .25% of the average annual net asset value of
the shares with respect to which said dealer provides Shareholder Services.
5. As used in this Agreement, the term "Registration Statement" shall mean
the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to the Fund filed by the Corporation as part
of the Registration Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or sub- accountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Corporation, and the Corporation shall not be responsible in
any way for any other information, statements or representations given or made
by the Distributor, any dealer or sub-accountant, or their representatives or
agents. Except as specifically provided in this Agreement, the Corporation shall
bear none of the expenses of the Distributor in connection with its offer and
sale of the Shares.
7. The Corporation agrees at its own expense to register the Shares with
the Securities and Exchange Commission, state and other regulatory bodies, and
to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the Registration Statement. The Fund shall bear all
expenses related to preparing and typesetting such Prospectuses, Statements of
Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to such Fund's
communications with persons who are shareholders of the Fund.
8. The Corporation agrees to indemnify, defend and hold the Distributor,
its several officers and directors, and any person who controls the Distributor
within the meaning of Section
- 3 -
<PAGE>
15 of the 1933 Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Distributor, its officers or directors, or any
such controlling person may incur, under the 1933 Act or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement or arising out of or based
upon any alleged omission to state a material fact required to be stated or
necessary to make the Registration Statement not misleading, provided that in no
event shall anything contained in this Agreement be construed so as to protect
the Distributor against any liability to the Corporation or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations and duties under this
Agreement, and further provided that the Corporation shall not indemnify the
Distributor for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the Corporation,
its several officers and directors, and any person who controls the Corporation
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Corporation, its
officers or directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, on account of any wrongful act of the
Distributor or any of its employees or arising out of or based upon any alleged
untrue statement of a material fact contained in information furnished in
writing by the Distributor to the Corporation for use in the Registration
Statement or arising out of or based upon any alleged omission to state a
material fact in connection with such information required to be stated in the
Registration Statement or necessary to make such information not misleading. As
used in this paragraph, the term "employee" shall not include a corporate entity
under contract to provide services to the Corporation or the Fund, or any
employee of such a corporate entity, unless such person is otherwise an employee
of the Corporation.
10. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of the Fund by written notice to the Distributor at its
principal office.
11. The Corporation shall not issue certificates representing Shares unless
requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued
- 4 -
<PAGE>
in such names and denominations as the Distributor shall from time to time
direct, provided that no certificates shall be issued for fractional Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by telex or in writing, the
Corporation and State Street Bank and Trust Company, the Corporation's transfer
agent, of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the identity of
the shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by the
Distributor for the repurchase of such Shares in cash or in the form of a credit
against moneys due the Corporation from the Distributor as proceeds from the
sale of Shares. The Corporation reserves the right to suspend such repurchase
right upon written notice to the Distributor. The Distributor further agrees to
act as agent for the Corporation to receive and transmit promptly to the
Corporation's transfer agent shareholder and dealer requests for redemption of
Shares.
13. The Distributor is an independent contractor and shall be agent for the
Corporation only in respect to the sale and redemption of the Shares.
14. The services of the Distributor to the Corporation under this Agreement
are not to be deemed exclusive, and the Distributor shall be free to render
similar services or other services to others so long as its services hereunder
are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's Board of
Directors on a quarterly basis showing such information concerning expenditures
related to this Agreement as from time to time shall be reasonably requested by
the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested person",
and "majority of the outstanding voting securities" shall have the meanings
given to them by Section 2(a) of the 1940 Act, subject to such exemptions as may
be granted by the Securities and Exchange Commission by any rule, regulation or
order.
17. This Agreement will become effective with respect to the Fund on the
date first written above and, unless sooner
- 5 -
<PAGE>
terminated as provided herein, will continue in effect for one year from the
above written date. Thereafter, if not terminated, this Agreement shall continue
in effect with respect to the Fund for successive annual periods ending on the
same date of each year, provided that such continuance is specifically approved
at least annually (i) by the Corporation's Board of Directors or (ii) by a vote
of a majority of the outstanding voting securities of the Fund (as defined in
the 1940 Act), provided that in either event the continuance is also approved by
a majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval.
18. This Agreement is terminable with respect to the Fund or in its
entirety without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act), or by the Distributor, on not less than 60 days' notice to the other
party and will be terminated upon the mutual written consent of the Distributor
and the Corporation. This Agreement will also automatically and immediately
terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharged or
terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be executed
by their officers thereunto duly authorized.
Attest: LEGG MASON INVESTORS TRUST, INC.
By:___________________ By:_________________________________
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By:___________________ By:_________________________________
- 7 -
CUSTODIAN CONTRACT
Between
LEGG MASON INVESTORS TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By
It...........................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States.......2
2.1 Holding Securities.................................2
2.2 Delivery of Securities.............................2
2.3 Registration of Securities.........................5
2.4 Bank Accounts......................................6
2.5 Availability of Federal Funds......................6
2.6 Collection of Income...............................6
2.7 Payment of Fund Monies.............................7
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased....................9
2.9 Appointment of Agents..............................9
2.10 Deposit of Fund Assets in Securities System........9
2.10A Fund Assets Held in the Custodian's Direct
Paper System......................................11
2.11 Segregated Account................................12
2.12 Ownership Certificates for Tax Purposes...........13
2.13 Proxies...........................................13
2.14 Communications Relating to Portfolio Securities...13
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States..................13
3.1 Appointment of Foreign Sub-Custodians.............13
3.2 Assets to be Held.................................14
3.3 Foreign Securities Depositories...................14
3.4 Agreements with Foreign Banking Institutions......14
3.5 Access of Independent Accountants of the Fund.....15
3.6 Reports by Custodian..............................15
3.7 Transactions in Foreign Custody Account...........15
3.8 Liability of Foreign Sub-Custodians...............16
3.9 Liability of Custodian............................16
3.10 Monitoring Responsibilities.......................17
3.11 Branches of U.S. Banks............................17
3.12 Tax Law...........................................18
<PAGE>
4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund.......................................18
5. Proper Instructions.........................................19
6. Actions Permitted Without Express Authority.................19
7. Evidence of Authority.......................................20
8. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income..............................................20
9. Records.....................................................21
10. Opinion of Fund's Independent Accountants...................21
11. Reports to Fund by Independent Public Accountants...........21
12. Compensation of Custodian...................................22
13. Responsibility of Custodian.................................22
14. Effective Period, Termination and Amendment.................24
15. Successor Custodian.........................................25
16. Interpretive and Additional Provisions......................26
17. Additional Portfolios.......................................26
18. Massachusetts Law to Apply..................................27
19. Prior Contracts.............................................27
20. Shareholder Communications..................................27
21. Miscellaneous...............................................28
<PAGE>
CUSTODIAN CONTRACT
This Contract between LEGG MASON INVESTORS TRUST, INC., a corporation
organized and existing under the laws of Maryland, having its principal place of
business at 111 South Calvert Street, Baltimore, Maryland 21202, hereinafter
