As filed with the Securities and Exchange Commission on July 2, 1999.
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. 12 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13 [X]
LEGG MASON INVESTORS TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
ARTHUR C. DELIBERT, ESQ.
MARIE K. KARPINSKI Kirkpatrick & Lockhart LLP
100 Light Street 1800 Massachusetts Ave., N.W.
Baltimore, Maryland 21202 Second Floor
(Name and Address of Washington, D.C. 20036-1800
Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on _______, 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on _______, 1999 pursuant to Rule 485(a)(i)
[X] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on _______, 1999 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason Investors Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Legg Mason Basic Value Fund - Class A shares and Primary Shares
Legg Mason Financial Services Fund - Class A shares and Primary Shares
Part A - Prospectus
Navigator Basic Value Fund
Navigator Financial Services Fund
Part A - Prospectus
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason American Leading Companies Trust
Legg Mason Balanced Trust
Legg Mason U.S. Small-Capitalization Value Trust
Legg Mason Basic Value Fund
Legg Mason Financial Services Fund
Class A Shares, Primary Shares and Navigator Shares
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
<TABLE>
Legg Mason Investors Trust, Inc.
Form N-1a Cross Reference Sheet
-------------------------------
<CAPTION>
PART A ITEM NO. CLASS A AND PRIMARY SHARES
- --------------- PROSPECTUS CAPTION
------------------
<S> <C>
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management; How to Invest
9 Financial Highlights Information Financial Highlights
PART A ITEM NO. NAVIGATOR SHARES PROSPECTUS CAPTION
- --------------- -----------------------------------
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management
9 Financial Highlights Information Financial Highlights
STATEMENT OF ADDITIONAL INFORMATION
PART B ITEM NO. ITEM NO.
- --------------- --------
10 Cover Page and Table of Contents Same
11 Fund History Description of the Funds
12 Description of the Fund and Its Description of the Funds; Fund Policies; Investment
Investments and Risks Strategies and Risks
13 Management of the Fund Management of the Funds
14 Control Persons and Principal Holders Management of the Funds
of Securities
15 Investment Advisory and Other Services Management Agreement; Investment Advisory
Agreement; The Funds' Distributor
16 Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
17 Capital Stock and Other Securities Capital Stock Information
18 Purchase, Redemption, and Pricing of Additional Purchase and Redemption Information;
Shares Valuation of Fund Shares
19 Taxation of the Fund Additional Tax Information; Tax-Deferred Retirement
Plans
<PAGE>
20 Underwriters The Funds' Distributors
21 Calculation of Performance Data Performance Information
22 Financial Statements Financial Statements
</TABLE>
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
Legg Mason Investors Trust, Inc.:
Legg Mason Basic Value Fund
Legg Mason Financial Services Fund
PRIMARY CLASS AND CLASS A PROSPECTUS SEPTEMBER ___, 1999
logo
HOW TO INVEST SM
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C O N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
<PAGE>
LEGG MASON INVESTORS TRUST, INC.
[icon] I N V E S T M E N T O B J E C T I V E S
LEGG MASON BASIC VALUE FUND:
INVESTMENT OBJECTIVE: capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in common stocks or securities convertible into
common stocks that Bartlett & Co., the fund's sub-adviser, believes to be
selling at attractive prices relative to their intrinsic value. Income is a
secondary consideration.
Bartlett & Co. offers a bottom up, value based approach to investing in equity
securities, with the goal of producing investment returns that are above average
over long-term market cycles while maintaining below average levels of risk (as
measured by volatility). Its approach to equity investment is to screen equities
for valuations based upon earnings, cash flow, book value and dividend multiples
that fall into the lower half of the stock universe (primarily U.S.). It then
performs a more intense financial and company evaluation to select those stocks
with superior outlooks.
Bartlett & Co.'s goal of individual stock selection and portfolio construction
is to produce a diversified portfolio with above average potential for growth
and financial strength, albeit with attractive valuations. It selects stocks
with a time horizon of at least two years, and turnover is low - it has averaged
below 35% over the last seven years.
In seeking its objective, the fund invests only in securities of companies with
at least three years of operating history.
If a stock appreciates to such a level that its position in relation to the
entire portfolio would be inordinately large, a portion of the position will be
sold so that no position will be in excess of 5% of the total portfolio.
Positions may also be reduced once the stock has reached a price objective that
was determined when the stock was purchased. Securities may be sold before they
reach their target price if certain fundamental aspects of the company's
business have changed.
For temporary defensive purposes, the fund may hold all or a portion of its
assets in money market instruments, cash equivalents, short-term government and
corporate obligations or repurchase agreements. As a result, the fund may not
achieve its investment objective when so invested.
LEGG MASON FINANCIAL SERVICES FUND:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
Gray, Seifert & Co., Inc., the fund's sub-adviser, under normal circumstances,
invests substantially all of the fund's assets in equity securities of issuers
in the financial services industry that it believes are undervalued and thus may
offer above average potential for capital appreciation. Equity securities
include common stocks, preferred stocks, convertible securities, rights and
warrants.
Financial services companies include, but are not limited to:
o regional and money center banks
o securities brokerage firms
3
<PAGE>
o asset management companies
o savings banks and thrift institutions
o specialty finance companies (e.g., credit card, mortgage providers)
o insurance and insurance brokerage firms
o government sponsored agencies
o financial conglomerates
o foreign financial services companies (limited to 25% of total assets, not
including ADRs)
Investments may also include companies that derive more than 50% of their
revenues from providing products and services to the financial services
industry, including software, hardware, publishing, news services, credit
research and ratings services, internet services and business services.
The sub-adviser believes the financial services industry is undergoing many
changes due to legislation reform and the shifting demographics of the
population. In deciding what securities to buy, the sub-adviser analyzes an
issuer's financial statements to determine earnings per share potential. It also
reviews, as appropriate, the economy where the issuer does business, the
products offered, its potential to benefit from the changes and the strength and
goals of management.
The sub-adviser will sell a security in the fund's portfolio if that security
experiences earnings problems.
For temporary defensive purposes, the fund may hold all or a portion of its
assets in money market instruments, cash equivalents, short-term government and
corporate obligations or repurchase agreements. As a result, the fund may not
achieve its investment objective when so invested.
4
<PAGE>
[icon] P R I N C I P A L R I S K S
IN GENERAL
An investment in any of these funds is not guaranteed; investors may lose money
by investing in the funds. There is no guarantee that any fund will achieve its
objective. The principal risks of investing in the funds are described below.
The amount and types of risks vary depending on:
o the fund's investment objective
o the fund's ability to achieve its investment objective
o the markets in which the fund invests
o prevailing economic conditions
MARKET RISK -
Stock prices generally fluctuate more than those of other securities. A fund may
experience a substantial or complete loss on an individual stock. Market risk
may affect a single issuer, industry or section of the economy or may affect the
market as a whole.
Basic Value Fund invests in stocks believed to be attractively priced relative
to their intrinsic value. Such an approach involves the risk that those stocks
may remain undervalued and you could lose money. Value stocks as a group may be
out of favor for a long period of time, while the market concentrates on
"growth" stocks.
CONCENTRATION RISK -
Financial Services Fund invests primarily in securities in the financial
services industry. A fund concentrating most of its investments in a single
industry will be more susceptible to factors adversely affecting issuers within
that industry than would a more diversified portfolio of securities.
Financial services companies are subject to extensive government regulation. The
profitability of financial services companies is dependent on the availability
and cost of funds, and can fluctuate significantly when interest rates change.
Economic downturns, credit losses and severe price competition can negatively
affect this industry.
CREDIT RISK -
There is a risk that a fund's holdings in fixed income securities could be
downgraded or could default. Credit ratings are the opinions of the private
companies that rate companies or their securities; they are not guarantees.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with the operations of the funds, their adviser, distributor or
sub-adviser and other outside service providers and could impact companies in
which the funds invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problems
will not directly affect the systems used by major service providers.
5
<PAGE>
Whether these steps will be effective can only be known for certain in the year
2000.
6
<PAGE>
[icon] P E R F O R M A N C E
Each fund has three authorized classes of shares: Class A shares, Primary Class
shares and Navigator Class shares. The information provided below is primarily
for Class A which is the class with the longest history. Its expenses generally
are slightly lower, and its performance higher than Primary Class shares. Each
class is subject to different expenses and a different sales charge structure.
Navigator shares are offered through a separate prospectus only to certain
investors. The information below provides an indication of the risks of
investing in Basic Value Fund by showing changes in its performance from year to
year. Annual returns assume reinvestment of dividends and other distributions.
Historical performance of a fund does not necessarily indicate what will happen
in the future. Sales charges have not been deducted from total returns (in the
bar chart) for Class A shares. Returns would have been lower had these charges
been deducted.
BASIC VALUE FUND - CLASS A SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
35%
31.56
30%
25.96 29.46
25%
20%
18.42
15%
11.66 10.24 11.65
10%
5%
0.40 3.76
0%
-9.60
- -10%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
DURING THE TEN CALENDAR YEARS OF CLASS A ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1991 +16.74%
-----------------------------------------------------------------------
Worst quarter: September 30, 1990 -18.78%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the Standard & Poor's 500 Stock Composite Index, a broad-based
unmanaged index of common stocks commonly used to measure general stock
market activity.
7
<PAGE>
---------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
---------------------------------------------------------------------------
Basic Value Fund - -1.19% +14.89% +12.09% +12.35%(a)
Class A Shares
---------------------------------------------------------------------------
Basic Value Fund - +2.96% n/a n/a +6.99%(b)
Primary Class Shares
---------------------------------------------------------------------------
Standard & Poor's 500 +28.58% +24.06% +19.21% +17.31%(c)
Stock Composite Index
---------------------------------------------------------------------------
(a) May 5, 1983 (commencement of sale of Class A shares) to December 31, 1998.
(b) September 12, 1997 (commencement of sale of Primary Class shares) to
December 31, 1998. (c) For comparison with Class A, the index's return shown in
the table is for the period April 30, 1983 to December 31, 1998. For comparison
with Primary Class, the index's return of 25.08% is for the period September 30,
1997 to December 31, 1998.
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
8
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets so they lower that fund's share price and dividends. Other
expenses include transfer agency, custody, professional and registration fees.
CLASS A SHARES
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- ----------------------------------------------------------------
BASIC FINANCIAL
VALUE SERVICES
FUND FUND
- ----------------------------------------------------------------
Maximum sales charge
(load) Imposed on
purchases (as a % of 4.75% 4.75%
offering price) (a)
- ----------------------------------------------------------------
Maximum deferred sales
charge (as a % of net None None
asset value) (b)
- ----------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) (d)
--------------------------------------------------------
BASIC VALUE FINANCIAL
FUND SERVICES FUND
--------------------------------------------------------
Management fees (c) 0.75% 1.00%
--------------------------------------------------------
Service (12b-1) fees 0.25% 0.25%
--------------------------------------------------------
Other expenses 0.20% 0.40%
--------------------------------------------------------
Total Annual Fund 1.20% 1.65%
Operating Expenses (c)
--------------------------------------------------------
(a) Sales charge waivers and reduced sales charge purchase plans are available
for Class A shares. See "How to Invest."
(b) A contingent deferred sales charge ("CDSC") of 1% of the net asset value of
Class A shares will be imposed on redemptions of shares purchased pursuant to
the front-end sales charge waiver on purchases of $1 million or more of Class A
shares made within one year of the purchase date. See "How to Invest."
(c) Legg Mason Fund Adviser, Inc., as investment adviser, has voluntarily agreed
to waive fees so that expenses of Class A shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) do not exceed annual rates of each fund's
average daily net assets attributable to Class A shares as follows: Basic Value,
1.15%, and Financial Services Fund, 1.50%. These voluntary waivers will continue
until May 1, 2000 and may be terminated at any time. With these waivers,
management fees and total annual fund operating expenses were as follows: Basic
Value, 0.63% and 1.08%; and Financial Services Fund, 0.85% and 1.50%.
(d) The fees and expenses shown are for the fiscal year ended December 31, 1998
and are calculated as a percentage of average net assets.
9
<PAGE>
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. This example also assumes that the maximum
initial sales charge is deducted at the time of purchase.
-----------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
Basic Value Fund $591 $838 $1,103 $1,860
-----------------------------------------------------------------------------
Financial Services Fund $635 $971 n/a n/a
-----------------------------------------------------------------------------
PRIMARY CLASS SHARES
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) (b)
--------------------------------------------------------
BASIC FINANCIAL
VALUE SERVICES
FUND FUND
--------------------------------------------------------
Management fees (a) 0.75% 1.00%
--------------------------------------------------------
Distribution and 1.00% 1.00%
Service (12b-1)
fees
--------------------------------------------------------
Other expenses 0.27% 0.40%
--------------------------------------------------------
Total Annual Fund 2.02% 2.40%
Operating Expenses
(a)
--------------------------------------------------------
(a) Legg Mason Fund Adviser, Inc., as investment adviser, has voluntarily agreed
to waive fees so that expenses of Primary Class shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) do not exceed annual rates of
each fund's average daily net assets attributable to Primary Class shares as
follows: Basic Value, 1.90%; and Financial Services Fund, 2.25%. These voluntary
waivers will continue until May 1, 2000 and may be terminated at any time. With
these waivers, management fees and total annual fund operating expenses were as
follows: Basic Value, 0.63% and 1.90%; and Financial Services Fund, 0.85% and
2.25%.
(b) The fees and expenses shown are for the fiscal year ended December 31, 1998
and are calculated as a percentage of average net assets.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. The funds charge no redemption fees.
10
<PAGE>
-----------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
Basic Value Fund $205 $634 $1,088 $2,348
-----------------------------------------------------------------------------
Financial Services Fund $243 $748 $1,280 $2,736
-----------------------------------------------------------------------------
11
<PAGE>
[icon] M A N A G E M E N T
ADVISER:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland 21202, is
the funds' investment adviser. The adviser is responsible for the actual
investment management of the funds, including making investment decisions and
placing orders to buy, sell or hold a particular security. The adviser has
delegated investment advisory functions for the funds to separate sub-advisers
as described below. The adviser also supervises all aspects of the operations of
the funds as administrator.
Prior to September 24, 1999, Bartlett & Co. served as investment adviser to the
funds, under compensation arrangements substantially similar to those with the
current adviser. For its services during the fiscal year ended December 31,
1998, Basic Value Fund paid Bartlett & Co. a fee equal to 0.63% of its average
daily net assets. Financial Services Fund is obligated to pay the adviser a fee
of 1.00% of its average daily net assets, net of any waivers.
The adviser acts as manager or adviser to investment companies with aggregate
assets of $18.1 billion as of March 31, 1999.
SUB-ADVISERS:
Bartlett & Co., 36 East Fourth Street, Cincinnati, Ohio 45202, serves as
investment sub-adviser to Basic Value Fund. For its services, Bartlett receives
a monthly fee from the adviser equal to 60% of the fee actually paid to the
adviser by the fund (net of any waivers). Bartlett provides investment advice to
individuals, corporations, pension and profit sharing plans, trust accounts and
mutual funds. Aggregate assets under management of Bartlett were approximately
$3.0 billion as of March 31, 1999.
Gray, Seifert & Co., 380 Madison Avenue, New York, New York 10017, serves as
investment sub-adviser to Financial Services Fund. For its services, Gray,
Seifert receives a monthly fee from the adviser equal to 60% of the fee actually
paid to the adviser by the fund (net of any waivers). Gray, Seifert is known for
its research and securities analysis with respect to the financial services
industry. It has not previously advised a mutual fund; however, Gray, Seifert
has been the evaluator of the Legg Mason Regional Bank and Thrift Unit
Investment Trusts. As of March 31, 1999, Gray, Seifert had aggregate assets
under management of $1.2 billion. Gray, Seifert is an indirect wholly owned
subsidiary of Legg Mason, Inc., a financial services holding company.
12
<PAGE>
PORTFOLIO MANAGEMENT:
BASIC VALUE FUND - James A Miller, CFA and Woodrow H. Uible, CFA, are
responsible for co-managing the fund. Mr. Miller is a Senior Portfolio Manager,
a Director and President of Bartlett. He joined Bartlett in 1977. He divides his
time among fulfilling administrative functions as the President of Bartlett,
handling client service aspects of client relationships, and management of
investment portfolios. Mr. Uible is a Senior Portfolio Manager and chairs
Bartlett's Equity Investment Group. He joined Bartlett in 1980.
FINANCIAL SERVICES FUND - Miles Seifert and Amy LaGuardia are responsible for
co-managing Financial Services Fund. Mr. Seifert has been Chairperson of the
Board and a Director of Gray, Seifert since its inception in 1980. Ms. LaGuardia
has been Senior Vice president and Director of Research at Gray, Seifert for
four years. Prior thereto, she was Vice President. She has been employed there
since 1982.
DISTRIBUTOR OF EACH FUND'S SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares. Each fund has adopted a
separate plan with respect to each class that allows it to pay distribution fees
and/or shareholder service fees for the sale of its shares and for services
provided to shareholders. The fees are calculated daily and paid monthly.
Each class of shares bears 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.
For Class A shares, each fund may pay the distributor a service fee at an annual
rate of 0.25% of its average daily Class A net assets.
For Primary Class shares, each fund may pay the distributor a distribution fee
at an annual rate of 0.75% and a service fee of 0.25% of average daily Primary
Class net assets.
Because these fees are paid out of each fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor collects the sales charges imposed on purchases of Class A
shares and any CDSCs that may be imposed on certain redemptions of Class A
shares. The distributor reallows a portion of the sales charges on Class A
shares to broker/dealers that have sold such shares in accordance with the Class
A Purchase Schedule and may from time to time reallow the full amount of the
sales charge.
The distributor may also pay special additional compensation and promotional
incentives to broker/dealers who sell Class A shares of the funds.
The distributor may enter into agreements with other brokers to sell Primary
Shares of each fund. The distributor pays these brokers up to 90% of the
distribution and service fee that it receives from a fund for those sales.
The adviser and distributor are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
13
<PAGE>
[icon] H O W T O I N V E S T
To open a regular account or a retirement account with one or more of the funds,
contact a Legg Mason financial adviser or other entity that has entered into an
agreement with the funds' distributor to sell shares of the Legg Mason family of
funds. A Legg Mason financial adviser will explain the shareholder services
available from the funds and answer any questions you may have. For each class
of shares the minimum initial investment is $1,000 and the minimum for each
purchase of additional shares is $100, except as noted below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. Contact your Legg Mason
financial adviser or other entity offering the funds to discuss which one might
be appropriate for you.
When placing a purchase order, please specify whether the order is for Class A
or Primary Class. All purchase orders that fail to specify a class will
automatically be invested in Primary Class shares.
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
------------------------------------------------------------------------
IN PERSON Give your financial adviser a check for $100 or more
payable to the fund
------------------------------------------------------------------------
MAIL Mail your check, payable to the fund, for $100 or more
to your financial adviser
------------------------------------------------------------------------
TELEPHONE OR Call your financial adviser to transfer available cash
WIRE balances in your brokerage account or to transfer
money from your bank directly to Legg Mason. Wire
transfers may be subject to a service charge by your
bank.
------------------------------------------------------------------------
FUTURE FIRST Contact your Legg Mason financial adviser to enroll in
SYSTEMATIC Legg Mason's Future First Systematic Investment Plan.
INVESTMENT PLAN Under this plan, you may arrange for automatic monthly
investments in a fund of $50 or more. The fund's
transfer agent will transfer funds monthly from your
Legg Mason account or from your checking account to purchase
shares of that fund.
------------------------------------------------------------------------
AUTOMATIC Arrangements may be made with some employers and
INVESTMENTS financial institutions for regular automatic monthly
investments of $50 or more in shares of a fund. You may also
reinvest dividends from certain unit investment trusts in
shares of a fund.
------------------------------------------------------------------------
Call your financial adviser or another entity offering the funds for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
14
<PAGE>
Purchase orders received by your financial adviser or the entity offering the
funds before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close of
the exchange on that day. Orders received after the close of the exchange will
be processed at the fund's net asset value as of the close of the exchange on
the next day the exchange is open. Payment must be made within three business
days to Legg Mason.
CLASS A PURCHASE SCHEDULE:
Each fund's offering price for Class A purchases is equal to the net asset value
per share plus a front-end sales charge determined from the following schedule
(which may be amended from time to time):
SALES CHARGE SALES CHARGE DEALER REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE NET INVESTMENT OFFERING PRICE
Less than $25,000 4.75% 4.99% 4.00%
$25,000 to $49,999 4.50 4.71 3.75
$50,000 to $99,999 4.00 4.17 3.25
$100,000 to $249,999 3.50 3.63 2.75
$250,000 to $499,999 2.50 2.56 2.00
$500,000 to $999,999 2.00 2.04 1.60
$1 million or more * 0.00 0.00 1.00
* A CDSC of 1% of the shares' net asset value at the time of purchase or sale,
whichever is less, may be charged on redemptions of shares purchased pursuant to
the front-end sales charge waiver for purchases of $1 million or more made
within one year of the purchase date. See "How to Sell Your Shares" for a
discussion of any applicable CDSC on Class A shares.
The distributor will pay the following commissions to brokers that initiate and
are responsible for purchases of Class A shares of any single purchaser of $2
million or more in the aggregate: 0.80% up to $2,999,999, plus 0.50% of the
excess over $3 million up to $20 million, plus 0.25% of the excess over $20
million.
SALES CHARGE WAIVERS FOR CLASS A SHARES:
Purchases of Class A shares made by the following investors will not be subject
to a sales charge:
o advisory clients (and related accounts) of Bartlett & Co. or Gray, Seifert
& Co., Inc.
o certain employee benefit or retirement accounts (subject to the discretion
of Bartlett & Co. or Gray, Seifert & Co., Inc.)
o employees of Legg Mason, Inc. and its affiliates
o registered representatives or full-time employees of broker/dealers that
have dealer agreements with the distributor
o the children, siblings and parents of such persons
o broker/dealers, registered investment advisers, financial institutions or
financial planners for the accounts of clients participating in "wrap fee"
advisory programs that adhere to certain standards and that are subject to
agreements between those entities and the distributor
o purchases of $1,000,000 or more (purchases for two or more funds may be
combined for this purpose)
15
<PAGE>
In addition, all existing shareholders of Basic Value as of July 18, 1997 will
be allowed to purchase additional Class A shares of the fund without a sales
charge.
Investors may be eligible for a reduced sales charge on purchases of Class A
shares through a Right of Accumulation or under a Letter of Intent.
RIGHT OF ACCUMULATION:
To receive the Right of Accumulation, investors must give the distributor or
their broker/dealer sufficient information to permit qualification. If
qualified, investors may purchase shares of the funds at the sales charge
applicable to the total of:
o the dollar amount being purchased plus
o the dollar amount of the investors' concurrent purchases of Class A shares
of other funds plus
o the price of all shares of Class A shares of funds already held by the
investor
LETTER OF INTENT:
Investors may execute a Letter of Intent indicating an aggregate amount to be
invested in Class A shares of any fund in the following thirteen months. All
purchases made during that period will be subject to the sales charge applicable
to that aggregate amount.
If a Letter of Intent is executed within 90 days of a prior purchase of Class A
shares, the prior purchase may be included under the Letter of Intent and an
adjustment will be made to the applicable sales charge. The adjustment will be
based on the current net asset value of the respective fund(s).
If the total amount of purchases does not equal the aggregate amount covered by
the Letter of Intent after the thirteenth month, you will be required to pay the
difference between the sales charges paid at the reduced rate and the sales
charge applicable to the purchases actually made.
Shares having a value equal to 5% of the amount specified in the Letter of
Intent will be held in escrow during the thirteen month period (while remaining
registered in your name) and will be subject to redemption to assure any
necessary payment to the distributor of a higher applicable sales charge.
16
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
-----------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial adviser or entity offering the
fund and request a redemption. Please have the following
information ready when you call: the name of the fund, the
number of shares (or dollar amount) to be redeemed and your
shareholder account number.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you.
Wire requests will be subject to a fee of $18. Be sure that your
financial adviser has your bank account information on file.
The funds will follow reasonable procedures to ensure the
validity of any telephone redemption request, such as requesting
identifying information from callers or employing identification
numbers. Unless you specify that you do not wish to have
telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
-----------------------------------------------------------------------------
MAIL Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners of
the account and their signatures guaranteed without
qualification. You may obtain a signature guarantee from most
banks or securities dealers.
-----------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial adviser or another entity.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
CONTINGENT DEFERRED SALES CHARGES:
If you redeem any Class A shares within one year that were purchased without a
sales charge because the purchase totaled $1,000,000 or more, you will be
subject to a CDSC of 1% of the lower of the original purchase price or the net
asset value of such shares at the time of redemption. You may exchange such
shares purchased without a sales charge for Class A shares of another fund
without being charged a CDSC. You will be subject to a CDSC if you redeem shares
acquired through exchange.
17
<PAGE>
Class A shares that are redeemed will not be subject to the CDSC to the extent
that the value of such shares represents (i) reinvestment of dividends or other
distributions or (ii) shares redeemed more than one year after their purchase.
The amount of any CDSC will be paid to the distributor.
The funds will use the "first-in, first-out" method to determine the one year
holding period. The date of redemption or exchange will be compared with the
earliest purchase date of shares held in the account. The fee will not apply to
any shares purchased through reinvestment of dividends or other distributions or
to shares held in retirement plans; however, it will apply to shares held in IRA
accounts (including IRA-based plans) and to shares purchased through automatic
investment plans.
18
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Class A Share and Primary Share is determined daily as of
the close of the New York Stock Exchange, on every day the exchange is open. To
calculate each fund's Class A Share or Primary Share price, the fund's assets
attributable to that class of shares are valued and totaled, liabilities
attributable to that class of shares are subtracted, and the resulting net
assets are divided by the number of shares outstanding for that class. Each
fund's securities are valued on the basis of market quotations or, lacking such
quotations, at fair value as determined under the guidance of the Board of
Directors.
Securities for which market quotations are readily available are valued at the
last sale price of the day for a comparable position, or, in the absence of any
such sales, the last available bid price for a comparable position. Where a
security is traded on more than one market, the securities are generally valued
on the market considered by each fund's sub-adviser to be the primary market.
Fixed income securities generally are valued using market quotations or
independent pricing services that use prices provided by market makers or
estimates of market values. Securities with remaining maturities of 60 days or
less are valued at amortized cost.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
19
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial adviser or other entity offering the funds for sale.
CONFIRMATIONS AND ACCOUNT STATEMENTS:
You will receive from Legg Mason a confirmation after each transaction involving
Class A Shares or Primary Shares (except a reinvestment of dividends or capital
gain distributions and purchases made through the Future First Systematic
Investment Plan or through automatic investments). Legg Mason or the entity
through which you invest will send you account statements monthly unless there
has been no activity in the account. Legg Mason will send you statements
quarterly if you participate in the Future First Systematic Investment Plan or
if you purchase shares through automatic investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares of a fund with a net asset value of
$5,000 or more, you may elect to make systematic withdrawals from the fund. The
minimum amount for each withdrawal is $50. You should not purchase shares of the
fund when you are a participant in the plan.
EXCHANGE PRIVILEGE:
Fund shares may be exchanged for the corresponding class of shares of any of the
other Legg Mason funds, provided these funds are eligible for sale in your state
of residence. You can request an exchange in writing or by phone. Be sure to
read the current prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. A CDSC may apply to the
redemption of Class A shares acquired through an exchange. In addition, an
exchange of a fund's shares will be treated as a sale of the shares and any gain
on the transaction may be subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
REINSTATEMENT PRIVILEGE:
If you have redeemed your Class A shares, you may reinstate your fund account
without a sales charge up to the dollar amount redeemed by purchasing shares
within 90 days of the redemption. Within 90 days of a redemption, contact the
distributor or your broker/dealer and notify them of your desire to reinstate
and give them an order for the amount to be purchased. The reinstatement will be
made at the net asset value next determined after the notification and purchase
order have been received by the transfer agent.
20
<PAGE>
[icon] D I V I D E N D S A N D T A X E S
Basic Value Fund declares and pays dividends from net investment income
quarterly; it pays dividends from any net short-term capital gains annually.
Financial Services Fund declares and pays all dividends on an annual basis.
Distributions of substantially all of each fund's net capital gain (the excess
of net long-term capital gain over net short-term capital loss) are generally
declared and paid 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 a federal excise tax.
Your dividends and other distributions will be automatically reinvested in the
same class of shares of the distributing fund. If you wish to receive dividends
and/or other distributions in cash, you must notify the distributing fund at
least 10 days before the next dividend and/or other distribution is to be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to most investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional shares of the fund. Dividends from investment company
taxable income are taxable as ordinary income. Distributions of a fund's net
capital gain are taxable as long-term capital gain, regardless of how long you
have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number or who are otherwise subject to backup withholding. Each fund will also
withhold 31% of all dividends and capital gain distributions payable to such
shareholders who are otherwise subject to backup withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
21
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights tables below are intended to help you understand each
fund's financial performance for the past five years or since its inception.
Total return represents the rate that an investor would have earned (or lost) on
an investment in a fund, assuming reinvestment of all dividends and other
distributions. This information has been audited by the funds' independent
accountants, PricewaterhouseCoopers LLP, whose report, along with the funds'
financial statements, is incorporated by reference into the Statement of
Additional Information and is included in the annual report. The annual reports
are available upon request by calling toll-free 1-800-822-5544.
BASIC VALUE FUND
<TABLE>
---------------------------------------------------------- -------------------------------------------------------------
Income From Investment Operations Distributions
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Realized Net
For the Net Asset & Unrealized Asset
Years Value, Net Gain (Loss) Total From From Net From Net Value,
Ended Beginning Investment On Investment Investment Realized Total End of
Dec. 31, of Year Income Investments Operations Income Gains Distributions Year
------------------------------------------------------------------------------------------------------------------------
Class A Shares:
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $18.95 $.20(c) $.48 $.68 $(.14) $(1.15) $(1.29) $18.34
------------------------------------------------------------------------------------------------------------------------
1997(a) 18.33 .19(c) 5.59 5.78 (.22) (4.94) (5.16) 18.95
------------------------------------------------------------------------------------------------------------------------
1997(b) 17.94 .22 1.82 2.04 (.26) (1.39) (1.65) 18.33
-----------------------------------------------------------------------------------------------------------------------
1996(b) 15.39 .30 3.32 3.62 (.24) (.83) (1.07) 17.94
------------------------------------------------------------------------------------------------------------------------
1995(b) 14.89 .27 1.53 1.80 (.27) (1.03) (1.30) 15.39
------------------------------------------------------------------------------------------------------------------------
1994(b) 14.76 .22 .28 .50 (.23) (.14) (.37) 14.89
------------------------------------------------------------------------------------------------------------------------
Primary Class:
------------------------------------------------------------------------------------------------------------------------
1998 $18.75 $.10(g) $.41 $.51 $(.08) $(1.15) $(1.23) $18.03
------------------------------------------------------------------------------------------------------------------------
1997(d) 22.84 .24(g) .88 1.12 (.27) (4.94) (5.21) 18.75
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
-----------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Total Expenses to Net Investment Portfolio Net Assets,
Years Ended Return Average Net Income to Average Turnover Rate End of Year
Dec. 31, (%)(c)(h) Assets (%) Net Assets (%) (%) (thousands - $)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares:
-----------------------------------------------------------------------------------------------------------------
1998 3.76 1.08(c) 1.05(c) 28 119,626
-----------------------------------------------------------------------------------------------------------------
1997(a) 33.14(e) 1.13(c,f) 1.15(c,f) 42(f) 133,076
-----------------------------------------------------------------------------------------------------------------
1997(b) 11.30 1.16 1.18 23 119,208
-----------------------------------------------------------------------------------------------------------------
1996(b) 24.05 1.17 1.79 25 125,636
-----------------------------------------------------------------------------------------------------------------
1995(b) 12.67 1.20 1.81 26 102,721
-----------------------------------------------------------------------------------------------------------------
1994(b) 3.42 1.20 1.48 33 94,289
-----------------------------------------------------------------------------------------------------------------
Primary Shares
-----------------------------------------------------------------------------------------------------------------
1998 2.96 1.90(g) .29(g) 28 2,228
-----------------------------------------------------------------------------------------------------------------
1997(d) 6.07(e) 1.90(f,g) 1.11(f,g) 42(f) 395
-----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the nine months ended December 31, 1997. The fund changed its year end
from March 31 to December 31.
(b) For the years ended March 31.
22
<PAGE>
(c) Net of fees waived pursuant to a voluntary expense limitation of 1.15%. If
no fees had been waived, the annualized ratio of expenses to average daily
net assets for each period would have been: 1997, 1.19% and 1998, 1.20%.
(d) September 12, 1997 (commencement of sale of this class) to December 31,
1997.
(e) Not annualized.
(f) Annualized.
(g) Net of fees waived pursuant to a voluntary expense limitation of 1.90%. If
no fees had been waived, the annualized ratio of expenses to average daily
net assets for each period would have been: 1997, 2.00% and 1998, 2.02%.
(h) Excluding sales charge.
FINANCIAL SERVICES FUND
<TABLE>
------------------------------------------------------------|---------------------------------------------------------
Income From Investment Operations | Distributions
------------------------------------------------------------|---------------------------------------------------------
<CAPTION>
For the Net Asset Net Realized
Period Value, Net & Unrealized Total From From Net From Net Total Net Asset
Ended Beginning Investment Gains On Investment Investment Realized Distribu- Value, End
Dec. 31, of Period Income Investments Operations Income Gains tions of Period
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares:
----------------------------------------------------------------------------------------------------------------------
1998(a) $10.00 ------ (b) $.58 $.58 $ ------ $ ------ $ ------ $10.58
----------------------------------------------------------------------------------------------------------------------
Primary Class:
----------------------------------------------------------------------------------------------------------------------
1998(a) $10.00 $(.01)(c) $.58 $.57 $ ------ $ ------ $ ------ $10.57
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Investment
Expenses to Income (Loss) Portfolio Net Assets,
For the Period Total Return Average Net to Average Net Turnover End of Year
ended Dec. 31 (%)(d) Assets (%) Assets (%) Rate(%) (thousands-$)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares:
------------------------------------------------------------------------------------------------------------
1998(a) 5.80(e) 1.50(b,f) .22(b,f) ------ 7,451
------------------------------------------------------------------------------------------------------------
Primary Shares:
------------------------------------------------------------------------------------------------------------
1998(a) 5.70(e) 2.25(c,f) (.11)(c,f) ------ 14,598
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) November 16, 1998 (commencement of sale of this class) to December 31,
1998.
(b) Net of fees waived pursuant to a voluntary expense limitation of 1.50%. If
no fees had been waived, the annualized ratio of expenses to average daily
net assets would have been 1.65%.
(c) Net of fees waived pursuant to a voluntary expense limitation of 2.25%. If
no fees had been waived, the annualized ratio of expenses to average daily
net assets would have been 2.40%.
(d) Excluding sales charge.
(e) Not annualized.
(f) Annualized.
23
<PAGE>
L e g g M a s o n I n v e s t o r s T r u s t, I n c.
The following additional information about the funds is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about each fund, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC (phone 1-800-SEC-0330).
Reports and other information about each fund are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-001 SEC file number: 811-7692
24
<PAGE>
Navigator Equity Funds:
Navigator Class of Legg Mason Basic Value Fund
Navigator Class of Legg Mason Financial Services Fund
NAVIGATOR SHARES PROSPECTUS September __, 1999
logo
HOW TO INVEST(SM)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C 0 N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
<PAGE>
LEGG MASON INVESTORS TRUST, INC.
[icon] I N V E S T M E N T 0 B J E C T I V E S
LEGG MASON BASIC VALUE FUND:
INVESTMENT OBJECTIVE: capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in common stocks or securities convertible into
common stocks that Bartlett & Co., the fund's sub-adviser, believes to be
selling at attractive prices relative to their intrinsic value. Income is a
secondary consideration.
Bartlett & Co. offers a bottom up, value based approach to investing in equity
securities, with the goal of producing investment returns that are above average
over long-term market cycles while maintaining below average levels of risk (as
measured by volatility). Its approach to equity investment is to screen equities
for valuations based upon earnings, cash flow, book value and dividend multiples
that fall into the lower half of the stock universe (primarily U.S.). It then
performs a more intense financial and company evaluation to select those stocks
with superior outlooks.
Bartlett & Co.'s goal of individual stock selection and portfolio construction
is to produce a diversified portfolio with above average potential for growth
and financial strength, albeit with attractive valuations. It selects stocks
with a time horizon of at least two years, and turnover is low - it has averaged
below 35% over the last seven years.
In seeking its objective, the fund invests only in securities of companies with
at least three years of operating history.
If a stock appreciates to such a level that its position in relation to the
entire portfolio would be inordinately large, a portion of the position will be
sold so that no position will be in excess of 5% of the total portfolio.
Positions may also be reduced once the stock has reached a price objective that
was determined when the stock was purchased. Securities may be sold before they
reach their target price if certain fundamental aspects of the company's
business have changed.
For temporary defensive purposes, the fund may hold all or a portion of its
assets in money market instruments, cash equivalents, short-term government and
corporate obligations or repurchase agreements. As a result, the fund may not
achieve its investment objective when so invested.
LEGG MASON FINANCIAL SERVICES FUND:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
Gray, Seifert & Co., Inc., the fund's sub-adviser, under normal circumstances,
invests substantially all of the fund's assets in equity securities of issuers
in the financial services industry that it believes are undervalued and thus may
offer above average potential for capital appreciation. Equity securities
include common stocks, preferred stocks, convertible securities, rights and
warrants.
Financial services companies include, but are not limited to:
o regional and money center banks
o securities brokerage firms
3
<PAGE>
o asset management companies
o savings banks and thrift institutions
o specialty finance companies (e.g., credit card, mortgage providers)
o insurance and insurance brokerage firms
o government sponsored agencies
o financial conglomerates
o foreign financial services companies (limited to 25% of total assets, not
including ADRs)
Investments may also include companies that derive more than 50% of their
revenues from providing products and services to the financial services
industry, including software, hardware, publishing, news services, credit
research and ratings services, internet services and business services.
The sub-adviser believes the financial services industry is undergoing many
changes due to legislation reform and the shifting demographics of the
population. In deciding what securities to buy, the sub-adviser analyzes an
issuer's financial statements to determine earnings per share potential. It also
reviews, as appropriate, the economy where the issuer does business, the
products offered, its potential to benefit from the changes and the strength and
goals of management.
The sub-adviser will sell a security in the fund's portfolio if that security
experiences earnings problems.
For temporary defensive purposes, the fund may hold all or a portion of its
assets in money market instruments, cash equivalents, short-term government and
corporate obligations or repurchase agreements. As a result, the fund may not
achieve its investment objective when so invested.
4
<PAGE>
[icon] P R I N C I P A L R I S K S
IN GENERAL
An investment in any of these funds is not guaranteed; investors may lose money
by investing in the funds. There is no guarantee that any fund will achieve its
objective. The principal risks of investing in the funds are described below.
The amount and types of risks vary depending on:
o the fund's investment objective
o the fund's ability to achieve its investment objective
o the markets in which the fund invests
o prevailing economic conditions
MARKET RISK -
Stock prices generally fluctuate more than those of other securities. A fund may
experience a substantial or complete loss on an individual stock. Market risk
may affect a single issuer, industry or section of the economy or may affect the
market as a whole.
Basic Value Fund invests in stocks believed to be attractively priced relative
to their intrinsic value. Such an approach involves the risk that those stocks
may remain undervalued and you could lose money. Value stocks as a group may be
out of favor for a long period of time, while the market concentrates on
"growth" stocks.
CONCENTRATION RISK -
Financial Services Fund invests primarily in securities in the financial
services industry. A fund concentrating most of its investments in a single
industry will be more susceptible to factors adversely affecting issuers within
that industry than would a more diversified portfolio of securities.