called the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in one series, Legg
Mason American Leading Companies Trust (such series together with all other
series subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 17, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio, desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of this Contract. The
Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian all
securities, similar investments and cash of the Portfolios, and all payments of
income, payments of principal or capital distributions received by it with
respect to all securities owned by the Portfolio(s) from time to time, and the
cash consideration received by it for such new or treasury shares of capital
stock of the Fund representing interests in the Portfolios, ("Shares") as may be
issued or sold from time to time. The Custodian shall not be responsible for any
property of a Portfolio held or received by the Portfolio and not delivered to
the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Directors of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian; provided, however, that (a) the Custodian
will be liable to the Fund for the Custodian's own negligence in transmitting
any instructions received by it from the Fund and for the Custodian's own
negligence in connection with the delivery of any securities, cash or other
assets held by it to any sub-custodian
<PAGE>
and (b) in the event of any loss, damage or expense suffered or incurred by the
Fund caused by or resulting from actions or omissions for which the Custodian
would be liable pursuant to this section, the Custodian shall promptly
reimburse the Fund in the amount of any such loss, damage or expense. The
Custodian may employ as sub-custodian for the Fund's foreign securities on
behalf of the applicable Portfolio(s) the foreign banking institutions and
foreign securities depositories designated in Schedule A hereto but only in
accordance with the provisions of Article 3. The Fund may instruct the
Custodian, through Proper Instructions, to cease the employment of any one or
more sub-custodians for maintaining custody of the Portfolio's assets, and to
cause the prompt delivery of such assets to another sub-custodian acceptable to
the Fund and the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department of the
Treasury, collectively referred to herein as "Securities System" and
(b) commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered
into by the Portfolio;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
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5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.9 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misfeasance;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
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11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund on behalf
of the applicable Portfolio, a certified copy of a resolution
of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as
the Portfolio, or in the name or nominee
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<PAGE>
name of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article
1. All securities accepted by the Custodian on behalf of the
Portfolio under the terms of this Contract shall be in "street
name" or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name," the Custodian
shall utilize its best efforts only to timely collect income due the
Fund on such securities and to notify the Fund on a best efforts
basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash maintained by
the Portfolio in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company
shall be qualified to act as a custodian under the Investment Company
Act of 1940 and that each such bank or trust company and the funds to
be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the
Board of Directors of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares
of such Portfolio which are deposited into the Portfolio's account.
2.6 Collections. Subject to the provisions of Section 2.3, the Custodian
shall, and shall require any sub-custodian to, collect on a timely
basis all income, payments of principal and other payments with respect
to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income,
payments of principal and other payments with respect to bearer
domestic securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and shall
promptly credit such income, as collected, to such Portfolio's
custodian account. Without limiting the generality of the foregoing,
the Custodian shall detach, endorse where necessary and present for
payment all coupons and other income items requiring presentation as
and when they become due and
5
<PAGE>
shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection with income
due on securities loaned, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in arranging
for the timely delivery to the Custodian of the income to which the
Portfolio is properly entitled. The Custodian shall promptly notify
the Fund by facsimile transmission or in such other manner as the Fund
and the Custodian may agree in writing if any amount payable with
respect to Shares of the Portfolios or other assets of the Portfolios
is not received by the Custodian when due.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of securities
owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from
the Portfolio or (e) for transfer to a time deposit account of
the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation
from a broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
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<PAGE>
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to so pay
in advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder. In the event of any loss, damage or expense suffered or
incurred by the Fund, on behalf of a Portfolio, caused by or resulting
from the
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<PAGE>
actions or omissions of any agent for which the Custodian would
otherwise be liable, the Custodian shall promptly reimburse the Fund in
the amount of any such loss, damage or expense.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in accordance
with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may deposit and/or maintain securities of the
Portfolio in a Securities System provided that such securities
are represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
2) The books and records of the Custodian with respect to
securities of the Portfolio which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i)
receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the
Portfolio. Copies of all advices from the Securities System
of transfers of securities for the account of the Portfolio
shall identify the Portfolio, be maintained for the Portfolio
by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund on behalf
of the Portfolio confirmation of each transfer to or from the
account of the Portfolio in the form of a written advice or
notice and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of
the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the Securities
System's accounting system, internal accounting
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<PAGE>
control and procedures for safeguarding securities deposited
in the Securities System;
5) The Custodian shall have received from the Fund on behalf of
the Portfolio the initial certificate required by Article 14
hereof;
6) At the written request of the Fund, the Custodian will
terminate the use of any such Securities System on behalf of
the Portfolios as promptly as practicable; and
7) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting
from use of the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against
the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to
the extent that the Portfolio has not been made whole for any
such loss or damage. In the event of any such subrogation,
the Custodian shall cooperate with the Fund in asserting such
rights and shall take all actions reasonably necessary to
enable the Fund to assert such rights.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
2) The Custodian may deposit and/or maintain securities of the
Portfolio in the Direct Paper System only if such securities
are represented in an account ("Account") of the Custodian in
the Direct Paper System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment
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and transfer of securities to the account of the Portfolio.
The Custodian shall transfer securities sold for the account
of the Portfolio upon the making of an entry on the records of
the Custodian to reflect such transfer and receipt of payment
for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio, in the form of a written advice or notice,
of Direct Paper on the next business day following such
transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account of
the Portfolio;
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash, securities and/or similar investments, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the Custodian
and a broker-dealer registered under the Exchange Act and a member
of the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or
any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Portfolio, (ii) for purposes of segregating
cash or securities in connection with options purchased, sold or
written by the Portfolio or commodity futures contracts or options
thereon purchased or sold by the Portfolio, (iii) for the purposes of
compliance by the Portfolio with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in
the case of clause (iv), upon receipt of, in addition to Proper
Instructions from the Fund on behalf of the applicable Portfolio,
a certified copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
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2.12 Ownership Certificates for Tax Purposes. The Custodian shall, and
shall require any sub-custodian to, promptly execute ownership and
other certificates and affidavits for all federal, state and foreign
tax purposes in connection with receipt of income or other payments
with respect to securities or similar investments of each Portfolio
held by it and in connection with transfers of securities or similar
investments.