Financial services companies are subject to extensive government regulation. The
profitability of financial services companies is dependent on the availability
and cost of funds, and can fluctuate significantly when interest rates change.
Economic downturns, credit losses and severe price competition can negatively
affect this industry.
CREDIT RISK -
There is a risk that a fund's holdings in fixed income securities could be
downgraded or could default. Credit ratings are the opinions of the private
companies that rate companies or their securities; they are not guarantees.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with the operations of the funds, their adviser, distributor or
sub-adviser and other outside service providers and could impact companies in
which the funds invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problems
will not directly affect the systems used by major service providers.
5
<PAGE>
Whether these steps will be effective can only be known for certain in the year
2000.
6
<PAGE>
[icon] P E R F 0 R M A N C E
The information below provides an indication of the risks of investing in Basic
Value by showing changes in its performance from year to year. Annual returns
assume reinvestment of dividends and other distributions. Historical performance
of a fund does not necessarily indicate what will happen in the future. As of
the date of this Prospectus, Navigator shares of Financial Services Fund have
not commenced operations.
BASIC VALUE FUND - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
4%
3.99%
2%
0%
1998
DURING 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +15.20%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -15.17%
- --------------------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the Standard and Poor's 500 Stock Composite Index, a broad-based
unmanaged index of common stocks, commonly used to measure general stock market
activity.
- --------------------------------------------------------------------------------
1 YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------
Basic Value Fund, Navigator Class +3.99% +9.65(a)
- --------------------------------------------------------------------------------
Standard & Poor's 500 Stock Composite +28.58% +28.45(b)
Index
- --------------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) August 15, 1997 (commencement of sales of Navigator Class shares) to
December 31, 1998.
(b) The index's return is for the period August 31, 1997 to December 31, 1998.
7
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets so they lower its share price and dividends. Other expenses
include transfer agency, custody, professional and registration fees.
NAVIGATOR CLASS
The fees and expenses shown are for the fiscal year ended December 31, 1998, and
are calculated as a percentage of average net assets. As of the date of this
prospectus, Navigator shares of Financial Services Fund have not commenced
operations.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -----------------------------------------------------
Basic Value Financial
Fund Services Fund
- -----------------------------------------------------
Management fees (a) 0.75% 1.00%
- -----------------------------------------------------
Distribution and/or none none
Service (12b-1) fees
- -----------------------------------------------------
Other Expenses 0.19% 0.40%
- -----------------------------------------------------
Total Annual Fund 0.94% 1.40%
Operating Expenses (a)
- -----------------------------------------------------
(a) Legg Mason Fund Adviser, Inc., as investment adviser, has voluntarily agreed
to waive fees so that expenses of Navigator Class shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) do not exceed annual rates of
each fund's average daily net assets attributable to Navigator Class shares as
follows: Basic Value, 0.90%, and Financial Services Fund, 1.25%. These voluntary
waivers will continue until May 1, 2000 and may be terminated at any time. With
these waivers, management fees and total annual fund operating expenses for
Basic Value Fund were 0.63% and 0.82%. Estimated management fees and total
annual fund operating expenses for Financial Services Fund were 0.85% and 1.25%
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. The funds charge no redemption fees.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Basic Value Fund $96 $300 $520 $1,155
- --------------------------------------------------------------------------------
Financial Services Fund $143 $443 n/a n/a
- --------------------------------------------------------------------------------
8
<PAGE>
[icon] M A N A G E M E N T
MANAGEMENT AND ADVISERS:
ADVISER:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland 21202, is
the funds' investment adviser. The adviser is responsible for the actual
investment management of the funds, including making investment decisions and
placing orders to buy, sell or hold a particular security. The adviser has
delegated investment advisory functions for the funds to separate sub-advisers
as described below. The adviser also supervises all aspects of the operations of
the funds as administrator.
Prior to September 24, 1999, Bartlett & Co. served as investment adviser to the
funds, under compensation arrangements substantially similar to those with the
current adviser. For its services during the fiscal year ended December 31,
1998, Basic Value Fund paid Bartlett & Co. a fee equal to 0.63% of its average
daily net assets. Financial Services Fund is obligated to pay the adviser a fee
of 1.00% of its average daily net assets, net of any waivers.
The adviser acts as manager or adviser to investment companies with aggregate
assets of $18.1 billion as of March 31, 1999.
SUB-ADVISERS:
Bartlett & Co., 36 East Fourth Street, Cincinnati, Ohio 45202, serves as
investment sub-adviser to Basic Value Fund. For its services, Bartlett receives
a monthly fee from the adviser equal to 60% of the fee actually paid to the
adviser by the fund (net of any waivers). Bartlett provides investment advice to
individuals, corporations, pension and profit sharing plans, trust accounts and
mutual funds. Aggregate assets under management of Bartlett were approximately
$3.0 billion as of March 31, 1999.
Gray, Seifert & Co., 380 Madison Avenue, New York, New York 10017, serves as
investment sub-adviser to Financial Services Fund. For its services, Gray,
Seifert receives a monthly fee from the adviser equal to 60% of the fee actually
paid to the adviser by the fund (net of any waivers). Gray, Seifert is known for
its research and securities analysis with respect to the financial services
industry. It has not previously advised a mutual fund; however, Gray, Seifert
has been the evaluator of the Legg Mason Regional Bank and Thrift Unit
Investment Trusts. As of March 31, 1999, Gray, Seifert had aggregate assets
under management of $1.2 billion. Gray, Seifert is an indirect wholly owned
subsidiary of Legg Mason, Inc., a financial services holding company.
9
<PAGE>
PORTFOLIO MANAGEMENT:
BASIC VALUE FUND - James A Miller, CFA and Woodrow H. Uible, CFA, are
responsible for co-managing the fund. Mr. Miller is a Senior Portfolio Manager,
a Director and President of Bartlett. He joined Bartlett in 1977. He divides his
time among fulfilling administrative functions as the President of Bartlett,
handling client service aspects of client relationships, and management of
investment portfolios. Mr. Uible is a Senior Portfolio Manager and chairs
Bartlett's Equity Investment Group. He joined Bartlett in 1980.
FINANCIAL SERVICES FUND - Miles Seifert and Amy LaGuardia are responsible for
co-managing Financial Services Fund. Mr. Seifert has been Chairperson of the
Board and a Director of Gray, Seifert since its inception in 1980. Ms. LaGuardia
has been Senior Vice president and Director of Research at Gray, Seifert for
four years. Prior thereto, she was Vice President. She has been employed there
since 1982.
DISTRIBUTOR OF EACH FUND'S SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares under separate Underwriting
Agreements. Each Underwriting Agreement obligates Legg Mason to pay certain
expenses in connection with offering fund shares, including compensation to its
financial advisers, the printing and distribution of prospectuses, statements of
additional information and shareholder reports (after these have been printed
and mailed to existing shareholders at the funds' expense), supplementary sales
literature and advertising materials.
The distributor and the adviser may pay non-affiliated entities out of their own
assets to support the distribution of Navigator Shares and shareholder
servicing.
The distributor and the adviser are wholly owned subsidiaries of Legg Mason,
Inc., a financial services holding company.
10
<PAGE>
[icon] H O W T O I N V E S T
Navigator Shares are currently offered for sale only to:
o Institutional Clients of Legg Mason Trust Company for which they exercise
discretionary investment management responsibility and accounts of the
customers with such Institutional Clients ("Customers").
o qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million
o clients of Bartlett & Co. who, as of December 19, 1996, were shareholders
of Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund and for whom
Bartlett acts as an ERISA fiduciary
o any qualified retirement plan of Legg Mason, Inc. or of any of its
affiliates
o certain institutions who were clients of Fairfield Group, Inc. as of
February 28, 1999 for investment of their own monies and monies for which
they act in a fiduciary capacity
o shareholders of Class Y shares of any of the Bartlett Funds on
____________, 1999
Eligible investors may purchase Navigator Shares through a brokerage account at
Legg Mason. The minimum initial investment is $50,000 and the minimum for each
purchase of additional shares is $100. Institutional Clients may set different
minimums for their Customers' investments in accounts invested in Navigator
Shares.
Customers of certain Institutional Clients that have omnibus accounts with the
funds' transfer agent can purchase shares through those Institutions. The
distributor may pay such Institutional Clients for account servicing.
Institutional Clients may charge their Customers for services provided in
connection with the purchase and redemption of shares. Information concerning
these services and any applicable charges will be provided by the Institutional
Clients. This Prospectus should by read by Customers in connection with any such
information received by Institutional Clients. Any such fees, charges or
requirements imposed by Institutional Clients will be in addition to the fees
and requirements of this Prospectus.
Certain institutions that have agreements with Legg Mason or the funds may be
authorized to accept purchase and redemption orders on their behalf. Once the
authorized institution accepts the order, you will receive the next determined
net asset value. You should consult with your institution to determine the time
by which it must receive your order to get that day's share price. It is the
institution's responsibility to transmit your order to the fund in a timely
fashion.
Purchase orders received by Legg Mason before the close of the New York Stock
Exchange (normally 4:00 p.m., Eastern time) will be processed at the fund's net
asset value as of the close of the exchange on that day. Orders received after
the close of the exchange will be processed at the fund's net asset value as of
the close of the exchange on the next day the exchange is open. Payment must be
made within three business days to the selling organization.
11
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
To redeem your shares by telephone:
o Call 1-800-822-5544
Please have available the number of shares (or dollar amount) to be redeemed and
the account number.
The funds will follow reasonable procedures to ensure the validity of any
telephone redemption request, such as requesting identifying information from
callers or employing identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
Customers of Institutional Clients may redeem only in accordance with
instructions and limitations pertaining to their account at the Institution.
Redemption orders received by Legg Mason before the close of the exchange will
be transmitted to the funds' transfer agent. Your order will be processed at
that day's net asset value. Redemption orders received by Legg Mason after the
close of the exchange will be processed at the closing net asset value on the
next day the exchange is open.
Your order will be processed promptly and you will generally receive the
proceeds by mail to the name and address on the account registration within a
week. You may also have your telephone redemption requests paid by a direct wire
to a previously designated domestic commercial bank account
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
12
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Navigator Share is determined daily as of the close of the
New York Stock Exchange, on every day the exchange is open. To calculate each
fund's Navigator Share price, the fund's assets attributable to Navigator Shares
are valued and totaled, liabilities attributable to Navigator Shares are
subtracted, and the resulting net assets are divided by the number of Navigator
Shares outstanding. Each fund's securities are valued on the basis of market
quotations or, lacking such quotations, at fair value as determined under the
guidance of the Board of Directors.
Securities for which market quotations are readily available are valued at the
last sale price of the day for a comparable position, or, in the absence of any
such sales, the last available bid price for a comparable position. Where a
security is traded on more than one market, the securities are generally valued
on the market considered by each fund's sub-adviser to be the primary market.
Fixed income securities generally are valued using market quotations or
independent pricing services that use prices provided by market makers or
estimates of market values. Securities with remaining maturities of 60 days or
less are valued at amortized cost.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
13
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
CONFIRMATIONS AND ACCOUNT STATEMENTS:
Confirmations will be sent to Institutional Clients after each transaction
involving Navigator Shares which will include the total number of shares being
held in safekeeping by the transfer agent. The transfer agent will send
confirmations of each purchase and redemption transaction (except a reinvestment
of dividends or capital gain distributions). Beneficial ownership of shares by
Customer accounts will be recorded by the Institutional Client and reflected in
their regular account statements.
EXCHANGE PRIVILEGE:
Navigator Shares of a fund may be exchanged for Navigator Shares of any of the
other Legg Mason funds or the Legg Mason Cash Reserve Trust, provided these
funds are eligible for sale in your state of residence. You can request an
exchange in writing or by phone. Be sure to read the current prospectus for any
fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. An exchange of a fund's shares
will be treated as a sale of the shares and any gain on the transaction may be
subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from a fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
Some Institutional Clients may not offer all of the Navigator Funds for
exchange.
14
<PAGE>
[icon] D I V I D E N D S A N D T A X E S
Basic Value declares and pays dividends from net investment income on a
quarterly basis and dividends from any net short-term capital gains annually.
Financial Services Fund declares and pays all dividends on an annual basis.
Distributions of substantially all of each fund's net capital gain (the excess
of net long-term capital gain over net short-term capital loss) and any net
realized gains form foreign currency transactions are generally declared and
paid 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 a federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Navigator Shares of the distributing fund. If you wish to receive
dividends and/or other distributions in cash, you must notify the distributing
fund at least 10 days before the next dividend and/or other distribution is to
be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional Navigator Shares of the fund. Dividends from net
investment company taxable income are taxable as ordinary income. Distributions
of a fund's net capital gain are taxable as long-term capital gain, regardless
of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
Each fund's dividend and interest income, and gains realized from disposition of
foreign securities, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. Each fund will also withhold 31% of all dividends and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
15
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The following financial highlights table is intended to help you understand
Basic Value Fund's financial performance since its inception. Total return
represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and other
distributions. This information has been audited by the funds' independent
accountants, PricewaterhouseCoopers LLP, whose report, along with the funds'
financial statements, is incorporated by reference into the Statement of
Additional Information (see back cover) and is included in the annual report.
The annual report is available upon request by calling toll-free 1-800-822-5544.
As of the date of this prospectus, Navigator Class of Financial Services Fund
has not commenced operations.
BASIC VALUE FUND
<TABLE>
------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations Distributions
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Realized
For the Net Asset & Unrealized
Years Value, Net Gain (Loss) Total From From Net From Net Total Net Asset
Ended Beginning Investment On Investment Investment Realized Distribu Value, End
Dec. 31, of Year Income Investments Operations Income Gains tions of Year
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Navigator Shares:
------------------------------------------------------------------------------------------------------------------------
1998 $18.87 $0.25(b) $0.47 $0.72 $(0.13) $(1.15) $(1.28) $18.31
------------------------------------------------------------------------------------------------------------------------
1997(a) 21.92 0.18(b) 1.94 2.12 (.23) (4.94) (5.17) 18.87
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
-----------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
-----------------------------------------------------------------------------------------------------------
<CAPTION>
Net Investment
For the Total Expenses Income (Loss) to Portfolio Net Assets,
Years Ended Return (%) to Average Net Average Net Assets Turnover End of Year
Dec. 31, Assets (%) (%) Rate (%) (Thousands--$)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Navigator Shares:
-----------------------------------------------------------------------------------------------------------
1998 3.99 .82(b) 1.31(b) 28 2,396
-----------------------------------------------------------------------------------------------------------
1997(a) 10.97(c) .86(b,d) 1.51(b,d) 42(d) 2,387
--------------- ----------- ---------------- --------------------- -------------------- -------------------
</TABLE>
(a) August 15, 1997 (commencement of sale of Navigator Class) to December 31,
1997.
(b) Net of fees waived pursuant to a voluntary expense limitation of 0.90%. If
no fees had been waived, the annualized ratio of expenses to average daily net
assets would have been: 1998, 0.94% and 1997, 0.96%.
(c) Not annualized.
(d) Annualized.
16
<PAGE>
L e g g M a s o n I n v e s t o r s T r u s t, I n c.
The following additional information about each fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated 100 Light Street, P.O.
Box 1476 Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC. (phone 1-800-SEC-0330).
Reports and other information about the funds are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-001 SEC file number 811-7692
17
<PAGE>
LEGG MASON EQUITY FUNDS
LEGG MASON VALUE TRUST, INC. LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON TOTAL RETURN TRUST, INC. LEGG MASON AMERICAN LEADING COMPANIES TRUST
LEGG MASON SPECIAL INVESTMENT LEGG MASON BALANCED TRUST
TRUST, INC. LEGG MASON U.S. SMALL-CAPITALIZATION VALUE
TRUST
LEGG MASON BASIC VALUE FUND
LEGG MASON FINANCIAL SERVICES FUND
CLASS A SHARES, PRIMARY SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER __, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus for Primary Shares or the Prospectus for
Navigator Shares of Value Trust, Total Return Trust, Special Investment Trust,
American Leading Companies, Balanced Trust and Small-Cap Value Trust (both dated
July __, 1999), or the Basic Value and Financial Services Fund Prospectus for
Class A and Primary Shares or the Prospectus for Navigator Shares (both dated
September ___, 1999), as appropriate, which have been filed with the Securities
and Exchange Commission ("SEC"). The funds' annual report is incorporated by
reference into this Statement of Additional Information. A copy of any of the
Prospectuses or the annual report may be obtained without charge from the funds'
distributor, Legg Mason Wood Walker, Incorporated ("Legg Mason"), at
1-800-822-5544.
Legg Mason Wood Walker,
Incorporated
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
TABLE OF CONTENTS
Page
DESCRIPTION OF THE FUNDS.....................................................1
FUND POLICIES................................................................1
INVESTMENT STRATEGIES AND RISKS..............................................5
ADDITIONAL TAX INFORMATION..................................................35
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................38
VALUATION OF FUND SHARES....................................................40
PERFORMANCE INFORMATION.....................................................40
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES AND CLASS A SHARES...........50
MANAGEMENT OF THE FUND......................................................51
THE FUNDS' INVESTMENT ADVISER/MANAGER.......................................54
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................58
THE FUNDS' DISTRIBUTOR......................................................60
CAPITAL STOCK INFORMATION...................................................63
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT.............63
THE FUNDS' LEGAL COUNSEL....................................................64
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS.................................64
FINANCIAL STATEMENTS........................................................64
Appendix A..................................................................65
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 any
fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
<PAGE>
DESCRIPTION OF THE FUNDS
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") and Legg Mason Investors Trust, Inc. ("Investors Trust") are
each diversified open-end investment companies that were established as Maryland
corporations on January 20, 1982, May 22, 1985, October 31, 1985, and May 5,
1993, respectively. Legg Mason American Leading Companies Trust ("American
Leading Companies"), Legg Mason Balanced Trust ("Balanced Trust"), Legg Mason
U.S. Small-Capitalization Value Trust ("Small-Cap Value"), Legg Mason Basic
Value Fund ("Basic Value") and Legg Mason Financial Services Fund ("Financial
Services Fund") are separate series of Investors Trust.
FUND POLICIES
VALUE TRUST's investment objective is to seek long-term growth of capital.
TOTAL RETURN TRUST's investment objective is to seek capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. SPECIAL INVESTMENT's investment objective is to
seek capital appreciation. AMERICAN LEADING COMPANIES' investment objective is
to seek long-term capital appreciation and current income consistent with
prudent investment risk. 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. SMALL-CAP
VALUE's investment objective is to seek long-term capital appreciation. BASIC
VALUE's investment objective is to seek capital appreciation. FINANCIAL SERVICES
FUND's investment objective is to seek long-term growth of capital.
In addition to the investment objective of each Fund described in the
Prospectuses, each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of its shareholders. Value Trust, Total
Return Trust and Special Investment Trust each may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes, in an aggregate amount not to exceed 10% of
the value of the total assets of the respective Fund at the time of borrowing;
provided that borrowings, including reverse repurchase agreements, in excess of
5% of such value will be only from banks (although not a fundamental policy
subject to shareholder approval, each Fund will not purchase securities if
borrowings, including reverse purchase agreements, exceed 5% of its total
assets);
2. With respect to 75% of total assets, invest more than 5% of its total
assets (taken at market value) in securities of any one issuer, other than the
U.S. Government, or its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
3. Purchase securities on "margin", except for short-term credits
necessary for clearance of portfolio transactions and except that each Fund may
make margin deposits in connection with the use of futures contracts and options
on futures contracts;
4. Invest 25% or more of its total assets (taken at market value) in any
one industry;
5. Purchase or sell commodities and commodity contracts, but this
limitation shall not prevent each Fund from purchasing or selling options and
futures contracts;
6. Underwrite the securities of other issuers, except insofar as each
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and except to the
extent that the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;
- 1 -
<PAGE>
8. Purchase or sell real estate, except that each Fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein (as a
non-fundamental policy changeable without a shareholder vote, each Fund will not
purchase or sell interests in real estate limited partnerships);
9. Make short sales of securities or maintain a short position, except
that each Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box;" or
10. Issue senior securities, except as permitted under the Investment
Company Act of 1940 ("1940 Act").