2.13 Proxies; Notices. The Custodian shall cause to be promptly executed by
the registered holder of such securities, if the securities are
registered otherwise than in the name of the Portfolio or a nominee of
the Portfolio, all forms of proxies that are received by the
Custodian or any agent for the Custodian or any nominee of either
of them, without indication of the manner in which such proxies are to
be voted, and shall promptly deliver to the Portfolio such
proxies, all proxy soliciting materials and all notices relating to
such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Portfolio shall notify the
Custodian at least three business days prior to the date on which the
Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Directors, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. The Fund may instruct the Custodian through Proper
Instructions to cease the employment of any one or more such
sub-custodians for maintaining custody of the Portfolio's assets
and to cause the delivery of such assets to another sub-custodian
acceptable to the Custodian and the Fund.
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3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Portfolio's foreign securities
transactions. The Custodian shall identify on its books as belonging
to the Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Portfolios
shall be maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the assets of
each Portfolio will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking
institution or its creditors or agent, except a claim of payment for
their safe custody or administration; (b) beneficial ownership for
the assets of each Portfolio will be freely transferable without
the payment of money or value other than for safe custody or
administration; (c) adequate records will be maintained identifying
the assets as belonging to each applicable Portfolio; (d) officers of
or auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the independent
public accountants for the Fund, will be given access to the books
and records of the foreign banking institution relating to its
actions under its agreement with the Custodian; and (e) assets
of the Portfolios held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the Fund,
its independent accountants and/or its attorneys to be afforded access
to the books and records of any foreign banking institution employed as
a foreign sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Portfolio(s) securities and other
assets and advices or notifications of any transfers of securities to
or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of each applicable Portfolio
indicating, as to securities acquired for a Portfolio, the identity of
the entity having physical
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possession of such securities. The Custodian shall also provide to the
Fund such other information as may be reasonably requested by the Fund
on behalf of the Portfolios to evidence compliance with Rule 17f-5
under the Investment Company Act.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of each applicable Portfolio and delivery of
securities maintained for the account of each applicable Portfolio may
be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer) against
a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer. (c) Securities maintained in
the custody of a foreign sub-custodian may be maintained in the name of
such entity's nominee to the same extent as set forth in Section 2.3 of
this Contract, and the Fund agrees to hold any such nominee harmless
from any liability as a holder of record of such securities (except
liability for failing to act in accordance with instructions).
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
and diligence in the performance of its duties and to indemnify, and
hold harmless, the Custodian and each Fund from and against any loss,
damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim. In the event of any such subrogation, the Custodian shall
cooperate with the Fund in asserting such rights and shall take all
actions reasonably necessary to enable the Fund to assert such rights.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care and diligence. Notwithstanding the
foregoing provisions of this paragraph 3.9, in delegating custody
duties to State Street London Ltd.,
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the Custodian shall not be relieved of any responsibility to the Fund
for any loss, damage or expense due to such delegation, except such
loss as may result from (a) political risk (including, but not limited
to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care and diligence.
In the event that any sub-custodian appointed pursuant to the
provisions of this Section 3 fails to perform any of its obligations
under the terms and conditions of the applicable sub-custodian
agreement, the Custodian shall use its best efforts to cause such
sub-custodian to fully perform its obligations. In the event that the
Custodian is unable to cause such sub-custodian to perform fully its
obligations thereunder, the Custodian shall forthwith notify the Fund
of the same and, upon the Fund's request, terminate such sub-custodian
as a sub-custodian for the Fund in accordance with the termination
provisions of the applicable sub-custodian agreement and, if
requested by the Fund, appoint another sub-custodian acceptable to the
Custodian and the Fund.
The Custodian will not amend any sub-custodian agreement or agree to
change or permit any changes thereunder in respect of the Fund except
upon the prior written approval of the Fund.
3.10 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, and a reasonably requested by the
Fund from time to time, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
shall monitor the performance and financial condition of the foreign
sub-custodians and foreign securities depositories to the extent
practicable and shall promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the performance or
financial condition of a foreign sub-custodian or any material loss of
the assets of the Fund or in the case of any foreign sub-custodian not
the subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there appears
to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or
that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.11 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by
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paragraph 1 of this Contract. (b) Cash held for each Portfolio of
the Fund in the United Kingdom shall be maintained in an interest
bearing account established for the Fund with the Custodian's London
branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.12 Tax Law. Except as provided in Section 2.12, the Custodian shall have
no responsibility or liability for any obligations now or hereafter
imposed on the Fund or the Custodian as custodian of the Fund by the
tax law of the United States of America or any state or political
subdivision thereof. It shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund, or the
Custodian with respect to assets of the Fund, by the tax law of
jurisdictions other than those mentioned in the above sentence,
including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to
such tax law shall be to use reasonable efforts to assist the Fund with
respect to any claim for exemption or refund under the tax law of
jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and promptly deposit into the account of the
appropriate Portfolio such payments as are received for Shares of that Portfolio
issued or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of a Portfolio, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or through
a commercial bank designated by the redeeming shareholders. In connection
with the redemption or repurchase of Shares of the Fund, the Custodian shall
honor checks drawn on the Custodian by a holder of Shares, which checks have
been furnished by the Fund to the holder of Shares, when presented to the
Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a written
request, direction, instruction or certification signed or initialled on behalf
of the Fund by one or more person or persons as the Board of Directors shall
have from time to time authorized.
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Each such writing shall set forth the specific transaction or type of
transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing in the manner set forth above. Upon receipt of a certificate of
the Secretary or an Assistant Secretary as to the authorization by the Board
of Directors of the Fund accompanied by a detailed description of procedures
approved by the Board of Directors, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Fund and the Custodian are satisfied that such
procedures afford adequate safeguards for the Portfolios' assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11. Proper Instructions may be in
the form of standing instructions.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Portfolio except as otherwise directed by the Board of
Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to have been properly executed by or on behalf
of the Fund. The Custodian may receive and accept a certified copy of a vote of
the Board of Directors of the Fund as conclusive evidence (a) of the authority
of any person to act in accordance with such vote or (b) of any determination or
of any action by the
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Board of Directors pursuant to the Articles of Incorporation as described in
such vote, and such vote may be considered as in full force and effect
until receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio. On each day that the Custodian computes the net asset value
per share of each Portfolio, the Custodian will provide information sufficient
to permit the Fund to verify that portfolio transactions have been recorded in
accordance with the prospectus and are reconciled with the Portfolio's trading
records.