American Leading Companies, Balanced Trust and Small-Cap Value each may
not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed 5% of the
value of its total assets at the time of borrowings. (Although not a fundamental
policy subject to shareholder approval, the Fund will repay any money borrowed
before any portfolio securities are purchased);
2. Issue senior securities, except as permitted under the 1940 Act;
3. Engage in the business of underwriting the securities of other issuers
except insofar as the Fund may be deemed an underwriter under the Securities Act
of 1933, as amended, in disposing of a portfolio security;
4. Buy or hold any real estate; provided, however, that instruments
secured by real estate or interests therein are not subject to this limitation;
5. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
6. Purchase or sell any commodities or commodities contracts, except that
the Fund may purchase or sell currencies, interest rate and currency futures
contracts, options on currencies, securities, and securities indexes and options
on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
Basic Value and Financial Services Fund each may not:
1. Borrow money, except (a) from a bank, provided that immediately after
such borrowing there is an asset coverage of 300% for all borrowings of the
Fund; or (b) from a bank or other persons for temporary purposes only, provided
that such temporary borrowings are in an amount not exceeding 5% of the Fund's
total assets at the time when the borrowing is made. This limitation does not
preclude Basic Value from entering into reverse repurchase transactions and
dollar rolls, provided that it has an asset coverage of 300% for all borrowings
and repurchase commitments pursuant to reverse repurchase transactions and
dollar rolls.
- 2 -
<PAGE>
2. Basic Value will not mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any assets of the Fund except as may be
necessary in connection with borrowings described in limitation (1) above.
(Margin deposits, security interests, liens and collateral arrangements with
respect to transactions involving options, futures contracts, short sales and
other permitted investments and techniques are not deemed to be a mortgage,
pledge or hypothecation of assets for purposes of this limitation.)
3. Act as underwriter of securities issued by other persons. This
limitation is not applicable to the extent that, in connection with the
disposition of portfolio securities (including restricted securities), the Fund
may be deemed an underwriter under certain federal securities laws.
4. Purchase, hold or deal in real estate. This limitation is not
applicable to investments in securities which are secured by or represent
interests in real estate or to securities issued by companies, including real
estate investment trusts, that invest in real estate or interests in real
estate. This limitation does not preclude a Fund from investing in
mortgage-related securities or investing directly in mortgages.
5. Purchase, hold or deal in commodities or commodities futures contracts
except as described in this Statement of Additional Information.
6. Make loans to other persons, except (a) by loaning portfolio
securities, (b) by engaging in repurchase agreements, (c) by purchasing
nonpublicly offered debt securities, or (d) through direct investments in
mortgages. For purposes of this limitation, the term "loans" shall not include
the purchase of a portion of an issue of publicly distributed bonds, debentures
or other securities.
7. Purchase securities or evidences of interest thereon on "margin." This
limitation is not applicable to short term credit obtained by a Fund for the
clearance of purchases and sales or redemption of securities, or to arrangements
with respect to transactions involving options, futures contracts, short sales
and other permitted investments and techniques (including foreign exchange
contracts).
8. Basic Value will not invest 25% or more of its total assets in a
particular industry. This limitation is not applicable to investments in
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities or repurchase agreements with respect thereto. Financial
Services Fund will invest more than 25% of its total assets in securities of
companies comprising the financial services industry.
9. Purchase the securities of any issuer if such purchase at the time
thereof would cause less than 75% of the value of its total assets to be
invested in cash and cash items (including receivables), securities issued by
the U.S. government, its agencies or instrumentalities and repurchase agreements
with respect thereto, securities of other investment companies, other securities
for the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the total assets of the Fund
and to not more than 10% of the outstanding voting securities of such issuer.
Additional Fundamental Limitations Applicable to Basic Value:
1. Basic Value will not effect short sales of securities except as
described in this Statement of Additional Information.
2. Basic Value will not purchase or sell puts, calls, options or straddles
except as described in this Statement of Additional Information.
3. Basic Value will not invest more than 10% of its total assets in
securities of other investment companies or invest more than 5% of its total
assets in securities of any investment company and will not purchase more than
3% of the outstanding voting stock of any investment company.
4. Basic Value will not purchase, hold or deal in oil, gas or other
mineral explorative or development programs.
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<PAGE>
5. Basic Value will not invest more than 10% of its net assets in
securities for which there are legal or contractual restrictions on resale and
other illiquid securities.
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.
Non-Fundamental Limitation Applicable to Basic Value:
Basic Value may not issue senior securities. This limitation is not
applicable to activities that may be deemed to involve the issuance or sale of a
senior security by the Fund, provided that the Fund's engagement in such
activities is consistent with or permitted by the 1940 Act, the rules and
regulations promulgated thereunder or interpretations of the SEC or its staff.
With respect to the percentages adopted by each of Basic Value and
Financial Services Fund as maximum limitations on its investment policies and
limitations, an excess above the fixed percentage will not be a violation of the
policy or limitation unless the excess results immediately and directly from the
acquisition of any security or the action taken. This paragraph does not apply
to the "Borrowing Money" limitation. A Fund may borrow money consistent with
this limitation and with the applicable provisions of the 1940 Act.
For purposes of the diversification requirements described above, Basic
Value and Financial Services will treat both the corporate borrower and the
financial intermediary as issuers of a loan participation interest. Investments
by a Fund in CMOs that are deemed to be investment companies under the 1940 Act
will be included in the limitation on investments in other investment companies.
AMERICAN LEADING COMPANIES, BALANCED TRUST AND SMALL-CAP VALUE:
The following are some of the non-fundamental limitations which American
Leading Companies, Balanced Trust and Small-Cap Value currently observe. Each
Fund may not:
1. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of permitted currency futures contracts and
options on currency futures contracts; or
2. Make short sales of securities or maintain a short position, except
that the Fund may sell short "against the box". This limit does not apply to
short sales and short positions in connection with its use of options, futures
contracts and options on futures contracts (No Fund intends to make short sales
in excess of 5% of its net assets during the coming year).
In addition, as a non-fundamental limitation, American Leading Companies
may not purchase or sell interest rate and currency futures contracts, options
on currencies, securities, and securities indexes and options on interest rate
and currency futures contracts, PROVIDED, however, that the Fund may sell
covered call options on securities and may purchase options to the extent
necessary to close out its position in one or more call options.
Except as otherwise stated, if a fundamental or non-fundamental percentage
limitation set forth above is complied with at the time an investment is made, a
later increase or decrease in percentage resulting from a change in value of
portfolio securities, in the net asset value of a Fund, or in the number of
securities an issuer has outstanding, will not be considered to be outside the
limitation.
Unless otherwise stated, the investment policies and limitations contained
in this Statement of Additional Information are not fundamental, and can be
changed without shareholder approval.
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INVESTMENT STRATEGIES AND RISKS
THE FOLLOWING INFORMATION APPLIES TO VALUE TRUST, TOTAL RETURN TRUST, SPECIAL
INVESTMENT TRUST, AMERICAN LEADING COMPANIES, BALANCED TRUST AND SMALL-CAP
VALUE:
This section supplements the information in the Prospectuses concerning
the investments the Funds may make and the techniques they may use. Each Fund,
unless otherwise stated, may employ several investment strategies, including but
not limited to:
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 other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.
The 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. 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. Each Fund may also invest in GDRs,
which are receipts, often denominated in U.S. dollars, issued by either a U.S.
or non-U.S. bank evidencing its ownership of the underlying foreign securities.
Small-Cap Value does not currently intend to invest in foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate the Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies will each invest no more than
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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. Small-Cap Value does not
currently intend to invest in foreign securities.
Illiquid Securities
- -------------------
Value Trust and Total Return Trust each may invest up to 10% of its net
assets in illiquid securities. American Leading Companies, Balanced Trust,
Special Investment Trust and Small-Cap Value each may invest up to 15% of its
net assets in illiquid securities. For this purpose, "illiquid securities" are
those that cannot be disposed of within seven days for approximately the price
at which the Fund values the security. Illiquid securities include repurchase
agreements with terms of greater than seven days, and restricted securities
other than those the adviser to a Fund has determined are liquid pursuant to
guidelines established by each Fund's Board of Directors. Due to the absence of
an active trading market, a Fund may have difficulty valuing or disposing of
illiquid securities promptly.
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 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.
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher current
yield than that provided by higher grade issues, but also involve higher risks.
Debt securities rated C by Moody's and S&P are bonds on which no interest is
being paid and which can be regarded as having extremely poor prospects of ever
attaining any real investment standing. However, debt securities, regardless of
their ratings, generally have a higher priority in the issuer's capital
structure than do equity securities.
Lower-rated debt securities are especially affected by adverse changes in
the industries in which the issuers are engaged and by changes in the financial
condition of the issuers. Highly leveraged issuers may also experience financial
stress during period of rising interest rates. Lower-rated debt securities are
also sometimes referred to as "junk bonds."
The market for lower-rated debt securities has expanded rapidly in recent
years. This growth has paralleled a long economic expansion. At certain times in
the past, the prices of many lower-rated debt securities declined, indicating
concerns that issuers of such securities might experience financial
difficulties. At those time, 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 issuer's 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
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<PAGE>
pricing such securities than is the case for securities having more active
markets. Adverse publicly 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 S&P and Moody's represent the opinions of those agencies.
Such ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as many buyers. A description of
the ratings assigned to corporate debt obligations by Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's ("S&P") is included in Appendix A.
In addition to ratings assigned to individual bond issues, each adviser
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which a Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial conditions of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of principal and interest.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by each Fund's adviser to determine, to
the extent possible, that the planned investment is sound.
If a security rated A or above at the time of purchase by American Leading
Companies is subsequently downgraded to a rating below A, LMFA will consider
that fact in determining whether to dispose of the security, but will dispose of
it if necessary to insure that no more than 5% of net assets are invested in
debt securities rated below A. If one rating agency has rated a security A or
better and another agency has rated it below A, LMFA may rely on the higher
rating in determining to purchase or retain the security on behalf of American
Leading Companies. Bonds rated A may be given a "+" or "-" by the rating agency.
The Fund considers bonds denominated A, A+ or A- to be included in the rating A.
Preferred Stock
- ---------------
Each fund may purchase preferred stock as a substitute for debt securities
of the same issuer when, in the opinion of its adviser, the preferred stock is
more attractively priced in light of the risks involved. Preferred stock pays
dividends at a specified rate and generally has preference over common stock in
the payment of dividends and the liquidation of the issuer's assets but is
junior to the debt securities of the issuer in those same respects. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. Shareholders may
suffer a loss of value if dividends are not paid. The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes in the issuer's creditworthiness than are the prices of debt securities.
Convertible Securities
- ----------------------
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stream
of income with generally higher yields than those of common stocks of the same
or similar issuers, but lower than the yield 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.
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<PAGE>
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 LMFA to be of comparable quality.
Moody's describes securities rated Ba as having "speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class."
If an investment grade security purchased by Value Trust, Total Return
Trust or Special Investment Trust is subsequently given a rating below
investment grade, LMFA will consider that fact in determining whether to retain
that security in that Fund's portfolio, but is not required to dispose of it.
Corporate Debt Securities
- -------------------------
Corporate debt securities may pay fixed or variable rates of interest, or
interest at a rate contingent upon some other factor, such as the price of some
commodity. These securities may be convertible into preferred or common equity,
or may be bought as part of a unit containing common stock. In selecting
corporate debt securities for a Fund, its adviser reviews and monitors the
creditworthiness of each issuer and issue. The adviser also analyzes interest
rate trends and specific developments which it believes may affect individual
issuers.
When-Issued Securities
- ----------------------
Each Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced and
have the best liquidity in the bond market. When a Fund purchases securities on
a when-issued basis, it assumes the risks of ownership at the time of the
purchase, not at the time of receipt. However, the Fund does not have to pay for
the obligations until they are delivered to it. This is normally seven to 15
days later, but could be longer. Use of this practice would have a leveraging
effect on the Fund.
American Leading Companies does not currently expect that its commitment
to purchase when-issued securities will at any time exceed, in the aggregate, 5%
of its net assets.
To meet its payment obligation under a when-issued commitment, a Fund will
establish a segregated account with its custodian and maintain cash or
appropriate liquid securities, in an amount at least equal in value to that
Fund's commitments to purchase when-issued securities.
A Fund may sell the securities underlying a when-issued purchase, which
may result in capital gains or losses.
Covered Call Options
- --------------------
Each Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, a Fund might write covered call options on
securities generally when the adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
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<PAGE>
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by a Fund declines, the amount of such decline will be offset wholly or in part
by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. A Fund would give up the ability to sell the portfolio securities
used to cover the call option while the call option was outstanding. In
addition, a Fund could lose the ability to participate in an increase in the
value of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of closing
out the call option.
If a Fund desires to close out its obligation under a call option it has
sold, it will have to purchase an offsetting option. The value of an option
position will reflect, among other things, the current market price of the
underlying security, futures contract or currency, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, and general market
conditions. Accordingly, when the price of the security rises toward the strike
price of the option, the cost of offsetting the option will negate to some
extent the benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy depends
upon the adviser's ability to forecast the direction of price fluctuations in
the underlying market or market sector.
Each Fund may write exchange-traded options. The ability to establish and
close out positions on the exchange is subject to the maintenance of a liquid
secondary market. Although a Fund intends to write only those exchange-traded
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any specific time. With respect to options written by a Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, because the Fund must maintain a covered position with respect to any
call option it writes on a security, the Fund may not sell the underlying
security during the period it is obligated under such option. This requirement
may impair the Fund's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
A Fund will not enter into an options position that exposes it to an
obligation to another party unless it owns an offsetting ("covering") position
in securities or other options. A Fund will comply with guidelines established
by the SEC with respect to coverage of these strategies by mutual funds, and, if
the guidelines so require, will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian in the amount prescribed,
as marked-to-market daily. Securities positions used for cover and securities
held in a segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
As a non-fundamental policy, ALC 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.
Indexed Securities
- ------------------
Indexed securities are securities whose prices are indexed to the prices
of securities indexes, currencies or other financial statistics. Indexed
securities typically are debt securities or deposits whose value at maturity
and/or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities fluctuates (either directly or
inversely, depending upon the instrument) with the performance of the index,
security, currency or other instrument to which they are indexed and may also be
influenced by interest rate changes in the U.S. and abroad. At the same time,
indexed securities are subject to the credit risks associated with the issuer of
the security, and their value may substantially decline if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations and certain U.S. government agencies. The U.S.
Treasury recently began issuing securities whose principal value is indexed to
the Consumer Price Index (also known as "Treasury Inflation-Protection
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Securities"). The funds will only purchase indexed securities of issuers which
its adviser determines present minimal credit risks and will monitor the
issuer's creditworthiness during the time the indexed security is held. The
adviser will use its judgment in determining whether indexed securities should
be treated as short-term instruments, bonds, stock or as a separate asset class
for purposes of each fund's investment allocations, depending on the individual
characteristics of the securities. Each fund currently does not intend to invest
more than 5% of its net assets in indexed securities. Indexed securities may
fluctuate according to a multiple of changes in the underlying instrument and,
in that respect, have a leverage-like effect on a Fund.
Stripped Securities
- -------------------
Stripped securities are created by separating bonds into their principal
and interest components and selling each piece separately (commonly referred to
as IOs and POs). Stripped securities are more volatile than other fixed income
securities in their response to changes in market interest rates. The value of
some stripped securities moves in the same direction as interest rates, further
increasing their volatility.
Zero Coupon Bonds
- -----------------
Zero coupon bonds do not provide for cash interest payments but instead
are issued at a significant discount from face value. Each year, a holder of
such bonds must accrue a portion of the discount as income. Because each Fund is
required to pay out substantially all of its income each year, including income
accrued on zero coupon bonds, a Fund may have to sell other holdings to raise
cash necessary to make the payout. Because issuers of zero coupon bonds do not
make periodic interest payments, their prices can be very volatile when market
interest rates change.
Closed-end Investment Companies
- -------------------------------
Each fund may invest in the securities of closed-end investment companies.
Such investments may involve the payment of substantial premiums above the net
asset value of such issuers' portfolio securities, and the total return on such
investments will be reduced by the operating expenses and fees of such
investment companies, including advisory fees. A Fund will invest in such funds,
when, in the adviser's judgment, the potential benefits of such investment
justify the payment of any applicable premium or sales charge.
THE FOLLOWING INFORMATION APPLIES TO SPECIAL INVESTMENT TRUST AND SMALL-CAP
VALUE:
Small and Mid-Sized Company Stocks
- ----------------------------------
The advisers for Special Investment Trust and Small-Cap Value believe that
the comparative lack of attention by investment analysts and institutional
investors to small and mid-sized companies may result in opportunities to
purchase the securities of such companies at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity or
long-term prospects. Each Fund's policy of investing primarily in the securities
of smaller companies differs from the investment approach of many other mutual
funds, and investment in such securities involves special risks. Among other
things, the prices of securities of small and mid-sized companies generally are
more volatile than those of larger companies; the securities of smaller
companies generally are less liquid; and smaller companies generally are more
likely to be adversely affected by poor economic or market conditions.
It is anticipated that some of the portfolio securities of either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a Fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a Fund to dispose of such
securities at prevailing market prices in order to meet redemptions. However, as
a non-fundamental policy, Special Investment Trust and Small-Cap Value will not
invest more than 15% of their respective net assets in illiquid securities.
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<PAGE>
Investments in securities of companies with small market capitalizations
are generally considered to offer greater opportunity for appreciation but also
may involve greater risks than customarily are associated with more established
companies. The securities of small companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks, I.E., small company stocks may decline
in price as the prices of large company stocks rise or vice versa.
THE FOLLOWING INFORMATION APPLIES TO BALANCED TRUST:
Mortgage-Related Securities
- ---------------------------
Mortgage-related securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest, and in most instances, principal to the investor. The
mortgagor's monthly payments to his/her lending institution are "passed-through"
to investors such as the Fund. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are backed by various forms of credit,
insurance and collateral. They may not extend to the full amount of the pool.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The majority of mortgage-related securities currently available are issued
by governmental or government-related organizations formed to increase the
availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is the Government National Mortgage Association.
GNMA certificates ("GNMAs") are interests in pools of loans insured by the
Federal Housing Administration or by the Farmer's Home Administration ("FHA"),
or guaranteed by the Veterans Administration ("VA"). Fannie Mae and Freddie Mac
each issue pass-through securities which are guaranteed as to principal and
interest by Fannie Mae and Freddie Mac, respectively.
The average life of mortgage-related securities varies with the maturities
and the nature of the underlying mortgage instruments, as well as with market
interest rates. For example, GNMAs tend to have a longer average life than
Freddie Mac participation certificates ("PCs") because there is a tendency for
the conventional and privately-insured mortgages underlying Freddie Mac PCs to
repay at faster rates than the FHA and VA loans underlying GNMAs. In addition,
the term of a security may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The occurrence of mortgage
pre-payments is affected by various factors, including the level of interest
rates, general economic conditions, the location and age of the mortgaged
property and other social and demographic conditions. 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 dollar-weighted average maturity of the fixed income
portion of the portfolio, Bartlett, investment adviser to Balanced Trust, will
follow industry practice in assigning an average life to the mortgage-related
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securities of the Fund unless the interest rate on the mortgages underlying such
securities is such that Bartlett believes a different prepayment rate is likely.
For example, where a GNMA has a high interest rate relative to the market, that
GNMA is likely to have a shorter 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.
Privately Issued Mortgage-Related Securities
- --------------------------------------------
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential mortgage
loans; mortgage-backed bonds which are considered to be obligations of the
institution issuing the bonds and are collateralized by mortgage loans; and
bonds and collateralized mortgage obligations ("CMOs") which are collateralized
by mortgage-related securities issued by Freddie Mac, Fannie Mae, or GNMA or by
pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each class of
obligations is scheduled to receive periodic interest payments according to the
coupon rate on the obligations. However, all monthly principal payments and any
prepayments from the collateral pool are paid first to the "Class 1"
bondholders. The principal payments are such that the Class 1 obligations are
scheduled to be completely repaid no later than, for example, five years after
the offering date. Thereafter, all payments of principal are allocated to the
next most senior class of bonds until that class of bonds has been fully repaid.
Although full payoff of each class of bonds is contractually required by a
certain date, any or all classes of obligations may be paid off sooner than
expected because of an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers generally
offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payments in the former securities, resulting in higher risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
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.
- 12 -
<PAGE>
Municipal lease obligations have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "non-appropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
In determining the liquidity of a municipal lease obligation, Bartlett
will distinguish between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond or other investment structure using a municipal lease-purchase
agreement as its base. While the former may present special liquidity issues,
the latter are based on a well established method of securing payment of a
municipal obligation. The Fund's investment in municipal lease obligations and
participation interests therein will be treated as illiquid unless Bartlett
determines, pursuant to guidelines established by the Board of Directors, that
the security could be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the security.
An issuer's obligations under its municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Code, and laws that may be enacted
by Congress or state legislatures extending the time for payment of 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 FOLLOWING INFORMATION APPLIES TO VALUE TRUST, TOTAL RETURN TRUST, SPECIAL
INVESTMENT TRUST, BALANCED TRUST AND SMALL-CAP VALUE: (SMALL-CAP VALUE DOES NOT
CURRENTLY INTEND TO INVEST IN FUTURES AND OPTIONS.)
Value Trust, Total Return Trust, Special Investment Trust and Balanced Trust
- ----------------------------------------------------------------------------
Each of these Funds can invest in futures and options transactions,
including puts and calls. Because such investments "derive" their value from the
value of the underlying security, index, or interest rate on which they are
based, they are sometimes referred to as "derivative" securities. Such
investments involve risks that are different from those presented by investing
directly in the securities themselves. While utilization of options, futures
contracts and similar instruments may be advantageous to a fund, if its adviser
is not successful in employing such instruments in managing the Fund's
investments, the Fund's performance will be worse than if the Fund did not make
such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated with
ownership of the securities in which each invests. For example, a Fund may sell
a stock index futures contract in anticipation of a general market or market
sector decline that could adversely affect the market value of the Fund's
portfolio. To the extent that a Fund's portfolio correlates with a given stock
index, the sale of futures contracts on that index would 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 contact 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 advance
in debt securities that the Fund plans to acquire at a future date. The purchase
- 13 -
<PAGE>
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 were 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 off-set 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 costs
of the option (in the form of premium and transaction costs), a Fund would
expect to suffer a loss in the put option if prices do not decline sufficiently
to offset the deterioration in the value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a written
put option, although its gain would be limited to the amount of the premium it
received. If stock prices remain the same over time, it is likely that the Fund
will also profit, because it should be able to close out the option at a lower
price. If stock prices fall, the Fund would expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to those
obtainable from purchasing a futures contract, but with risk limited to the cost
of the option if stock prices fell. At the same time, a Fund can expect to
suffer a loss if stock prices do not rise sufficiently to offset the cost of the
option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a Fund would seek to mitigate the effects
of a price decline. At the same time, when writing call options the Fund would
give up some ability to participate in security price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and also
require different skills from the advisers in managing the Funds' portfolios.
While utilization of options, futures contracts and similar instruments may be
advantageous to the Funds, if the adviser is not successful in employing such
instruments in managing a Fund's investments or in predicting interest rate
changes, the Fund's performance will be worse than if the Fund did not make such
investments. It is possible that there will be imperfect correlation, or even no
correlation, between price movements of the investments being hedged and the
options or futures used. It is also possible that a Fund may be unable to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or that a Fund may need to sell a portfolio security
at a disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a Fund
may be unable to close out or liquidate its hedge 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 elated 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. Small-Cap Value does not currently intend to invest in futures and
options.
- 14 -
<PAGE>
Futures Contracts
- -----------------
Each Fund may from time to time purchase or sell futures contracts. In the
purchase of a futures contract, the purchaser agrees to buy a specified
underlying instrument at a specified future date. In the sale of a futures
contract, the seller agrees to sell the underlying instrument at a specified
future date. The price at which the purchase or sale will take place is fixed at
the time the contract is entered into. Some currently available contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on indexes of securities such as S&P 500. Futures contracts can be held
until their delivery dates, or can be closed out before then, if a liquid
secondary market is available. A futures contract is closed out by entering into
an opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery date as
a contract the party had sold) at the current price as determined on the futures
exchange.
As the purchaser or seller of a futures contract, a Fund would not be
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, the Fund would be required to deposit
with its custodian, in the name of the futures broker (known as a futures
commission merchant, or "FCM"), a percentage of the contract's value. This
amount, which is known as initial margin, generally equals 10% or less of the
value of the futures contract. Unlike margin in securities transactions, initial
margin on futures contracts does not involve borrowing to finance the futures
transactions. Rather, initial margin is in the nature of a good faith deposit or
performance bond, and would be returned to that Fund when the futures position
is terminated, after all contractual obligations have been satisfied. Initial
margin may be maintained either in cash or appropriate liquid securities.
The value of a futures contract tends to increase and decrease with the
value of the underlying instrument. The purchase of a futures contract will tend
to increase exposure to positive and negative price fluctuations in the
underlying instrument in the same manner as if the underlying instrument had
been purchased directly. By contrast, the sale of a futures contract will tend
to offset both positive and negative market price changes.
As the contract's value fluctuates, payments known as variation margin or
maintenance margin are made to or received from the FCM. If the contract's value
moves against the Fund, (i.e., the Fund's futures position declines in value),
the Fund may be required to make payments to the FCM, and, conversely, the Fund
may be entitled to receive payments from the FCM if the value of the Fund's
futures position increases. This process is known as "marking-to-market" and
takes place on a daily basis. Variation margin does not involve borrowing to
finance the futures transactions, but rather represents a 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.
- 15 -
<PAGE>
Before exercise, a Fund may seek to terminate its position in an option it
has written by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
Over-The-Counter and Exchange-Traded Options
- --------------------------------------------
Each Fund may purchase and write both over-the-counter ("OTC") and
exchange-traded options. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between a Fund and its
contra-party with no clearing organization guarantee. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make/take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC market.
Exchange markets for options on debt securities exist, but the ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market.
Value Trust and Total Return Trust each may invest up to 10% and Special
Investment Trust, Balanced Trust and Small-Cap Value may invest up to 15% of its
assets in illiquid securities. The term "illiquid securities" includes purchased
OTC options. Assets used as cover for OTC options written by the Fund also will
be deemed illiquid securities, unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC options it writes for a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option.
Cover for Options and Futures Strategies
- ----------------------------------------
No Fund will use leverage in its hedging strategies involving options and
futures contracts. Each Fund will hold securities, options or futures positions
whose values are expected to offset ("cover") its obligations under the
transactions. No Fund will enter into hedging strategies involving options and
futures contracts that expose the Fund to an obligation to another party unless
it owns either (i) an offsetting ("covered") position in securities, options or
futures contracts or (ii) has cash, receivables and liquid debt securities with
a value sufficient at all times to cover its potential obligations. Each Fund
will comply with guidelines established by the SEC with respect to coverage of
these strategies by mutual funds and, if the guidelines so require, will set
aside cash and/or appropriate liquid securities in a segregated account with its
custodian in the amount prescribed. Securities, options or futures contracts
used for cover and securities held in a segregated account cannot be sold or
closed out while the strategy is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that the use of cover or
segregation involving a large percentage of a Fund's assets could impede the
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Risks of Futures and Related Options Trading
- --------------------------------------------
Successful use of futures contracts and related options depends upon the
ability of the adviser to assess movements in the direction of overall
securities and interest rates, which requires different skills and techniques
than assessing the value of individual securities. Moreover, futures contracts
relate not to the current price level of the underlying instrument, but to the
anticipated price level at some point in the future; trading of stock index
futures may not reflect the trading of the securities that are used to formulate
the index or even actual fluctuations in the index itself. There is, in
addition, the risk that movements in the price of the futures contract will not
correlate with the movements in the prices of the securities being hedged. Price
distortions in the marketplace, such as result from increased participation by
speculators in the futures market, may also impair the correlation between
movements in the prices of futures contracts and movements in the prices of the
hedged securities. If the price of the futures contract moves less than the
- 16 -
<PAGE>
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 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.
- 17 -
<PAGE>
Options on indexes are settled exclusively in cash. If a Fund writes a
call option on an index, the Fund will not know in advance the difference, if
any, between the closing value of the index on the exercise date and the
exercise price of the call option itself, and thus will not know the amount of
cash payable upon settlement. In addition, a holder of an index option who
exercises it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change.
Each Fund's activities in the options markets may result in higher
portfolio turnover rates and additional brokerage costs.
Additional Limitations on Futures and Options
- ---------------------------------------------
As a non-fundamental policy, each Fund will write a put or call on a
security only if (a) the security underlying the put or call is permitted by the
investment policies of that Fund, and (b) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined as of the
date the options are sold does not exceed 25% of that Fund's net assets.
Under regulations adopted by the Commodity Futures Trading Commission
("CFTC"), futures contracts and related options may be used by each Fund (a) for
hedging purposes, without quantitative limits, and (b) for other purposes to the
extent that the amount of margin deposit on all such non-hedging futures
contacts owned by the Fund, together with the amount of premiums paid by that
Fund on all such non-hedging options held on futures contracts, does not exceed
5% of the market value of that Fund's net assets.
The foregoing limitations, as well as those set forth in the prospectus
regarding each Fund's use of futures and related options transactions, do not
apply to options attached to, or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options, such as rights, certain debt securities and indexed
securities.
The above limitations on each Fund's investments in futures contracts and
options may be changed as regulatory agencies permit. However, each Fund will
not modify the above limitations to increase its permissible futures and options
activities without supplying additional information, as appropriate, in a
current Prospectus or Statement of Additional Information.
Forward Currency Contracts
- --------------------------
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. No Fund will speculate with
forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect to
specific transactions. For example, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. A Fund will thereby be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between the
date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
Each Fund also may use forward currency contracts in connection with
portfolio positions to lock-in the U.S. dollar value of those positions or to
shift the Fund's exposure to foreign currency fluctuations from one country to
another. For example, when the adviser believes that the currency of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another currency, it may enter into a forward currency contract to
sell the amount of the former foreign currency approximating the value of some
or all of a Fund's securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
- 18 -
<PAGE>
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 or other appropriate liquid securities in a segregated account in an
amount not less than the value of the Fund's total assets committed to the
consummation of the contract.
The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
Each Fund will deal only with banks, broker/dealers or other financial
institutions which the adviser deems to be of high quality and to present
minimum credit risk. The use of forward currency contracts does not eliminate
fluctuations in the prices of the underlying securities each Fund owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
FOR EACH OF VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST, BALANCED
TRUST AND SMALL-CAP VALUE:
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%
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<PAGE>
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.
Repurchase Agreements
- ---------------------
When cash is temporarily available, or for temporary defensive purposes,
each Fund may invest without limit in repurchase agreement and money market
instruments, including high-quality short-term debt securities. A repurchase
agreement is an agreement under which either U.S. government obligations or
high-quality liquid debt securities are acquired from a securities dealer or
bank subject to resale at an agreed-upon price and date. The securities are held
for each Fund by a custodian bank as collateral until resold and will be
supplemented by additional collateral if necessary to maintain a total value
equal to or in excess of the value of the repurchase agreement. Each Fund bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the fund is delayed or prevented from exercising
its rights to dispose of the collateral securities, which may decline in value
in the interim. The Funds will enter into repurchase agreements only with
financial institutions determined by each Fund's adviser to present minimal risk
of default during the term of the agreement based on guidelines established by
the Funds' Board of Directors.
Repurchase agreements are usually for periods of one week or less, but may
be for longer periods. The Funds will not enter into repurchase agreements of
more than seven days' duration if more than 15% of net assets (with respect to
American Leading Companies, Balanced Trust, Special Investment Trust and
Small-Cap Value) or more than 10% of net assets (with respect to Value Trust and
Total Return Trust) would be invested in such agreements and other illiquid
investments. To the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, a Fund might
suffer a loss. If bankruptcy proceedings are commenced with respect to the
seller of the security, realization upon the collateral by a Fund could be
delayed or limited. However, each Fund has adopted standards for the parties
with whom it may enter into repurchase agreements, including monitoring by each
Fund's adviser of the creditworthiness of such parties which the Fund's Board of
Directors believes are reasonably designed to assure that each party presents no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase agreement.
When a Fund enters into a repurchase agreement, it will obtain as
collateral from the other party securities equal in value to 102% of the amount
of the repurchase agreement (or 100%, if the securities obtained are U.S.
Treasury bills, notes or bonds). Such securities will be held by a custodian
bank or an approved securities depository or book-entry system.
THE FOLLOWING INFORMATION APPLIES TO BASIC VALUE AND FINANCIAL SERVICES FUND:
This section supplements the information in the Prospectuses concerning
the investments the Funds may make and the techniques they may use. Each fund,
unless otherwise stated, may employ several investment strategies, including,
but not limited to:
Illiquid Securities
- -------------------
The portfolio of each fund may contain illiquid securities. Securities may
be illiquid due to contractual or legal restrictions on resale or lack of a
ready market. Illiquid securities generally include securities which cannot be
sold promptly without taking a reduced price.
- 20 -
<PAGE>
The following securities are considered generally to be illiquid (although
if they are liquid they will be treated as such): repurchase agreements and time
deposits maturing in more than seven days, options traded in the
over-the-counter market, nonpublicly offered securities, stripped collateralized
mortgage obligations ("CMOs"), CMOs for which there is no established market,
direct investments in mortgages and restricted securities.
The limitation on a fund's net assets that may be invested in illiquid
securities is as follows:
Basic Value 10%
Financial Services 15%
Restricted Securities
- ---------------------
Each fund may invest in restricted securities, which are subject to legal
or contractual restrictions. Restricted securities may be sold only: in
privately negotiated transactions, in a public offering with respect to which a
registration statement is in effect under the Securities Act of 1933 or pursuant
to Rule 144 or Rule 144A. If registration is required, a fund may be obligated
to pay all or a part of the registration expense. A considerable period may
elapse between the time of the decision to sell and the time such security may
be sold under an effective registration statement. The fund may obtain a less
favorable price if adverse market conditions were to develop during this period.
Rule 144A securities will be treated as liquid to the extent they are determined
to be so. To the extent a fund is invested in Rule 144A securities, the level of
illiquidity of the fund could increase to the extent qualified buyers become
disinterested.
Basic Value does not intend to invest more than 5% of its net assets in
restricted securities.
Option Transactions (for Basic Value only)
- -------------------
The Fund may engage in option transactions involving equity securities,
debt securities, futures contracts and stock indexes. An option involves either
(a) the right or the obligation to buy or sell a specific instrument at a
specific price until the expiration date of the option, or (b) the right to
receive payments or the obligation to make payments representing the difference
between the closing price of a market index and the exercise price of the option
expressed in dollars times a specified multiple until the expiration date of the
option. Options are sold (written) on equity securities, debt securities,
futures contracts and stock indexes. The purchaser of an option on an equity
security, debt security or futures contract pays the seller (the writer) a
premium for the right granted but is not obligated to buy or sell the underlying
security or futures contract. The purchaser of an option on a stock index pays
the seller a premium for the right granted, and in return the seller of such an
option is obligated to make the payment. A writer of an option may terminate the
obligation prior to expiration of the option by making an offsetting purchase of
an identical option. Options are traded on organized exchanges and in the
over-the-counter market. Options on equity securities, debt securities or
options on futures contracts which the Fund sells (writes) will be covered or
secured, which means that the Fund will own the underlying security or futures
contracts in the case of a call option and that the Fund will segregate with the
custodian, high grade liquid debt securities sufficient to purchase the
underlying security or futures contracts in the case of a put option. The Fund
will also segregate and maintain with its Custodian liquid assets equal to the
market value of each put option sold (written) by the Fund on a stock index. In
addition, when the Fund writes options, it may be required to maintain a margin
account, to pledge the underlying securities or U.S. government obligations or
to deposit high grade liquid debt securities in escrow with its Custodian.
The purchase and writing of options involves certain risks. The purchase
of options limits the Fund's potential loss to the amount of the premium paid
and can afford the Fund the opportunity to profit from favorable movements in
the price of an underlying security to a greater extent than if transactions
were effected in the security directly. However, the purchase of an option could
result in the Fund losing a greater percentage of its investment than if the
transaction were effected directly. When the Fund writes a covered call option,
it will receive a premium, but it will give up the opportunity to profit from a
price increase in the underlying security above the exercise price as long as
its obligation as a writer continues, and it will retain the risk of loss should
the price of the security decline. When the Fund writes a secured put option, it
- 21 -
<PAGE>
will assume the risk that the price of the underlying security will fall below
the exercise price, in which case the Fund may be required to purchase the
security at a higher price than the market price of the security. In addition,
there can be no assurance that the Fund can effect a closing transaction on a
particular option it has written.
The Fund may engage in option transactions involving foreign currencies,
foreign stock indexes or futures contracts. A foreign currency option or an
option on a futures contract involves either the right or the obligation to buy
or sell a specific currency or futures contract at a specific price until the
expiration date of the option. A foreign stock index option involves either the
right to receive payments or the obligation to make payments representing the
difference between the closing price of a market index and the exercise price of
the option until the expiration date of the option. The purchaser of an option
on a foreign currency or futures contact pays the seller (the writer) a premium
for the right granted but is not obligated to buy or sell the underlying
currency or futures contract. The purchaser of an option on a stock index pays
the seller a premium for the right granted, and in return the seller of such an
option is obligated to make the payment. A writer of an option may terminate the
obligation prior to expiration of the option by making an offsetting purchase of
an identical option.
Options or foreign currencies and futures contracts which the Fund sells
(writes) will be covered or secured, which means that the Fund will own the
underlying currency or futures contract in the case of a call option and that
the Fund will segregate with is Custodian liquid assets sufficient to purchase
the underlying currency or futures contact in the case of a put option. The Fund
will also segregate and maintain with its Custodian high grade liquid assets
equal to the market value of each put option sold (written) by the Fund on a
stock index. In addition, when the Fund writes options, it may be required to
maintain a margin account, to pledge the underlying currency, futures contract
or U.S. government obligations, or to deposit high grade liquid assets in escrow
with its Custodian.
There is no restriction on the percentage of the Fund's total assets which
may be committed to transactions in options (except options on futures
contracts). However, the SEC considers over-the-counter options to be illiquid.
Therefore, the Fund will not engage in an over-the-counter option transaction if
such transaction would cause the value of such options purchased by the fund and
the assets used to cover such options written by the fund, together with the
value of other illiquid securities to exceed 10% of its net assets.
Hedging Transactions (for Basic Value only)
- --------------------
(1) U.S. Securities
The Fund may hedge all or a portion of its portfolio investments through
the use of options, futures contacts and options on futures contracts. The
objective of a hedging program is to protect a profit or offset a loss in a
portfolio security from future price erosion or to assure a definite price for a
security by acquiring the right or option to purchase or sell a fixed amount of
the security at a future date. For example, in order to hedge against an
anticipated rise in interest rates that might cause the value of the Fund's
portfolio securities to decline, the Fund might sell interest rate futures
contracts. When hedging of this character is successful, any depreciation in the
value of the hedged portfolio securities will be substantially offset by an
increase in the Fund's equity in the interest rate futures position.
Alternatively, an interest rate futures contract may be purchased when the Fund
anticipates the future purchase of a security but expects the rate of return
then available in the securities market to be less favorable than rates
currently available in the futures markets.