9. Books and Records
The Custodian shall with respect to each Portfolio create and maintain
all books and records relating to its activities and obligations under this
Contract in such manner as will meet the obligations of the Fund under the
Investment Company Act of 1940, with particular attention to Section 31 thereof
and Rules 31a-1 and 31a-2 thereunder and under applicable state and federal tax
laws. All such books and records shall be the property of the Fund and shall at
all times during the regular business hours of the Custodian be open for
inspection and audit by duly authorized officers, employees, agents and
auditors of and attorneys for, the Fund and employees and agents of the
Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by each
Portfolio and held by the Custodian and shall, when requested to do so by the
Fund and for such compensation as shall be agreed upon between the Fund and
the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to the Custodian's activities hereunder in connection
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with the preparation of the Fund's Form N-1A, and Form N-SAR or other
periodic reports to Fund shareholders or to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding cash, securities, futures contracts and
options on futures contracts, including cash, securities and other assets
deposited and/or maintained in a Securities System or with a sub-custodian,
relating to the services provided by the Custodian, directly or through any
agent, under this Contract; such reports shall be of sufficient scope and in
sufficient detail as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so
state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon in writing from time to time
between the Fund on behalf of each applicable Portfolio and the Custodian. The
Custodian shall provide the Fund a written invoice for each such payment.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice of counsel that such actions
or omissions comply with the terms of this Contract and with all applicable
laws, provided the Custodian acts in good faith and without negligence.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable
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for the payment of money or incurring liability of some other form, the
Fund on behalf of the Portfolio, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of a Portfolio including the purchase or sale of foreign
exchange or of contracts for foreign exchange (any such amount is referred to
herein as an "Advance") or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's or agent's own negligent action, negligent
failure to act or willful misfeasance (any such liability is referred to herein
as a "Liability"), then in such event cash held for the account of the
appropriate Portfolio and securities issued by United States issuers or other
securities selected by the Custodian equal in value to not more than 125% of
such Advance and accrued interest on the Advance or the anticipated amount of
such Liability, held at any time for the account of the appropriate Portfolio by
the Custodian or sub-custodian, shall be held as security for such Liability or
for such Advance and the accrued interest on the Advance. Each Portfolio hereby
grants to the Custodian a security interest and lien on cash held by the
Custodian for the account of such Portfolio and any assets of such Portfolio as
may be designated from time to time by the Custodian as provided in this Section
13. The Custodian shall designate the security or securities constituting
security for an Advance or Liability (the "Designated Securities") by notice in
writing to the Fund (which may be sent by telefax). In the event the value of
the Designated Securities shall decline to less than 110% of the amount of such
Advance and accrued interest on the Advance or the anticipated amount of such
Liability, then the Custodian may designate in the same manner additional
securities to be held as security for such obligation ("Additional Securities")
but the aggregate value of the Designated Securities and the Additional
Securities shall not be in excess of 125% of the amount of such Advance and the
accrued interest on the Advance or the anticipated amount of such Liability.
At the request of the Fund, the Custodian shall agree to substitution of a
security or securities which have a value equal to the value of the Designated
or Additional Securities which the Fund desires to be released from their
status as security, and such release from status as security shall be
effective upon the Custodian and the Fund agreeing in writing as to the
identity of the substituted security or securities, which shall thereupon
become Designated Securities.
Notwithstanding the above, the Custodian shall, at the request of the
Fund, immediately release from their status as security any or all of the
Designated Securities or Additional Securities upon the Custodian's receipt from
such Fund cash or cash equivalents in an amount equal to 100% of the value of
the Designated Securities or Additional Securities that the Fund desires to be
released from their status as security pursuant to this Section. The Fund shall
reimburse the Custodian in respect of a Liability and shall pay any Advances
upon demand; provided, however, that the Custodian first notified the Fund of
such demand for repayment or reimbursement. If, upon
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notification, the Fund shall fail to pay such advance or interest when due or
shall fail to reimburse the Custodian promptly in respect of a Liability, the
Fund, on behalf of the Portfolios, acknowledges and agrees that the
Custodian shall be entitled to apply cash held for the applicable Portfolio
and/or dispose of the Designated Securities and Additional Securities to the
extent necessary to obtain repayment or reimbursement. Interest, dividends and
other distributions paid or received on the Designated Securities or Additional
Securities, other than payments of principal or payments upon retirement,
redemption or repurchase, shall remain the property of the Fund, and shall
not be subject to this Section. To the extent that the disposition of the
Fund's property, designated as security for such Advance or Liability,
results in an amount less than necessary to obtain repayment or reimbursement,
the Fund shall continue to be liable to the Custodian for the difference
between the proceeds of the disposition of the Fund's property, designated as
security for such Advance or Liability, and the amount of the repayment or
reimbursement due to the Custodian and the Custodian shall be entitled to
designate Additional Securities to secure the amount of the shortfall and
shall have the same rights with respect to such Additional Securities as are
provided herein with respect to Designated Securities generally.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Directors of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.10A
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors has approved the initial use
of the Direct Paper System by such Portfolio; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund on behalf of one or more of
the Portfolios may at any time by action of its Board of Directors (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
reasonable costs, expenses and disbursements.
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Termination of this Contract with respect to one Portfolio (but less than
all of the Portfolios) will not constitute termination of the Contract, and
the terms of the Contract continue to apply to the other Portfolios.
15. Successor Custodian
If a successor custodian for the Fund, or one or more of the Portfolios
shall be appointed by the Board of Directors of the Fund, the Custodian shall,
upon termination, promptly deliver to such successor custodian at the office of
the Custodian, duly endorsed and in the form for transfer, all cash, securities,
similar investments and other property, as well as all books and records, of
each applicable Portfolio then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of each such Portfolio
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and promptly
transfer such securities, similar investments, cash, books, records and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, similar
investments, cash books, records and other properties held by the Custodian on
behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract on behalf
of each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract. The Custodian agrees to cooperate with the
successor custodian and the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian.
In the event that securities, similar investments, cash and other
properties remain in the possession of the Custodian after the date of
termination hereof owing to failure of the Fund to procure the certified copy of
the vote referred to or of the Board of Directors to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such securities,
similar investments,cash and other properties and the provisions of this
Contract relating to the duties and obligations of the Custodian shall remain in
full force and effect.