There is no assurance that the objective of the hedging program will be
achieved, since the success of the program will depend on Bartlett's ability to
predict the future direction of stock prices or interest rates and incorrect
predictions Bartlett may have an adverse effect on the Fund. In this regard, it
should be noted that the skills and techniques necessary to arrive at such
predictions are different from those needed to predict price changes in
individual stocks. Bartlett is registered as a commodity trading advisor with
the Commodity Futures Trading Commission ("CFTC"), is a member of the National
Futures Association and has prior experience in the use of options, futures
- 22 -
<PAGE>
contracts and options on future contracts.
The hedging strategy involves the use of one or more techniques, including
buying and selling options (described above), futures contracts and options on
such futures contracts. A futures contract is a binding contractual commitment
which involves either (a) the delivery and payment for a specified amount of
securities or currency at a price agreed upon at the time the contract is
entered into but with actual delivery made during a specified period in the
future, or (b) the payment or receipt of payments representing, respectively,
the loss or gain of a specified group of stocks or market index. The securities
or currency underlying the contract may be government or corporate bonds (an
interest rate futures contract), foreign currency (a foreign currency futures
contract) or a group of stocks such as a popular market index (a stock index
futures contact). Interest rate futures contracts are currently available in
standardized amounts on government obligations (such as U.S. Treasury bills,
notes, and bonds), Government National Mortgage Association ("GNMA")
certificates, corporate bonds, domestic certificates of deposit and Eurodollar
certificates of deposit. It is expected that other financial instruments will at
later dates be subject to other futures contacts. As new futures contracts are
developed and offered to investors, Bartlett will, consistent with the Fund's
investment objectives and policies, consider making investments in such new
futures contracts. Ordinarily the Fund will enter into interest rate futures
contracts to hedge its investments in fixed income securities such as preferred
stocks and money market obligations, stock index futures contracts to hedge its
investments in common stocks and foreign currency futures contracts to hedge
currency risks associated with investments in foreign securities.
Futures contracts are traded on exchanges licensed and regulated by the
CFTC. Interest rate futures contracts are principally traded on the Chicago
Board of Trade and International Monetary market. Stock index futures contracts
are principally traded on the New York Futures Exchange, Chicago Mercantile
Exchange, Kansas City Board of Trade, New York Stock Exchange and Chicago Board
of Trade. The Fund will be subject to any limitations imposed by these boards of
trades and exchanges with respect to futures contracts trading and positions. A
clearing corporation associated with the particular exchange assumes
responsibility for all purchases and sales and guarantees delivery and payment
on the contracts. Although most futures contracts call for actual delivery or
acceptance of the underlying securities or currency, in most cases the contracts
are closed out before settlement date without the making or taking of delivery.
Closing out is accomplished by entering into an offsetting transaction, which
may result in a profit or a loss. There is no assurance that the Fund will be
able to close out a particular futures contract.
(2) International Securities
In general, the strategies and risks associated with hedging portfolio
investments in international securities are similar to those involved in hedging
U.S. securities, but have some differences.
The Fund may hedge the international securities in its portfolio by
engaging in futures contracts transactions involving foreign currencies or stock
indexes. A foreign currency futures contract is a binding contractual commitment
which involves either the delivery or payment for a specified period in the
future. A foreign stock index futures contract involves either the payment or
receipt of payments, representing, respectively, the loss or gain of a specified
group of stocks or market index. Ordinarily the Fund would enter into foreign
stock index futures contracts to hedge its investments in foreign common stocks
and foreign currency futures contracts to hedge currency risk associated with
investments in foreign securities.
There is no assurance that the objective of any hedging strategy used by
the Fund will be achieved, since the success of the strategy will depend on
Bartlett's ability to predict the future direction of the relevant currency,
stock index or futures contract and incorrect predictions by Bartlett may have
an adverse effect on the Fund The forecasting of currency market movement is
extremely difficult and whether a hedging strategy involving foreign currency
transactions will be successful is highly uncertain. In addition, it should be
noted that the skills and techniques necessary to predict movements in a stock
index are different from those needed to predict price changes in individual
stocks.
- 23 -
<PAGE>
Futures contracts are traded on exchanges licensed and regulated by the
CFTC and analogous foreign regulatory agencies. The Fund will be subject to any
limitations imposed by the exchanges with respect to futures contracts trading
and positions. A clearing corporation associated with the particular exchange
assumes responsibility for all purchases and sales and guarantees delivery and
payment on the contracts. Although foreign currency futures contracts call for
actual delivery or acceptance of the currency, in most cases the contracts are
closed out before settlement date without the making or taking of delivery.
Closing out is accomplished by entering into an offsetting transaction, which
may result in a profit or a loss. There is no assurance that the Fund will be
able to close out a particular futures contract or that a liquid secondary
market will exist for any particular futures contract at any specific time.
Futures contracts transactions entail some risks. For example, it is
possible that the futures contracts selected by the Fund will not follow the
price movement of the underlying currency or stock index. If this occurs, the
hedging strategy may not be successful. Further, if the Fund sells a stock index
futures contract and is required to pay an amount measured by any increase in
the index, it will be exposed to an indeterminate liability. In addition, a
liquid secondary market may not exist for any particular futures contract at any
specific time.
(3) Risks of Hedging Strategies
A hedging strategy involving options and futures contracts entails some
risks. For example, the total premium paid for an option on a futures contract
may be lost if the Fund does not exercise the option or the writer does not
perform his obligations. It is also possible that the futures contracts selected
by the Fund will not follow the price movement of the underlying securities,
currencies or stock index. If this occurs, the hedging strategy may not be
successful. Further, if the Fund sells a stock index futures contract and is
required to pay an amount measured by any increase in the market index, it will
be exposed to an indeterminate liability. In addition, a liquid secondary market
may not exist for any particular option or futures contract at any specific
time.
The Fund will incur transactional costs in connection with the hedging
program. When the Fund purchases or sells a futures contract, an amount of cash
and liquid assets will be deposited in a segregated account with the Custodian
to guarantee performance of the futures contract. The amount of such deposits
will depend upon the requirements of each exchange and broker and will vary with
each futures contract. Because open futures contract positions are
marked-to-market and gains and losses are settled on a daily basis, the Fund may
be required to deposit additional funds in such a segregated account if it has
incurred a net loss on its open futures contract positions on any day.
The Fund has filed a supplemental notice of eligibility with the CFTC to
claim relief from regulation as a commodity "pool" within the meaning of the
CFTC's regulations. In its filing, the Fund has represented that its
transactions in futures contracts and options on futures contacts will
constitute bona fide hedging transactions within the meaning of such regulations
and that the Fund will enter into commitments which require as deposits for
initial margin for futures contracts or premiums for options on futures
contracts no more than 5% of the fair market value of its total assets.
The Fund may not purchase or sell futures contacts or purchase related
options if, immediately thereafter, more than one-third of its net assets would
be hedged. In addition, the Fund may not enter into transactions involving
futures contracts and related options if such transactions would result in more
than 5% of the fair market value of the fund's assets being deposited as initial
margin for such transactions.
Concentration
- -------------
Financial Services Fund will not invest more than 25% or more of its total
assets in a particular industry other than the financial services industry.
- 24 -
<PAGE>
Forward Contracts
- -----------------
A fund may wish to lock on the U.S. dollar value of a transaction at or
near the time of the purchase or sale at the exchange rate or rates then
prevailing between the U.S. dollar and the currency in which the foreign
security is denominated. To do this, a fund may enter into a forward contract,
which involves an obligation to purchase or sell a specified 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. These
contacts are traded directly between currency traders (usually large commercial
banks) and their customers.
When it is desirable to limit or reduce exposure in a foreign currency in
order to moderate potential changes in the U.S. dollar value of the portfolio, a
fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of foreign currency approximating the value of some or all
of that fund's portfolio securities denominated in such foreign currency. This
is known as portfolio hedging. Hedging against a decline in the value of
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline.
The funds may also employ forward contracts to hedge against an increase
in the value of the currency in which the securities a fund intends to buy are
denominated. A fund may also hedge its foreign currency exchange rate risk by
engaging in currency futures contracts and options transactions. No fund will
engage in foreign currency transactions for speculative purposes.
Repurchase Agreements
- ---------------------
Each fund may enter into repurchase agreements. In a repurchase agreement
transaction, a fund purchases a security and simultaneously commits to resell
that security to the seller at an agreed upon price and date. In the event of a
bankruptcy or other default of the seller of a repurchase agreement, a fund
could experience both delays in liquidating the underlying security and losses.
Forward Commitments, Reverse Repurchase Agreements and Dollar Rolls
- -------------------------------------------------------------------
Basic Value may purchase or sell securities on a "forward commitment"
basis, including purchases on a "when-issued" basis, a "when, as and if issued"
basis and a "to be announced" basis. The Fund may invest no more than 5% of its
net assets in forward commitments. When such transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be negotiated. During
the period between a commitment and settlement, no payment is made by the
purchaser for the securities purchased and, thus, no interest accrues to the
purchaser from the transaction. In a "when, as and if issued" transaction, the
issuance of the security depends upon the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. In a
"to be announced" transaction, the Fund has committed to purchase or sell
securities for which all specific information is not yet known at the time of
the trade, particularly the face amount in GNMA securities transactions.
The use of forward commitments enables the Fund to hedge against
anticipated changes in interest rates and prices. Forward commitment securities
may be sold prior to the settlement date, but the Fund will enter into forward
commitment transactions only with the intention of actually receiving or
delivering the securities, as the case may be. Any significant commitment of the
Fund's assets to the purchase of securities on a forward commitment basis may
increase the possibility that its net asset value will fluctuate. In addition,
if the Fund chooses to dispose of the right to receive or deliver a forward
commitment security prior to the settlement date, it may incur a gain or loss.
Purchases of forward commitment securities also involve a risk of loss if the
value of the securities declines prior to the settlement date or if the seller
fails to deliver after the value of the securities has risen.
- 25 -
<PAGE>
The Fund will direct State Street to place cash or U.S. government
obligations in a separate account in an amount equal to the commitments of the
Fund to purchase securities as a result of its forward commitment obligations.
With respect to forward commitments to sell securities, the Fund will direct
State Street to place the securities in a separate account. The Fund will direct
State Street to segregate such assets for "when, as and if issued" commitments
only when it determines that issuance of the security is probable.
Basic Value may enter into reverse repurchase agreements but may invest no
more than 5% of its net assets in such transactions. Reverse repurchase
agreements involve sales of portfolio securities by a Fund to member banks of
the Federal Reserve System or recognized securities dealers, concurrently with
an agreement by the Fund to repurchase the same securities at a later date at a
fixed price, which is generally equal to the original sales price plus interest.
The Fund retains record ownership and the right to receive interest and
principal payments on the portfolio security involved. The Fund's objective in
such a transaction would be to obtain funds to pursue additional investment
opportunities whose yield would exceed the cost of the reverse repurchase
transaction. Generally, the use of reverse repurchase agreements should reduce
portfolio turnover and increase yield.
In connection with each reverse repurchase agreement, the Fund will direct
State Street to place cash or U.S. government obligations in a separate account
in an amount equal to the repurchase price. In the event of bankruptcy or other
default by the purchaser, the Fund could experience both delays in repurchasing
the portfolio securities and losses.
Basic Value also may enter in dollar roll transactions with certain
broker/dealers and banks but may invest no more than 5% of its net assets in
such transactions. For all purposes (including borrowing restrictions) the Fund
treats dollar roll transactions as reverse repurchase agreements. Dollar roll
transactions consist of the sale by a Fund of mortgage-backed securities
combined with a commitment to purchase similar (although not identical)
securities at a future date at the same price. The Fund would receive a fee for
entering into the commitment to purchase. The principal risk of dollar roll
transactions is that if the broker/dealer or bank to whom the Fund sells the
securities underlying a dollar roll transaction becomes insolvent, the Fund's
right to purchase similar securities may be restricted. Similarly, the value of
the securities may change adversely over the term of the dollar roll transaction
and the securities that the Fund is required to repurchase may be worth less
than the securities originally held by the Fund. Finally, the return earned by
the Fund with the proceeds of a dollar roll transaction may not exceed
transaction costs.
When a separate account is maintained in connection with forward
commitment transactions to purchase securities or reverse repurchase agreements,
the securities deposited in the separate account will be valued daily at market
for the purpose of determining the adequacy of the securities in the account. If
the market value of such securities declines, additional cash or securities will
be placed in the account on a daily basis so that the market value of the
account will equal the amount of the Fund's commitments to purchase or
repurchase securities. To the extent funds are in a separate account, they will
not be available for new investment or to meet redemptions.
Commitments to purchase securities on a when, as and if issued basis will
not be recognized in the portfolio of a Fund until Bartlett determines that
issuance of the security is probable. At such time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value of
the security daily.
Securities purchased on a forward commitment basis, securities subject to
reverse repurchase agreements and the securities held in each Fund's portfolio
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes in the level of interest rates (which
will generally result in all of those securities changing in value in the same
way, i.e., all those securities experiencing appreciation when interest rates
decline and depreciation when interest rates rise). Therefore, if in order to
achieve a higher level of income, the Fund remains substantially fully invested
at the same time that it has purchased securities on a forward commitment basis
or entered into reverse repurchase transactions, there will be a possibility
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<PAGE>
that the market value of the Fund's assets will have greater fluctuation.
Short Sales (for Basic Value only)
- -----------
Basic Value may sell a security short in anticipation of a decline in the
market value of the security. The Fund may invest no more than 5% of its net
assets in short sales. When the Fund engages in a short sale, it sells a
security which it does not own. To complete the transaction, the Fund must
borrow the security in order to deliver it to the buyer. The Fund must replace
the borrowed security by purchasing it at the market price at the time of
replacement, which may be more or less than the price at which the Fund sold the
security. The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a profit if
the security declines in price between those dates.
In connection with its short sales, the Fund will be required to maintain
a segregated account with State Street of cash or high grade liquid debt assets
equal to the market value of the securities sold less any collateral deposited
with its broker. The Fund will limit its short sales so that no more than 25% of
its net assets (less all its liabilities other than obligations under the short
sales) will be deposited as collateral and allocated to the segregated account.
However, the segregated account and deposits will not necessarily limit the
Fund's potential loss on a short sale, which is unlimited. The Fund's policy
with respect to short sales is fundamental, although the particular practices
followed with respect to short sales, such as the percentage of the Fund's
assets which may be deposited as collateral or allocated to the segregated
account, are not deemed fundamental and may be changed by the Board of Directors
without the vote of the Fund's shareholders.
When Basic Value borrows a security in connection with a short sale, the
Fund is required to pay to the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium to the lender, which would increase the cost of the
security sold. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of any premium, dividends or interest the Fund may
be required to pay in connection with the short sale. The proceeds of the short
sale will be retained by the lender or its broker, to the extent necessary to
meet margin requirements, until the short position is closed out by delivery of
the underlying security.
Short Sales Against the Box (for Basic Value only)
- ---------------------------
Basic Value may make short sales "against the box." Short sales "against
the box" are truncations, similar to those described above, in which a security
identical to one owned by the Fund is borrowed and sold short. The Fund may not
invest more than 5% of its net assets in short sales "against the box."
Emerging Market Securities
- --------------------------
Because of the high levels of foreign-denominated debt owed by many
emerging market countries, fluctuating exchange rates can significantly affect
the debt service obligations of those countries. This could, in turn, affect
local interest rates, profit margins and exports which are a major source of
foreign exchange earnings. Although it might be theoretically possible to hedge
for anticipated income and gain, the ongoing and indeterminate nature of the
foregoing risk (and the costs associated with hedging transactions) makes it
virtually impossible to hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with
respect to its foreign exchange reserves, it may increase restrictions on the
outflow of any foreign exchange. Repatriation is ultimately dependent on the
ability of a Fund to liquidate its investments and convert the local currency
proceeds obtained from such liquidation into U.S. dollars. Where this conversion
must be done through official channels (usually the central bank or certain
authorized commercial banks), the ability to obtain U.S. dollars is dependent on
the availability of U.S. dollars through those channels and, if available, upon
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<PAGE>
the willingness of those channels to allocate those U.S. dollars to a Fund. In
such a case, a Fund's ability to obtain U.S. dollars may be adversely affected
by any increased restrictions imposed on the outflow of foreign exchange. If a
Fund is unable to repatriate any amounts due to exchange controls, it may be
required to accept an obligation payable at some future date by the central bank
or other government entity of the jurisdiction involved. If such conversion can
legally be done outside official channels, either directly or indirectly, a
Fund's ability to obtain U.S. dollars may not be affected as much by any
increased restrictions except to the extent of the price which may be required
to be paid for the U.S. dollars.
Many emerging market countries have little experience with the corporate
form of business organization, and may not have well developed corporation and
business laws or concepts of fiduciary duty in the business context.
The securities markets of emerging markets are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the U.S.
and other more developed countries. Disclosure and regulatory standards in many
respects are less stringent than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets; enforcement of existing regulations has
been extremely limited.
Some emerging markets have different settlement and clearance procedures.
In certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. The inability of a Fund to make intended securities
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security caused by
settlement problems could result either in losses to a Fund due to subsequent
declines in the value of the portfolio security or, if the Fund has entered into
a contract to sell the security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a fund's portfolio securities in such
markets may not be readily available.
Securities in the Financial Services Industry (for Financial Services only)
- ---------------------------------------------
Companies in the financial services industry include regional and money
center banks, securities brokerage firms, asset management companies, savings
banks and thrift institutions, specialty finance companies (e.g., credit card,
mortgage providers), insurance and insurance brokerage firms, government
sponsored agencies, financial conglomerates and foreign banking and financial
services companies.
The financial services industry is currently undergoing relatively rapid
change as existing distinctions between financial service segments becomes less
clear. For instance, recent business combinations in the U.S. have included
insurance, finance, banking and/or securities brokerage under single ownership.
Moreover, the federal laws generally separating commercial and investment
banking are being studied actively by Congress. The services offered by banks
may expand if legislation broadening bank powers is enacted. While providing
diversification, expanded powers could expose banks to well-established
competitors, particularly as the historical distinctions between banks and other
financial institutions erode. Increase competition may also result from the
broadening of regional and national interstate banking powers, which has already
reduced the number of publicly traded regional banks.
Banks, savings and loan associations, and finance companies are subject to
extensive governmental regulation which may limit both the amounts and types of
loans and other financial commitments they can make and the interest rates and
fees they can charge. The profitability of these groups is largely dependent on
the availability and cost of capital funds, and can fluctuate significantly when
interest rates change. In addition, general economic conditions are important to
the operations of these concerns, with exposure to credit losses resulting from
possible financial difficulties of borrowers potentially having an adverse
effect.
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<PAGE>
Finance companies can be highly dependent upon access to capital markets
and any impediments to such access, such as adverse overall economic conditions
or a negative perception in the capital markets of a finance company's financial
condition or prospects, could adversely affect its business.
Insurance companies are likewise subject to substantial governmental
regulation, predominately at the state level, and may be subject to severe price
competition. The performance of the Fund's investments in insurance companies
will be subject to risk from several additional factors. The earnings of
insurance companies will be affected by, in addition to general economic
conditions, pricing (including severe pricing competition from time to time),
claims activity, and marketing competition. Particular insurance lines will also
be influenced by specific matters. Property and casualty insurer profits may be
affected by certain weather catastrophes and other disasters. Life and health
insurer profits may be affected by mortality and morbidity rates. Individual
companies may be exposed to material risk, including reserve inadequacy,
problems in investment portfolios (due to real estate or "junk" bond holdings,
for example), and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the
imposition of maximum rate levels, which may not be adequate for some lines of
business. Proposed or potential anti-trust or tax law changes also may affect
adversely insurance companies' policy sales, tax obligations and profitability.
Companies engaged in stock brokerage, commodity brokerage, investment
banking, investment management, or related investment advisory services are
closely tied economically to the securities and commodities markets and can
suffer during a decline in either. These companies also are subject to the
regulatory environment and changes in regulations, pricing pressure and the
availability of funds to borrowing and interest rates.
ADRs and EDRs
- -------------
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and other similar securities convertible into securities of foreign
companies provide a means for investing directly in foreign equity securities.