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16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Articles of Incorporation
of the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Portfolios
In the event that the Fund establishes one or more series of Shares in
addition to Legg Mason American Leading Companies Trust with respect to which it
desires to have the Custodian render services as custodian under the terms
hereof, it shall so notify the Custodian in writing, and if the Custodian agrees
in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the
Custodian "no", the Custodian will not provide this information to
requesting companies. If the Fund tells the Custodian "yes" or do not check
either "yes" or "no" below, the Custodian is required by the rule to treat the
Fund as consenting to disclosure of this information for all securities owned by
the Fund or any funds or accounts established by the Fund. For the
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Fund's protection, the Rule prohibits the requesting company from using the
Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consent or object by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [ ] The Custodian is not authorized to release the
Fund's name, address, and share positions.
21. Miscellaneous
21.1 Expenses of the Fund. In addition to any liability to the
Fund for which the Custodian is determined to be liable under
this Contract, the Custodian shall be liable to the Fund for
all reasonable costs and expenses incurred by the Fund in
connection with a claim by the Fund against the Custodian, an
Agent or subcustodian for which the Custodian is determined to
be liable under this Contract, including, reasonable
attorneys' fees and expenses and other reasonable fees
incurred in any investigation, lawsuit or other proceeding
related to such claim. Nothing in this paragraph shall
preclude the parties from agreeing to payment of such expenses
by Custodian in connection with a claim settled by
arbitration, mediation or negotiation.
21.2 Assignment. This Contract may not be assigned by either party
without the written consent of the other.
21.3 Insurance. The Custodian agrees to maintain insurance
adequate to the protection of all assets of the Fund that may
come into the Custodian's care under this Contract.
21.4 Confidentiality. The Custodian agrees that all books,
records, information and data pertaining to the business of
the Fund which are exchanged or received pursuant to the
negotiation or carrying out of this Contract shall remain
confidential, shall not be voluntarily disclosed to any other
person, except as may be required by law, and shall not be
used by the Custodian for any purpose not directly related to
the business of the Fund, except with the Fund's written
consent.
21.5 Separate Portfolios. Notwithstanding any other provision of
this Agreement, the parties agree that the assets and
liabilities of each series of the Fund are separate and
distinct from the assets and liabilities of each other series
and that no series shall be liable or shall be charged for any
debt, obligation or liability of any other series, whether
arising under this Contract or otherwise.
23
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 1st day of September, 1993.
ATTEST LEGG MASON INVESTORS TRUST, INC.
/s/Kathi. D. Bair By /s/Marie K. Karpinski
Vice President & Treasurer
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/Francine S. Hayes By /s/ Ronald E. Logue
Executive Vice President
24
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Legg Mason
Investors Trust, Inc. for use as sub-custodians for the Fund's securities and
other assets:
(Insert banks and securities depositories)
Certified:
Fund's Authorized Officer
Date:
25
TRANSFER AGENCY AND SERVICE AGREEMENT
between
LEGG MASON INVESTORS TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
Article 1 Terms of Appointment; Duties of the Bank...................1
Article 2 Fees and Expenses..........................................4
Article 3 Representations and Warranties of the Bank.................5
Article 4 Representations and Warranties of the Fund.................5
Article 5 Data Access and Proprietary Information....................6
Article 6 Indemnification............................................7
Article 7 Standard of Care...........................................10
Article 8 Covenants of the Fund and the Bank.........................11
Article 9 Termination of Agreement...................................12
Article 10 Additional Funds...........................................12
Article 11 Assignment.................................................13
Article 12 Amendment..................................................13
Article 13 Massachusetts Law to Apply.................................13
Article 14 Force Majeure..............................................13
Article 15 Consequential Damages......................................14
Article 16 Merger of Agreement........................................14
Article 17 Miscellaneous..............................................14
Article 18 Counterparts...............................................14
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of September, 1993, by and between
LEGG MASON INVESTORS TRUST, INC., a Maryland corporation, having its principal
office and place of business at 7 East Redwood Street, Baltimore, MD 21202 (the
"Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company
having its principal office and place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in one series,
Legg Mason American Leading Companies Trust (each such series, together with all
other series subsequently established by the Fund and made subject to this
Agreement in accordance with Article 10, being herein referred to, as a
"Portfolio", and collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the
Bank as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article l Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of capital stock of the Fund representing interests
in each of the respective Portfolios ("Shares"), dividend disbursing agent,
custodian of certain retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of each
of the respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
<PAGE>
("prospectus") of the Fund on behalf of the applicable Portfolio, including
without limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase
of Shares, and promptly deliver payment and appropriate
documentation thereof to the Custodian of the Fund
authorized pursuant to the Articles of Incorporation of
the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the
appropriate number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests
and redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in
items (i), (ii) and (iii) above, the Bank shall execute
transactions directly with broker-dealers authorized by
the Fund who shall thereby be deemed to be acting on
behalf of the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to any
redemption, pay over or cause to be paid over in the
appropriate manner such monies as instructed by the
redeeming Shareholders;
(vi) Effect transfers of Shares by the registered
owners thereof upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends
and distributions declared by the Fund on behalf of the
applicable Portfolio;
(viii) Issue replacement certificates for those
certificates alleged to have been lost, stolen or destroyed
upon receipt by the Bank of indemnification satisfactory
to the Bank and protecting the Bank and the Fund, and the
Bank at
2
its option, may issue replacement certificates in place of
mutilated stock certificates upon presentation thereof
and without such indemnity;
(ix) Maintain records of account for and advise the
Fund and its Shareholders as to the foregoing; and
(x) Record the issuance of Shares of the Fund
and maintain pursuant to SEC Rule 17Ad-10(e) a record
of the total number of Shares of the Fund which are
authorized, based upon data provided to it by the
Fund, and issued and outstanding. The Bank shall also
provide the Fund on a regular basis with the total number
of Shares which are authorized and issued and outstanding
and shall have no obligation, when recording the
issuance of Shares, to monitor the issuance of such Shares
or to take cognizance of any laws relating to the issue
or sale of such Shares, which functions shall be the
sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a), the Bank shall: (i)
perform the customary services of a transfer agent, dividend disbursing agent,
custodian of certain retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, receiving and tabulating proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing and filing U.S. Treasury
Department Forms 1099 and other appropriate forms required by federal
authorities with respect to dividends and distributions for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders, and providing Shareholder account information and (ii) provide
a system which will enable the Fund to monitor the total number of Shares of
each series and class sold in each State.
3
<PAGE>
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
(d) Procedures as to who shall provide certain of these
services in Article 1 may be established from time to time by agreement between
the Fund on behalf of each Portfolio and the Bank per the attached service
responsibility schedule. The Bank may at times perform only a portion of these
services and the Fund or its agent may perform these services on the Fund's
behalf.
(e) The Bank shall provide additional services on behalf of
the Fund (e.g., escheatment services) which may be agreed upon in writing
between the Fund and the Bank.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this
Agreement, the Fund agrees on behalf of each of the Portfolios to pay the Bank
an annual maintenance fee for each Shareholder account as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above,
the Fund agrees on behalf of each of the Portfolios to reimburse the Bank for
out-of-pocket expenses, including but not limited to confirmation production,
postage, forms, telephone, microfilm, microfiche, tabulating proxies, records
storage or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund, will be reimbursed by the Fund
on behalf of the applicable Portfolio.
2.03 The Fund agrees on behalf of each of the Portfolios to
pay all fees and reimbursable expenses within five days following the receipt of
the respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall
4
<PAGE>
be advanced to the Bank by the Fund at least seven (7) days prior to the mailing
date of such materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and
in good standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its
Charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in
good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an open-end and diversified management investment
company registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of
1933, as amended on behalf of each of the Portfolios is currently effective and
will remain effective, and appropriate state
5
<PAGE>
securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
Article 5 Data Access and Proprietary Information
5.01 The Fund acknowledges that the data bases, computer
programs, screen formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of the Fund's
ability to access certain Fund-related data ("Customer Data") maintained by the
Bank on data bases under the control and ownership of the Bank or other third
party ("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall Customer Data be
deemed Proprietary Information belonging to the Bank. The Fund agrees to treat
all Proprietary Information as proprietary to the Bank and further agrees that
it shall not divulge any Proprietary Information to any person or organization
except as may be provided hereunder. Without limiting the foregoing, the Fund
agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations
as may be designated in writing by the Bank and solely in
accordance with the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any
way the Proprietary Information;
(c) to refrain from obtaining unauthorized
access to any portion of the Proprietary
Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and
dispose of such information in accordance with the Bank's
instructions;
(d) to refrain from causing or allowing
third-party data acquired hereunder from being
retransmitted to any other computer facility or other
location, except with the prior written consent of the
Bank;
(e) that the Fund shall have access only to those
authorized transactions agreed upon by the parties;
6
<PAGE>
(f) to honor all reasonable written requests made
by the Bank to protect at the Bank's expense the rights
of the Bank in Proprietary Information at common
law, under federal copyright law and under other federal
or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement.
5.02 If the Fund notifies the Bank that any of the Data
Access Services do not operate in material compliance with the most recently
issued user documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may obtain
certain data included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the
ability to originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash or Shares or (ii) transmit Shareholder
information or other information (such transactions constituting a "COEFI"),
then in such event the Bank shall be entitled to rely on the validity and
authenticity of such instruction without undertaking any further inquiry as long
as such instruction is undertaken in conformity with security procedures
established by the Bank from time to time. Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund
shall on behalf of the applicable Portfolio indemnify and hold the Bank harmless
from and against, any and all losses,
7
<PAGE>
damages, costs, charges, counsel fees, payments, expenses and liability
arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services which (i) are
received by the Bank or its agents or subcontractors, and (ii) have been
prepared, maintained or performed by the Fund or any other person or firm on
behalf of the Fund including but not limited to any previous transfer agent or
registrar.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
8
<PAGE>
The Bank shall be liable for any and all losses and damages,
and any and all reasonable costs, charges, counsel fees, payments, expenses and
liability directly arising out of or attributable to the Bank's lack of good
faith or its negligence or willful misconduct. In the event of any loss, damage
or expense suffered or incurred by the Fund caused by or resulting from actions
or omissions for which the Bank would be liable pursuant to this section, the
Bank shall promptly reimburse the Fund in the amount of any such loss, damage or
expense. The Bank shall not be liable for any special or consequential damages
under any provision of this agreement or for any special or consequential
damages arising out of any act or failure to act hereunder.
9
<PAGE>
6.02 At any time the Bank may apply to any officer of the
Fund for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the Bank under
this Agreement, and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund on behalf of the applicable
Portfolio for any action taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel that such actions or omissions
comply with the terms of this Agreement and with all applicable laws, provided
the Bank acts in good faith and without negligence. The Bank, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund, reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided the Bank or
its agents or subcontractors by machine readable input, telex, CRT data
entry or other similar means authorized by the Fund, and shall not be held to
have notice of any change of authority of any person, until receipt of written
notice thereof from the Fund. The Bank, its agents and subcontractors shall also
be protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signatures of
the officers of the Fund, and the proper countersignature of any
former transfer agent or former registrar, or of a co-transfer agent or
co-registrar.
6.03 In order that the indemnification provisions contained
in this Article 6 shall apply, upon the assertion of a claim for which the Fund
may be required to indemnify the Bank, the Bank shall promptly notify the Fund
of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
Article 7 Standard of Care
7.01 The Bank shall at all times act in good faith and
agrees to use its best efforts within reasonable limits to insure the accuracy
of all services performed under this Agreement, but
10
<PAGE>
assumes no responsibility and shall not be liable for loss or damage due to
errors unless said errors are caused by its negligence, bad faith, or
willful misconduct or that of its employees.
Article 8 Covenants of the Fund and the Bank
8.01 The Fund shall on behalf of each of the Portfolios
promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Directors of
the Fund authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices and to make such changes in said procedures and
facilities as the Fund may from time to time reasonably request.
8.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, shall not be voluntarily disclosed to any
other person, except as may be required by law, and shall not be used by the
Bank for any purpose not directly related to the business of the Fund, except
with the Fund's written consent.
11
<PAGE>
8.05 In case of any requests or demands for the inspection
of the Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon
one hundred twenty (120) days written notice to the other.
9.02 Should the Fund exercise its right to terminate in the
absence of a material breach of this Agreement by the Bank, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund on behalf of the applicable Portfolio(s). Additionally, the Bank
reserves the right to charge for any other reasonable expenses associated with
such termination and/or a charge equivalent to the average of three (3) months'
fees if the Fund terminates the Agreement within one year of its effectiveness.
In the event that the Fund designates a successor to any of the Bank's
obligations hereunder, the Bank shall, at the expense and direction of the Fund,
transfer to such successor a certified list of Shareholders of the Fund, a
complete record of the account of each Shareholder, and all other necessary or
relevant books, records and other data established or maintained by the Bank
hereunder.
Article 10 Additional Funds
10.01 In the event that the Fund establishes one or more
series of Shares in addition to Legg Mason American Leading Companies Trust with
respect to which it desires to have the Bank render services as transfer agent
under the terms hereof, it shall so notify the Bank in writing, and if the Bank
agrees in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
12
<PAGE>
Article 11 Assignment
11.01 Except as provided in Section 11.03 below, neither
this Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
11.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
11.03 The Bank may, without further consent on the part of
the Fund, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(1)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to the Fund for
the acts and omissions of any subcontractor as it is for its own acts and
omissions.