ADRs are receipts typically issued by a European bank evidencing ownership of
the underlying foreign securities. To the extent an ADR or EDR is issued by a
bank unaffiliated with the foreign company issuer of the underlying security,
the bank has no obligation to disclose material information about the foreign
company issuer. Each fund may invest in ADRs and EDRs.
Corporate Debt Securities
- -------------------------
Corporate debt securities are bonds or notes issued by corporations and
other business organizations, including business trusts, in order to finance
their credit needs. Corporate debt securities include commercial paper which
consists of short-term (usually from 1 to 270 days) unsecured promissory notes
issued by corporations in order to finance their current operations. Any Fund
may invest in foreign corporate debt securities denominated in U.S. dollars or
foreign currencies. Foreign debt securities include Yankee dollar obligations
(U.S. dollar denominated securities issued by foreign corporations and traded on
U.S. markets) and Eurodollar obligations (U.S. dollar denominated securities
issued by foreign corporations and traded on foreign markets).
Government Obligations and Related Securities
- ---------------------------------------------
U.S. government obligations include a variety of securities that are
issued or guaranteed by the U.S. Treasury, by various agencies of the U.S.
Government or by various instrumentalities that have been established or
sponsored by the U.S. Government. U.S. Treasury securities and securities issued
by the GNMA and Small Business Administration are backed by the "full faith and
credit" of the U.S. Government. Other U.S. government obligations may or may not
be backed by the "full faith and credit" of the U.S. In the case of securities
not backed by the "full faith and credit" of the U.S., the investor must look
principally to the agency issuing or guaranteeing the obligation (such as the
Federal Farm Credit System, the Federal Home Loan Banks, Fannie Mae and Freddie
Mac for ultimate repayment and may not be able to assert a claim against the
- 29 -
<PAGE>
U.S. itself in the event the agency or instrumentality does not meet its
commitments.
Participation interests in U.S. government obligations are pro rata
interests in such obligations which are generally underwritten by government
securities dealers. Certificates of safekeeping for U.S. government obligations
are documentary receipts for such obligations. Both participation interests and
certificates of safekeeping are traded on exchanges and in the over-the-counter
market.
Each Fund may invest in U.S. government obligations and related
participation interests. In addition, each Fund may invest in custodial receipts
that evidence ownership of future interest payments, principal payments or both
on certain U.S. government obligations. Such obligations are held in custody by
a bank on behalf of the owners. These custodial receipts are known by various
names, including Treasury Receipts, Treasury Investors Growth Receipts ("TIGRs")
and Certificates of Accrual on Treasury Securities ("CATS"). Custodial receipts
generally are not considered obligations of the U.S. government for purposes of
securities laws. The Funds will consider all interest-only or principal-only
fixed income securities as illiquid.
Municipal Obligations
- ---------------------
Municipal obligations are debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia, and their political subdivisions, agencies, authorities and
instrumentalities and other qualifying issuers which pay interest that is, in
the opinion of bond counsel to the issuer, exempt from federal income tax. Each
Fund may invest no more than 5% of its net assets in municipal obligations
(including participation interests). Municipal obligations are issued to obtain
funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works, to pay general operating expenses or to refinance outstanding
debts. They also may be issued to finance various private activities, including
the lending of funds to public or private institutions for construction of
housing, educational or medical facilities or the financing of privately owned
or operated facilities. Municipal obligations consist of tax-exempt bonds,
tax-exempt notes and tax-exempt commercial paper. Tax-exempt notes generally are
used to provide short term capital needs and generally have maturities of one
year or less. Tax-exempt commercial paper typically represents short-term,
unsecured, negotiable promissory notes.
The two principal classifications of municipal obligations are "general
obligations" and "revenue" bonds. General obligation bonds are backed by the
issuer's full credit and taxing power. Revenue bonds are backed by the revenues
of a specific project, facility or tax. Industrial development revenue bonds are
a specific type of revenue bond backed by the credit of the private issuer of
the facility, and therefore investments in these bonds have more potential risk
that the issuer will not be able to meet scheduled payments of principal and
interest.
Zero Coupon and Pay-in-Kind Bonds
- ---------------------------------
Corporate debt securities and municipal obligations include so-called
"zero coupon" bonds and "pay-in-kind" bonds. A Fund may invest no more than 5%
of its net assets in zero coupon bonds or pay-in-kind bonds, respectively. Zero
coupon bonds are issued at a significant discount from their principal amount in
lieu of paying interest periodically. Pay-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. The value of zero coupon and pay-in-kind bonds is subject to
greater fluctuation in response to changes in market interest rates than bonds
which make regular payments of interest. Both of these types of bonds allow an
issuer to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds which make
regular payments of interest. Even though zero coupon and pay-in-kind bonds do
not pay current interest in cash, a Fund holding those bonds is required to
accrue interest income on such investments and may be required to distribute
that income at least annually to shareholders. Thus, such a Fund could be
required at times to liquidate other investments in order to satisfy its
dividend requirements.
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<PAGE>
Mortgage-Related Securities
- ---------------------------
Each fund may invest no more than 5% of its net assets in mortgage-related
securities. Mortgage-related securities provide capital for mortgage loans made
to residential homeowners, including securities which represent interests in
pools of mortgage loans made by lenders such as savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled for sale to investors (such as the Funds) by various governmental,
government-related and private organizations, such as dealers. The market value
of mortgage-related securities will fluctuate as a result of changes in interest
rates and mortgage rates.
Interests in pools of mortgage loans generally provide a monthly payment
which consists of both interest and principal payments. 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 are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by GNMA)
are described as "modified pass-through" because they entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, regardless of whether the mortgagor actually makes the payment.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers, such
as dealers, create pass-through pools of conventional residential mortgage
loans. Such issuers also may be the originators of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments with respect to such pools. However, timely
payment of interest and principal of these pools is supported by various forms
of insurance or guarantees, including individual loan, title, pool and hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. A Fund may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the persons creating the pools, Bartlett determines
that the securities are appropriate investment for the Fund.
Another type of security representing an interest in a pool of mortgage
loans is known as a collateralized mortgage obligation ("CMO"). CMOs represent
interests in a short-term, intermediate-term or long-term portion of a mortgage
pool. Each portion of the pool receives monthly interest payments, but the
principal repayments pass through to the short-term CMO first and the long-term
CMO last. A CMO permits an investor to more accurately predict the rate of
principal repayments. CMOs are issued by private issuers, such as broker/dealers
and government agencies, such as Fannie Mae and Freddie Mac. Investments in CMOs
are subject to the same risks as direct investments in the underlying
mortgage-backed securities. In addition, in the event of a bankruptcy or other
default of a broker who issued the CMO held by a Fund, the Fund could experience
both delays in liquidating its position and losses. Each Fund may invest in CMOs
in any rating category of the recognized rating services and may invest in
unrated CMOs. Each Fund may also invest in "stripped" CMOs, which represent only
the income portion or the principal portion of the CMO.
Each Fund's sub-adviser expects that governmental, government-related or
private entities may create mortgage loan pools offering pass-through
investments in addition to those described above. The mortgages underlying these
securities may be second mortgages or alternative mortgage instruments (for
example, mortgage instruments whose principal or interest payments may vary or
whose terms to maturity may differ from customary long-term fixed rate
mortgages). As new types of mortgage-related securities are developed and
offered to investors, the sub-adviser will, consistent with a Fund's investment
objective and policies, consider making investments in such new types of
securities. The Prospectuses will be amended with any necessary additional
disclosure prior to that Fund investing in such securities.
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<PAGE>
The average life of securities representing interests in pools of mortgage
loans is likely to be substantially less than the original maturity of the
mortgage pools as a result of prepayments or foreclosures of such mortgages.
Prepayments are passed through to the registered holder with the regular monthly
payments of principal and interest, and have the effect of reducing future
payments. To the extent the mortgages underlying a security representing an
interest in a pool of mortgages are prepaid, a Fund may experience a loss (if
the price at which the respective security was acquired by the Fund was at a
premium over par, which represents the price at which the security will be
redeemed upon prepayment) or a gain (if the price at which the respective
security was acquired by the Fund was at a discount from par). In addition,
prepayments of such securities held by a Fund will reduce the share price of the
Fund to the extent the market value of the securities at the time of prepayment
exceeds their par value, and will increase the share price of the Fund to the
extent the par value of the securities exceeds their market value at the time of
prepayment. Prepayments may occur with greater frequency in periods of declining
mortgage rates because, among other reasons, it may be possible for mortgagors
to refinance their outstanding mortgages at lower interest rates.
Although the market for mortgage-related securities issued by private
organizations is becoming increasingly liquid, such securities may not be
readily marketable. No Fund will purchase mortgage-related securities for which
there is no established market (including CMOs and direct investments in
mortgages as described below) or any other investments which the adviser and/or
the respective sub-adviser deems to be illiquid pursuant to criteria established
by the Board of Directors if, as a result, more than 10% of the value of the
Fund's net assets would be invested in such illiquid securities and investments.
Government-related organizations which issue mortgage-related securities include
GNMA, Fannie Mae and Freddie Mac. Securities issued by GNMA and Fannie Mae are
fully modified pass-through securities, i.e., the timely payment of principal
and interest is guaranteed by the issuer. Freddie Mac securities are modified
pass-through securities, i.e., the timely payment of interest is guaranteed by
Freddie Mac, principal is passed through as collected but payment thereof is
guaranteed not later than one year after it becomes payable.
Direct Investment in Mortgages
- ------------------------------
Mortgage-related securities include investments made directly in mortgages
secured by real estate. When a Fund makes a direct investment in mortgages, the
Fund, rather than a financial intermediary, becomes the mortgagee with respect
to such loans purchased by the Fund. Direct investments in mortgages are
normally available from lending institutions which group together a number of
mortgages for resale (usually from 10 to 50 mortgages) and which act as
servicing agent for the purchaser with respect to, among other things, the
receipt of principal and interest payments. (Such investments are also referred
to as "whole loans.") The vendor of such mortgages receives a fee from the
purchaser for acting as servicing agent. The vendor does not provide any
insurance or guarantees covering the repayment of principal or interest on the
mortgages. Each Fund will invest in such mortgages only if the sub-adviser has
determined through an examination of the mortgage loans and their originators
that the purchase of the mortgages should not present a significant risk of loss
to the Fund.
Loan Participation Interests (for Basic Value only)
- ----------------------------
Basic Value may invest no more than 5% of its net assets in loan
participation interests. Loan participation interests are interests in debt
obligations (such as corporate loans) that are owned by banks or other financial
institutions. Loan participation interests are subject to the credit risks
generally associated with the corporate borrower; however, certain loan
participation interests may be backed by irrevocable letters of credit or a
guarantee of the bank or financial institution. Certain loan participation
interests may carry demand features that permit the Fund to sell the obligations
back to the financial intermediaries for the full amount of the Fund's interest
in the debt obligation plus accrued interest upon short notice at any time or
prior to specific dates. In the event of a default by the corporate borrower,
the Fund may be required to assert its rights through the financial intermediary
which may subject the Fund to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a direct
obligation (such as commercial paper) of such borrower. Moreover, under the
terms of the loan participation, the Fund may be regarded as a creditor of the
bank or financial institution (rather than of the corporate borrower), so that
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<PAGE>
the Fund may also be subject to the risk that the financial intermediary may
become insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, the loan participation may be subject to certain defenses
that can be asserted by such borrower as a result of improper conduct by the
financial intermediary. Loan participation interests which do not carry
unconditional demand features that can be exercised within seven days or less
are deemed illiquid and the Fund's investment in such interests would be limited
to the extent that it is not permitted to invest more than 10% of the value of
its net assets in illiquid investments.
Asset-Backed and Receivable-Backed Securities (for Basic Value only)
- ---------------------------------------------
Basic Value is permitted to invest in asset-backed and receivable-backed
securities. The Fund may invest no more than 5% of its net assets in
asset-backed securities and receivable-backed securities, respectively. Several
types of asset-backed and receivable-backed securities are available to
investors, including CARs(SM) (Certificates for Automobile Receivable(SM)) and
interests in pools of credit card receivables. CARs(SM) represent a pool (the
"Pool") of motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interest on CARs(SM) are passed through monthly to certificate holders. Such
payments may be guaranteed up to certain amounts for a certain time period by a
letter of credit issued by a financial institution unaffiliated with the Pool.
Early prepayment of principal on the underlying vehicle sales contracts may
reduce the overall return to an investor. If the letter of credit is exhausted
and if the full amount of the underlying sales contract is not repaid,
certificate holders may experience losses on CARs(SM) or delays in payment.
Certificates representing pools of credit card receivables have characteristics
similar to CARs(SM), however, the underlying receivables are not secured.
Consistent with the Fund's investment objective and subject to the review
and the approval of the Board of Directors, Basic Value also may invest in other
types of asset-backed and receivable-backed securities. The Prospectuses will be
amended with any necessary additional disclosure prior to the Fund investing in
such securities.
Floating and Variable Rate Obligations
- --------------------------------------
Fixed income securities may be offered in the form of floating and
variable rate obligations. Each Fund may invest no more than 5% of its net
assets in floating and variable rate obligations, respectively. Floating rate
obligations have an interest rate which is fixed to a specified interest rate,
such as bank prime rate, and is automatically adjusted when the specified
interest rate changes. Variable rate obligations have an interest rate which is
adjusted at specified intervals to a specified interest rate. Periodic interest
rate adjustments help stabilize the obligations' market values.
A Fund may purchase these obligations from the issuers or may purchase
participation interests in pools of these obligations from banks or other
financial institutions. Variable and floating rate obligations usually carry
demand features that permit a Fund to sell the obligations back to the issuers
or to financial intermediaries at par value plus accrued interest upon short
notice at any time or prior to specific dates. The inability of the issuer or
financial intermediary to repurchase an obligation on demand could affect the
liquidity of the Fund's portfolio. Frequently, obligations with demand features
are secured by letters of credit or comparable guarantees. Floating and variable
rate obligations which do not carry unconditional demand features that can be
exercised within seven days or less are deemed illiquid unless the Board
determines otherwise. A Fund's investment in illiquid floating and variable rate
obligations would be limited to the extent that it is not permitted to invest
more than 10% of the value of its net assets in illiquid investments.
Structured Securities (for Basic Value only)
- ---------------------
Basic Value may invest no more than 5% of its net assets in structured
securities which are derived from securities that are issued by U.S. government
agencies and are denominated in U.S. dollars. These short maturity notes differ
from traditional government agency securities in that the return (principal
and/or interest) is linked to the performance of a diversified array of
financial indices.
- 33 -
<PAGE>
An investment in structured securities entails risks not associated with
investments in conventional debt securities. However, the Fund used these
securities only as a hedge or to protect its portfolio against rising interest
rates. Structured securities are privately issued securities, although they are
traded in the secondary market. The secondary market for such securities is
affected by factors independent of the creditworthiness of the issuer and the
value of the index, such as the volatility of the index, time remaining to
maturity and the amount of such securities outstanding.
Loans of Portfolio Securities
- -----------------------------
Each fund may make short-and long-term loans of their portfolio
securities. Under an authorized lending policy, the borrower must agree to
maintain collateral, in the form of cash or U.S. Government obligations, with
the Fund on a daily mark-to-market basis in an amount at least equal to 100% of
the value of the loan securities.
The Funds will continue to receive dividends or interest on the loaned
securities and may terminate such loans at any time or reacquire such securities
in time to vote on any matter which the Board of Directors determines to be
serious. There is a risk that the borrower may fail to return the loaned
securities or may not be able to provide additional collateral.
No loans will be made if, as a result, the aggregate amount of such loans
would exceed 25% of a Fund's total assets.
Investment Companies
- --------------------
Each Fund is permitted to invest in other investment companies. A Fund
will not: (a) invest more than 10% of its total assets in securities of other
investment companies; (b) invest more than 5% of its total assets in securities
of any investment company; and (c) purchase more than 3% of the outstanding
voting stock of any investment company.
If a Fund acquires securities of another investment company, you may be
subject to duplicative management fees.
Bond Ratings
- ------------
Each Fund may invest in debt obligations (such as corporate debt
securities and municipal obligations) in any rating category of the recognized
rating services, including issues that are in default, and may invest in unrated
debt obligations. Most foreign debt obligations re not rated.
Generally, investments in securities in the lower rating categories or
comparable unrated securities provide higher yields but involve greater price
volatility and risk of loss of principal and interest than investments in
securities with higher ratings. Securities rated lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's ("S&P")
(commonly know as "junk bonds"), are below investment grade and have speculative
characteristics, and those in the lowest rating categories are extremely
speculative and may be in default with respect to payment of principal and
interest. Each Fund does not intend to invest more than 5% of its net assets in
securities rated below investment grade.
Lower ratings reflect a greater possibility that an adverse change in
financial condition will affect the ability of the issuer to make payments of
principal and interest than is the case with higher grade securities. In
addition, lower-rated securities will also be affected by the market's
perceptions of their credit quality and the outlook for economic growth. In the
past, economic downturns or an increase in interest rates have under certain
circumstances caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high yield
securities. An effect of such legislation may be to significantly depress the
prices of outstanding lower-rated securities. The market for lower-rated
securities may be less liquid than the market for securities with higher
ratings. Furthermore, the liquidity of lower-rated securities may be affected by
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<PAGE>
the market's perception of their credit quality. Therefore, judgment may at
times play a greater role in valuing these securities than in the case of
higher-rated securities, and it also may be more difficult during certain
adverse market conditions to sell lower-rated securities at their face value to
meet redemption requests or to respond to changes in the market.
Although the above risks apply to all lower-rated securities, the
investment risk increases when the rating of the security is below investment
grade. The lowest-rated securities (D by S&P and C by Moody's) are regarded as
having extremely poor prospects of ever attaining any real investment standing
and, in fact, may be in default of payment of interest or repayment of
principal. To the extent a Fund invests in these lower-rated securities, the
achievement of its investment objective may be more dependent on Bartlett's
and/or Gray, Seifert's own credit analysis than in the case of a Fund investing
in higher-rated securities.
Each Fund may invest in securities which are in lower rating categories or
are unrated if Bartlett and/or Gray, Seifert determines that the securities
provide the opportunity of meeting the Fund's objective without presenting
excessive risk. Bartlett and/or Gray, Seifert will consider all factors which it
deems appropriate, including ratings, in making investment decisions for a Fund
and will attempt to minimize investment risks through diversification,
investment analysis and monitoring of general economic conditions and trends.
While Bartlett and/or Gray, Seifert may refer to ratings, they do not rely
exclusively on ratings, but make their own independent and ongoing review of
credit quality.
Portfolio Turnover
- ------------------
Basic Value and Financial Services Fund each anticipates that in the
future its portfolio turnover rate will not exceed 100%. 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. High portfolio turnover
rates (100% or more) will involve corresponding greater transaction costs which
will be borne directly by a Fund. It may also increase the amount of short-term
capital gains realized by a Fund and thus may affect the tax treatment of
distributions paid to shareholders, because distributions of net short-term
capital gains are taxable as ordinary income. Each Fund will take these
possibilities into account as part of its investment strategies. It is expected
that the portfolio turnover for Financial Services Fund will be low to moderate.
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 apply to them.
General
- -------
For federal tax purposes, each Fund is treated as a separate corporation.
To continue to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended ("Code"), 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) the fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward currency contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
- 35 -
<PAGE>
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If any fund failed to qualify for treatment as a RIC for any taxable
year, (i) it would be taxed at corporate rates on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (ii) the shareholders would treat all those distributions,
including distributions of net capital gain (I.E., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
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, and gains realized thereby,
may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the total return on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.
Dividends and Other Distributions
- ---------------------------------
Dividends and other distributions declared by a Fund in December of any
year and payable to its shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if the distributions are paid by the Fund during the following
January. Accordingly, those distributions will be taxed to shareholders for the
year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
for any Fund may not exceed the aggregate dividends received by that Fund for
the taxable year from domestic corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the federal alternative minimum tax.