Article 12 Amendment
12.01 This Agreement may be amended or modified by a
written agreement executed by both parties and authorized or approved by a
resolution of the Directors of the Fund.
Article 13 Massachusetts Law to Apply
13.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 14 Force Majeure
14.01 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes. The Bank shall use reasonable care to minimize the
likelihood of damage, loss of data, delays and/or errors and should such damage,
loss of data, delays and/or errors occur, the Bank shall use its best efforts to
mitigate the effects of such occurrence.
13
<PAGE>
Article 15 Consequential Damages
15.01 Neither party to this Agreement shall be liable to
the other party for consequential damages under any provision of this Agreement
or for any consequential damages arising out of any act or failure to act
hereunder.
Article 16 Merger of Agreement
16.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject matter hereof whether oral or written.
Article 17 Miscellaneous
17.01 Notwithstanding any other provision of this Agreement,
the parties agree that the assets and liabilities of each series of the Fund are
separate and distinct from the assets and liabilities of each other series and
that no series shall be liable or shall be charged for any debt, obligation or
liability of any other series, whether arising under this Agreement or
otherwise.
Article 18 Counterparts
18.01 This Agreement may be executed by the parties hereto
on any number of counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
LEGG MASON INVESTORS TRUST, INC.
BY:/s/ Marie K. Karpinski
ATTEST:
/s/Kathi D. Bair
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Ronald E. Logue
Executive Vice President
ATTEST:
/s/D. Hufnagle
Assistant Secretary
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
Bank Fund
1. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
<PAGE>
Service Performed Responsibility
Bank Fund
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Article 1.02 (a), (b) and
(c) of the Agreement.
LEGG MASON INVESTORS TRUST, INC.
BY:____________________________________
ATTEST:
- --------------------------------
STATE STREET BANK AND TRUST COMPANY
BY:____________________________________
Executive Vice President
ATTEST:
- ----------------------------------
FORM OF AMENDED
DISTRIBUTION PLAN OF
LEGG MASON INVESTORS TRUST, INC.
WHEREAS, Legg Mason Investors Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended ("1940 Act"), and has offered, and intends to continue
offering, for public sale distinct series of shares of common stock ("Series"),
each corresponding to a distinct portfolio;
WHEREAS, the Corporation has registered the offering of its shares of
common stock under a Registration Statement filed with the Securities and
Exchange Commission and that Registration Statement is in effect as of the date
hereof;
WHEREAS, the Corporation's Board of Directors has established one
Series of shares of common stock of the Corporation: Legg Mason
American Leading Companies Trust ("Fund");
WHEREAS, the Corporation's Distribution Plan was adopted by the
Board of Directors on May 14, 1993;
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Amended Distribution
Plan (the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the
following terms and conditions:
1. A. Legg Mason American Leading Companies Trust shall pay
to Legg Mason, as compensation for Legg Mason's services as principal
underwriter of the Series' shares, a distribution fee at the rate of 0.75% on
an annualized basis of the average daily net assets of the Corporation's
shares, such fee to be calculated and accrued daily and paid monthly or at such
other intervals as the Board shall determine.
B. The Corporation shall pay to Legg Mason, as compensation
for ongoing services provided to the Corporation's shareholders, a service fee
at the rate of 0.25% on an annualized basis of the average daily net assets of
the Corporation's shares, such fee to be calculated and accrued daily and paid
monthly or at such other intervals as the Board shall determine.
<PAGE>
C. The Corporation may pay a distribution or service fee to
Legg Mason at a lesser rate than the fees specified in paragraphs 1.A. and 1.B.,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 4 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Article III, Section 26(d) of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD") remain
in effect and apply to distributors or dealers in the Corporation's shares, the
amounts paid hereunder shall not exceed those limitations, including permissible
interest.
2. As principal underwriter of the Corporation's shares, Legg Mason may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the shares of the Series and/or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason, other
broker-dealers and other entities that engage in or support the distribution of
shares or who service shareholder accounts or provide sub-accounting and
recordkeeping services; expenses of Legg Mason and such other broker-dealers and
other entities, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
4. This Amended Plan shall take effect on ___________ and shall
continue in effect for successive periods of one year from its execution for so
long as such continuance is specifically approved at least annually together
with any related agreements, by votes of a majority of both (a) the Board of
Directors of the Corporation and (b) those Directors who are not "interested
persons" of the Corporation, as defined in the 1940 Act, and who have no direct
or indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Plan and such related
agreements; and only if the Directors who approve the Plan taking effect have
reached the conclusion required by Rule 12b- 1(e) under the 1940 Act.
- 2 -
<PAGE>
5. Any person authorized to direct the disposition of monies paid or
payable by any Series pursuant to this Plan or any related agreement shall
provide to the Corporation's Board of Directors and the Board shall review, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made. Legg Mason shall submit only information
regarding amounts expended for "distribution activities," as defined in this
paragraph 5, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this paragraph 5, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated ___________, 1996, by and
between the Corporation and Legg Mason, that are not deemed "service
activities." As used herein, "distibution activities" also includes
subaccounting or recordkeeping services provided by an entity if the entity is
compensated, directly or indirectly, by the Fund or Legg Mason for such
services. Such entity may also be paid a service fee if it provides appropriate
services. Nothing in the foregoing is intended to or shall cause there to be any
implication that compensation for such services must be made only pursuant to a
plan of distribution under Rule 12b-1. "Service activities" shall mean
activities covered by the definition of "service fee" contained in amendments to
Article III, Section 26(d) of the NASD's Rules of Fair Practice that are
currently scheduled to become effective July 7, 1993, including the provision by
Legg Mason of personal, continuing services to investors in the Corporation's
shares. Overhead and other expenses of Legg Mason related to its "distribution
activities" or "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such distribution or service activities, respectively.
6. This Plan may be terminated with respect to any Series at any time
by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of
the outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1.A. hereof or the amount of service
fees provided for in paragraph 1.B. hereof unless such amendment is approved by
a vote of at least a majority of the outstanding securities, as defined in the
1940 Act, of the Corporation, and no material amendment to the Plan shall be
made unless such amendment is approved in the manner provided for continuing
approval in paragraph 4 hereof.
- 3 -
<PAGE>
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in the
1940 Act, shall be committed to the discretion of directors who are themselves
not interested persons.
9. The Corporation shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 5 hereof for a period of not less than six years from the date of such
report, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
as of the day and year set forth below:
Date: LEGG MASON INVESTORS TRUST, INC.
Attest: By:
By:
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:________________________________
- 4 -
FORM OF DISTRIBUTION PLAN OF
LEGG MASON INVESTORS TRUST, INC.
WHEREAS, Legg Mason Investors Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended ("1940 Act"), and intends to offer for public sale
distinct series of common stock ("Series"), each corresponding to a distinct
portfolio;
WHEREAS, the Corporation has registered the offering of its shares of
common stock under a Registration Statement filed with the Securities and
Exchange Commission and that Registration Statement is in effect as of the date
hereof or expected to be made effective in the near future;
WHEREAS, the Corporation's Board of Directors has
established a second Series of shares of common stock of the
Corporation: Legg Mason Balanced Trust "(Fund");
WHEREAS, the Corporation desires to adopt a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act and the Board of Directors has determined that
there is a reasonable likelihood that adoption of the Distribution Plan will
benefit the Corporation and its shareholders; and
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. A. Legg Mason Balanced Trust shall pay to Legg Mason, as
compensation for Legg Mason's services as principal underwriter of the Fund's
Class A Shares (known as "Primary Shares"), a distribution fee at the rate of
0.75% on an annualized basis of the average daily net assets attributable to
Primary Shares of the Fund, such fee to be calculated and accrued daily and paid
monthly or at such other intervals as the Board shall determine.
B. The Corporation shall pay to Legg Mason, as compensation for
ongoing services provided to the investors in Primary Shares of the Fund, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets attributable
<PAGE>
to Primary Shares of the Fund, such fee to be calculated and accrued daily and
paid monthly or at such other intervals as the Board shall determine.
C. The Corporation may pay a distribution or service fee to
Legg Mason at a lesser rate than the fees specified in paragraphs 1.A. and 1.B.,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 3 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Article III, Section 26(d) of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD") remain
in effect and apply to distributors or dealers in the Corporation's shares, the
amounts paid hereunder shall not exceed those limitations, including permissible
interest.
2. As principal underwriter of the Corporation's shares, Legg Mason may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the shares of the Fund and/or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason, other
broker-dealers and other entities that engage in or support the distribution of
shares or who service shareholder accounts or provide sub-accounting and
recordkeeping services; expenses of Legg Mason and such other broker-dealers and
other entities, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
4. This Plan shall take effect on ___________ __, 1996 and shall
continue in effect for successive periods of one year from its execution for so
long as such continuance is specifically approved at least annually together
with any related agreements, by votes of a majority of both (a) the Board of
Directors of the Corporation and (b) those Directors who are not "interested
persons" of the Corporation, as defined in the 1940 Act, and who have no direct
or indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Plan and such related
agreements; and only if the Directors who approve the Plan taking effect have
- 2 -
<PAGE>
reached the conclusion required by Rule 12b-1(e) under the 1940 Act.
5. Any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to this Plan or any related agreement shall provide
to the Corporation's Board of Directors and the Board shall review, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made. Legg Mason shall submit only information
regarding amounts expended for "distribution activities," as defined in this
paragraph 4, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this paragraph 4, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean
any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated ___________, by and between
the Corporation and Legg Mason, that are not deemed "service activities." As
used herein, "distribution activities" also includes sub-accounting or
recordkeeping services provided by an entity if the entity is compensated,
directly or indirectly, by the Fund or Legg Mason for such services. Such entity
may also be paid a service fee if it provides appropriate services. Nothing in
the foregoing is intended to or shall cause there to be any implication that
compensation for such services must be made only pursuant to a plan of
distribution under Rule 12b-1. "Service activities" shall mean activities
covered by the definition of "service fee" contained in amendments to Article
III, Section 26(d) of the NASD's Rules of Fair Practice that became effective
July 7, 1993, including the provision by Legg Mason of personal, continuing
services to investors in the Corporation's shares. Overhead and other expenses
of Legg Mason related to its "distribution activities" or "service activities,"
including telephone and other communications expenses, may be included in the
information regarding amounts expended for such distribution or service
activities, respectively.
6. This Plan may be terminated with respect to the Fund at any time by
vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the
outstanding voting securities of the Fund.
7. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1.A. hereof or the amount of
service fees provided for in paragraph 1.B. hereof unless such amendment is
approved by a vote of at least a majority of the outstanding securities, as
defined in the 1940 Act, of the Corporation, and no material amendment to the
- 3 -
<PAGE>
Plan shall be made unless such amendment is approved in the manner provided for
continuing approval in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons of the Corporation, as defined in the
1940 Act, shall be committed to the discretion of Directors who are themselves
not interested persons.
9. The Corporation shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 4 hereof for a period of not less than six years from the date of such
report, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
as of the day and year set forth below.
Date: LEGG MASON INVESTORS TRUST, INC.
By:
Attest:
By:
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:________________________________
- 4 -
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Legg Mason American Leading Companies Trust
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 58,704,473
<INVESTMENTS-AT-VALUE> 60,048,657
<RECEIVABLES> 700,430
<ASSETS-OTHER> 62,910
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,811,997
<PAYABLE-FOR-SECURITIES> 669,403
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 157,956
<TOTAL-LIABILITIES> 827,359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,872,824
<SHARES-COMMON-STOCK> 5,891,418
<SHARES-COMMON-PRIOR> 5,679,486
<ACCUMULATED-NII-CURRENT> 248,230
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (480,763)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,344,347
<NET-ASSETS> 59,984,638
<DIVIDEND-INCOME> 1,453,300
<INTEREST-INCOME> 366,251
<OTHER-INCOME> 0
<EXPENSES-NET> 1,124,498
<NET-INVESTMENT-INCOME> 695,053
<REALIZED-GAINS-CURRENT> (439,491)
<APPREC-INCREASE-CURRENT> 3,245,707
<NET-CHANGE-FROM-OPS> 3,501,269
<EQUALIZATION> 5,664
<DISTRIBUTIONS-OF-INCOME> (645,458)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,742,006
<NUMBER-OF-SHARES-REDEEMED> (12,279,159)
<SHARES-REINVESTED> 637,649
<NET-CHANGE-IN-ASSETS> 4,962,184
<ACCUMULATED-NII-PRIOR> 192,971
<ACCUMULATED-GAINS-PRIOR> (41,272)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 431,577
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,218,942
<AVERAGE-NET-ASSETS> 57,543,615
<PER-SHARE-NAV-BEGIN> 9.69
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 0.48
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.18
<EXPENSE-RATIO> 1.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