Distributions of net capital gain made by any Fund do not qualify for the
dividends-received deduction.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as a long-term, instead of a short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Passive Foreign Investment Companies
- ------------------------------------
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (i.e., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which a Fund is a U.S. shareholder -- that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.
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<PAGE>
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if the QEF did not
distribute those earnings and gain to the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Each Fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income by the
Fund for prior taxable years under the election (and under regulations proposed
in 1992 that provided a similar election with respect to the stock of certain
PFICs). A Fund's adjusted basis in each PFIC's stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.
Options, Futures, Forward Currency Contracts and Foreign Currencies
- -------------------------------------------------------------------
The use of hedging instruments, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses each Fund realizes
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains that may be excluded by future regulations) -- and gains
from options derived by American Leading Companies, or from options, futures and
forward currency contracts derived by each other Fund, with respect to its
business of investing in securities or foreign currencies -- will qualify as
permissible income under the Income Requirement.
Certain futures and foreign currency contracts in which a Fund may invest
will be subject to section 1256 of the Code ("section 1256 contracts"). Any
section 1256 contracts a Fund holds at the end of each taxable year other than
contracts with respect to which the Fund has made a "mixed straddle election,
must be "marked-to-market" (that is, treated as having been sold at that time
for their fair market value), with the result that unrealized gains or losses
will be treated as though they were realized. Sixty percent of any net gain or
loss recognized on these deemed sales, and sixty percent of any net realized
gain or loss on section 1256 contracts actually sold by the Fund during the year
will be treated as long-term capital gain or loss, and the balance will be
treated as short-term capital gain or loss. Section 1256 contracts also may be
marked-to market for purposes of the Excise Tax. These rules may operate to
increase the amount that a fund must distribute to satisfy the Distribution
Requirement (I.E., with respect to the portion treated as short-term capital
gain), which will be taxable to the shareholders as ordinary income, and to
increase the net capital gain a fund recognizes, without in either case
increasing the cash available to the fund. A fund may elect to exclude certain
transactions from the operation of section 1256, although doing so may have the
effect of increasing the relative proportion of net short-term capital gain
(taxable as ordinary income) and thus increasing the amount of dividends that
must be distributed.
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 on the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the underlying security.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a Fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
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<PAGE>
purposes, options and futures contracts are personal property. Under section
1092, any loss from the disposition of a position in a straddle generally may be
deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle; in addition, these rules may apply to
postpone the recognition of loss that otherwise would be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a position
is sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses
from the affected straddle positions would be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of straddle transactions are not entirely clear.
If a Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or a futures or forward
currency contract entered into by a Fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction of
a fund during any taxable year that otherwise would be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the fund holds the appreciated financial position unhedged for 60 days after
that closing (I.E., at no time during that 60-day period is the fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
To the extent a fund recognizes income from a "conversion transaction," as
defined in section 1258 of the Code, all or part of the gain from the
disposition or other termination of a position held as part of the conversion
transaction may be recharacterized as ordinary income. A conversion transaction
generally consists of two or more positions taken with regard to the same or
similar property, where (1) substantially all of the taxpayer's return is
attributable to the time value of its net investment in the transaction and (2)
the transaction satisfies any of the following criteria: (a) the transaction
consists of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; (b) the transaction is a straddle, within the meaning of section
1092 of the Code (see above); (c) the transaction is one that was marketed or
sold to the taxpayer on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as capital
gain; or (d) the transaction is described as a conversion transaction in future
regulations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Basic Value and Financial Services Fund each also offer a
third class of shares: Class A shares. Primary Shares and Class A shares are
available from Legg Mason, certain of its affiliates and unaffiliated entities
having an agreement with Legg Mason. Navigator Shares are currently offered for
sale only to Institutional Clients of Legg Mason Trust Company for which they
exercise discretionary investment management responsibility and accounts of the
customers with such Institutional Clients, to qualified retirement plans managed
on a discretionary basis and having net assets of at least $200 million, to
clients of Bartlett & Co. who, as of December 19, 1996 were shareholders of
Bartlett Short-Term Bond Fund or Bartlett Fixed Income Fund and for whom
Bartlett acts as an ERISA fiduciary, Class Y shareholders of Bartlett Value
International Fund, Bartlett Basic Value Fund, Bartlett Europe Fund or Bartlett
Financial Services Fund on _________, 1999, to any qualified retirement plan of
Legg Mason, Inc. or of any of its affiliates, and to certain institutions who
were clients of Fairfield Group, Inc. as of February 28, 1999. Navigator Shares
may not be purchased by individuals directly, but Institutional Clients may
- 38 -
<PAGE>
purchase shares for Customer Accounts maintained for individuals. Primary Shares
and Class A 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 or Class A shares, the Prospectus for
those shares explains that you may buy Primary Shares or Class A through the
Future First Systematic Investment Plan. Under this plan you may arrange for
automatic monthly investments in Primary Shares or Class A shares of $50 or more
by authorizing Boston Financial Data Services ("BFDS"), each Fund's transfer
agent, to transfer funds each month from your Legg Mason account or from your
checking account to be used to buy Primary Shares at the per share net asset
value determined on the day the funds are sent from your bank. You will receive
a quarterly account statement. You may terminate the Future First Systematic
Investment Plan at any time without charge or penalty. Forms to enroll in the
Future First Systematic Investment Plan are available from any Legg Mason or
affiliated office.
Investors in Primary Shares may also buy Primary Shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of a Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
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 or Class A shares with a net asset value of
$5,000 or more, you may also elect to make systematic withdrawals from your Fund
account of a minimum of $50 on a monthly basis. The amounts paid to you each
month are obtained by redeeming sufficient shares from your account to provide
the withdrawal amount that you have specified. The Systematic Withdrawal Plan is
not currently available for shares held in an Individual Retirement Account
("IRA"), Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan
for Employees ("SIMPLE") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the 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 shares in your account must be
automatically reinvested in the applicable class of shares. You may terminate
the Systematic Withdrawal Plan at any time without charge or penalty. Each Fund,
its transfer agent, and Legg Mason also reserve the right to modify or terminate
the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
- 39 -
<PAGE>
Ordinarily, you should not purchase additional shares of the Fund in which
you have an account if you maintain a Systematic Withdrawal Plan, because you
may incur tax liabilities in connection with such purchases and withdrawals. No
Fund will knowingly accept purchase orders from you for additional shares if you
maintain a Systematic Withdrawal Plan unless your purchase is equal to at least
one year's scheduled withdrawals. In addition, if you maintain a Systematic
Withdrawal Plan you may not make periodic investments under the Future First
Systematic Investment Plan.
Other Information Regarding Redemption
- --------------------------------------
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, by a Fund or its
distributor except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in markets
the Fund normally utilizes is restricted, or an emergency, as defined by rules
and regulations of the SEC, exists, making disposal of the Fund's investments or
determination of its net asset value not reasonably practicable, or (iii) for
such other periods as the SEC by regulation or order may permit for protection
of each Fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
Each Fund reserves the right, under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part in securities valued in
the same way as they would be valued for purposes of computing the Fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
will be subject to fluctuation in the market price of those securities until
they are sold. Each Fund does not redeem "in kind" under normal circumstances,
but would do so where the adviser determines that it would be in the best
interests of the Fund's shareholders as a whole.
Class A shares that were purchased pursuant to the front-end sales charge
waiver on purchases of $1 million or more and are redeemed within one year of
their purchase are subject to a CDSC of 1.00% of the shares' net asset value at
the time of purchase or redemption, whichever is less.
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily for each Class as of
the close of the Exchange, on every day the Exchange is open, by dividing the
value of the total assets attributable to that Class, less liabilities
attributable to that Class, by the number of shares of that Class outstanding.
Pricing will not be done on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Presidents' Day,
Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. As described in the Prospectuses, securities
for which market quotations are readily available are valued at current market
value. Securities traded on an exchange or the NASDAQ Stock Market are normally
valued at last sale prices. Other over-the-counter securities, and securities
traded on exchanges for which there is no sale on a particular day (including
debt securities), are valued at the mean of latest closing bid and asked prices.
Securities with remaining maturities of 60 days or less are valued at amortized
cost. Securities and other assets quoted in foreign currencies will be valued in
U.S. dollars based on the currency exchange rates prevailing at the time of the
valuation. All other securities are valued at fair value as determined by or
under the direction of the appropriate Fund's Board of Directors. Premiums
received on the sale of call options are included in the net asset value of each
Class, and the current market value of options sold by a Fund will be subtracted
from net assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year, of
a hypothetical investment of $10,000 made in each Fund at commencement of
operations of each class of Fund shares. The tables assume that all dividends
and other distributions are reinvested in each respective Fund. They include the
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<PAGE>
effect of all charges and fees applicable to the respective class of shares the
Fund has paid. (There are no fees for investing or reinvesting in the Funds
imposed by the Funds, and there are no redemption fees other than those
described above for Class A shares.) They do not include the effect of any
income tax that an investor would have to pay on distributions. Performance data
is only historical, and is not intended to indicate any Fund's future
performance.
Financial Services Fund commenced operations on November 16, 1998;
therefore no performance information is provided for this fund.
VALUE TRUST:
PRIMARY SHARES
- --------------
Value of Original Value of Shares
Shares Plus Shares Acquired Through
Obtained Through Reinvestment of
Fiscal Year Reinvestment of Income Dividends Total Value
Capital Gain
Distributions
- --------------------------------------------------------------------------------
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
1996 82,356 14,870 97,226
1997 110,379 19,502 129,881
1998 172,947 28,814 201,761
1999 259,794 42,708 302,502
- --------------------------------------------------------------------------------
* April 16, 1982 (commencement of operations) to March 31, 1983.
- 41 -
<PAGE>
NAVIGATOR SHARES
- ----------------
Value of Original Value of Shares
Shares Plus Shares Acquired Through
Obtained Through Reinvestment of
Fiscal Year Reinvestment of Income Dividends Total Value
Capital Gain
Distributions
- --------------------------------------------------------------------------------
1995* $ 10,805 $ 6 $10,811
1996 15,249 268 15,517
1997 20,323 619 20,942
1998 31,713 1,146 32,859
1999 48,038 1,688 49,726
* 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, 1999 would have been $146,180, and the investor would
have received a total of $29,223 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1999 would have
been $39,707, and the investor would have received a total of $4,062 in
distributions. If the adviser had not waived certain fees in the 1983-1999
fiscal years, returns would have been lower.
- 42 -
<PAGE>
TOTAL RETURN TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income 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
1996 21,342 5,194 26,536
1997 26,102 6,890 32,992
1998 37,430 9,565 46,995
1999 34,742 8,903 43,175
* November 21, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
- ----------------
Value of Original Value of Shares
Shares Plus Shares Acquired Through
Obtained Through Reinvestment of
Fiscal Year Reinvestment of Income Dividends Total Value
Capital Gain
Distributions
- --------------------------------------------------------------------------------
1995* $10,203 $160 $10,363
1996 13,106 668 13,774
1997 15,989 1,321 17,310
1998 22,606 2,311 24,917
1999 20,509 2,619 23,128
* December 1, 1994 (commencement of operations) to March 31, 1995.
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<PAGE>
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $21,690, and the investor would
have received a total of $10,332 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1999 would have
been $16,643, and the investor would have received a total of $5,056 in
distributions. If the adviser had not waived certain fees in the 1986-1995
fiscal years, returns would have been lower.
SPECIAL INVESTMENT TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Total
Fiscal Year Distributions Income Dividends 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
1996 34,291 1,442 35,733
1997 38,345 1,526 39,871
1998 54,898 2,070 56,968
1999 64,288 2,230 66,518
* December 30, 1985 (commencement of operations) to March 31, 1986.
- 44 -
<PAGE>
NAVIGATOR SHARES
- ----------------
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1995* $10,481 - $10,481
1996 13,489 $121 13,610
1997 15,224 129 15,353
1998 21,996 177 22,173
1999 25,948 193 26,141
* 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, 1999 would have been $38,820, and the investor would
have received a total of $10,646 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of March 31, 1999 would have
been $21,313, and the investor would have received a total of $3,249 in
distributions. If the adviser had not waived certain fees in the 1986-1998
fiscal years, returns would have been lower.
AMERICAN LEADING COMPANIES:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1994* $9,690 $ 24 $9,714
1995 10,180 140 10,320
1996 12,230 283 12,513
1997 15,242 366 15,608
1998 20,658 442 21,100
1999 24,713 506 25,219
* September 1, 1993 (commencement of operations) to March 31, 1994.
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<PAGE>
NAVIGATOR SHARES
- ----------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1997* $11,428 $88 $11,516
1998 15,602 110 15,742
**1999 ------- ----- -------
* October 4, 1996 (commencement of operations) to March 31, 1997.
**
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $20,380, and the investor would
have received a total of $3,295 in distributions.
BALANCED TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1997* $10,160 $42 $10,202
1998 12,749 289 13,038
1999 12,241 473 12,687
* October 1, 1996 (commencement of operations) to March 31, 1997.
If the investor had not reinvested dividends and other distributions, the
total value of the hypothetical investment as of March 31, 1999 would have been
$11,980, and the investor would have received a total of $630 in distributions.
If the adviser had not waived certain fees in the fiscal years ended March 31,
1997 and 1998, returns would have been lower.
The table above is based only on Primary Shares of Balanced Trust. As of
the date of this Statement of Additional Information, Navigator Shares of
Balanced Trust have no performance history of their own.
- 46 -
<PAGE>
SMALL-CAP VALUE TRUST:
PRIMARY SHARES
- --------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1999*
* June 15, 1998 (commencement of operations) to March 31, 1999.
If the investor had not reinvested dividends and other distributions, the total
value of the hypothetical investment as of March 31, 1999 would have been
$______________, and the investor would have received a total of
$_________________ in distributions.
NAVIGATOR SHARES
- ----------------
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1999*
* June 19, 1998 (commencement of operations) to March 31, 1999.
If the investor had not reinvested dividends and other distributions, the total
value of the hypothetical investment as of March 31, 1999 would have been
$_______________, and the investor would have received a total of $_____________
in distributions.
BASIC VALUE:
The average annual total returns of Class A shares of Basic Value for the
one, five and ten year periods ended December 31, 1998 were (1.19)%, 14.89% and
12.09%, respectively.
The following table shows the one year and cumulative rates of total
return for the indicated period as well as the value of a $10,000 investment
made on May 5, 1983 (the date of the initial public offering of shares), as of
the end of the specified period. Sales charges have not been deducted from total
returns for the periods ended March 31, 1984 through December 31, 1997. For the
year ended December 31, 1998, total returns do reflect the sales charge.
- 47 -
<PAGE>
Year End Value of Total
Year Net Asset Dividends $10,000 Return Total Return
Ended Value Paid Investments(a) One Year Cumulative(b)
- --------------------------------------------------------------------------------
3/31/84(b) $10.20 $0.46 $10,668 6.68%(b) 6.68%
3/31/85 10.88 0.75 12,202 14.38% 22.02%
3/31/86 13.13 1.23 16,194 32.72% 61.94%
3/31/87 12.96 1.56 18,037 11.38% 80.37%
3/31/88 12.44 0.36 17,813 -1.24% 78.13%
3/31/89 12.56 1.71 20,593 15.61% 105.93%
3/31/90 12.34 1.05 21,930 6.49% 119.30%
3/31/91 12.60 0.46 23,310 6.29% 133.10%
3/31/92 13.47 0.36 25,624 9.91% 156.24%
3/31/93 14.76 0.58 29,268 14.22% 192.69%
3/31/94 14.89 0.37 30,268 3.42% 202.68%
3/31/95 15.39 1.30 34,103 12.67% 241.03%
3/31/96 17.94 1.07 42,306 24.05% 323.06%
3/31/97 18.33 1.65 47,110 11.36% 371.10%
12/31/97 18.95 5.16 59,701 33.14%(c) 526.87%
12/31/98 18.33 1.28 65,042 -1.19% 519.45%
(a) Value at end of fiscal year of $10,000 investment made on May 5, 1983.
(b) Not annualized and from May 5, 1983.
(c) For the nine months ended December 31, 1997.
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 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.
- 48 -
<PAGE>
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.
Each Fund may also include in advertising biographical information on key
investment and managerial personnel.
Each Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through periods of low price levels.
- 49 -
<PAGE>
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 approximately $89 billion as of March 31, 1999.
In advertising, each Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
Lipper Analytical Services, Inc., an independent rating service which
measures the performance of most U.S. mutual funds, reported that Value Trust's
total return of Primary Shares ranked among general equity funds it measured
during the one year ended April 30, 1999. For the five years ended April 30,
1999, Value Trust's total return ranked among equity funds and for the ten years
ended April 30, 1999, 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. Rankings
may have been different if the adviser had not waived certain fees during the
periods in question.
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES AND CLASS A SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of those plans until the
income is distributed to them. Class A or Primary Share investors who are
considering establishing an IRA, SEP, SIMPLE or other qualified retirement plan
should consult their attorneys or other tax advisers with respect to individual
tax questions. The option of investing in those plans with respect to Class A or
Primary Shares through regular payroll deductions may be arranged with a Legg
Mason or affiliated financial advisor and your employer. Additional information
with respect to these plans is available upon request from any Financial Advisor
or Service Provider.
TRADITIONAL IRA. Certain Class A or Primary Share investors may obtain tax
advantages by establishing IRAs. Specifically, except as noted below, if neither
you nor your spouse is an active participant in a qualified employer or
government retirement plan, or if either you or your spouse is an active
participant and your adjusted gross income does not exceed a certain level, then
each of you may deduct cash contributions made to an IRA in an amount for each
taxable year not exceeding the lesser of 100% of your earned income or $2,000. A
married investor who is not an active participant in such a plan and files a
joint income tax return with his or her spouse (and their combined adjusted
gross income does not exceed $150,000) is not affected by the spouse's active
participant status. In addition, if your spouse is not employed and you file a
joint return, you may establish a separate IRA for your spouse and contribute up
to a total of $4,000 to the two IRAs, provided that the contribution to either
does not exceed $2,000. If your employer's plan qualifies as a SEP, permits
voluntary contributions and meets certain other requirements, you may make
voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Class A shares or Primary
Shares through non-deductible IRA contributions, up to certain limits, because
all dividends and other distributions on your fund shares are then not
immediately taxable to you or the IRA; they become taxable only when distributed
to you. To avoid penalties, your interest in an IRA must be distributed, or
start to be distributed, to you not later than the end of the taxable year in
which you attain age 70 1/2. Distributions made before age 59 1/2, in addition
to being taxable, generally are subject to a penalty equal to 10% of the
distribution, except in the case of death or disability, where the distribution
is rolled over into another qualified plan or certain other situations.
ROTH IRA. A shareholder whose adjusted gross income (or combined adjusted
gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
- 50 -
<PAGE>
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
EDUCATION IRA. Although not technically for retirement savings, an
Education IRA provides a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than the maximum amount allowable under
current law (currently $500) may be contributed for any year to Education IRAs
for the same beneficiary. Contributions are not deductible and may not be made
after the beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or transferred to an Education IRA of a qualified
family member).
Simplified Employee Pension Plan -- SEP
- ---------------------------------------
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares or Class A shares.
Savings Incentive Match Plan for Employees - SIMPLE
- ---------------------------------------------------
An employer with no more than 100 employees that does not maintain another
retirement plan may establish a SIMPLE either as separate IRAs or as part of a
Code section 401(k) plan. A SIMPLE, which is not subject to the complicated
nondiscrimination rules that generally apply to qualified retirement plans, will
allow certain employees to make elective contributions of up to $6,000 per year
and will require the employer to make either matching contributions up to 3% of
each such employee's salary or a 2% nonelective contribution.
Withholding at the rate of 20% is required for federal income tax purposes
on certain distributions (excluding, for example, certain periodic payments)
from the foregoing retirement plans (except IRAs and SEPs), unless the recipient
transfers the distribution directly to an "eligible retirement plan" (including
IRAs and other qualified plans) that accepts those distributions. Other
distributions generally are subject to regular wage withholding at the rate of
10% (depending on the type and amount of the distribution), unless the recipient
elects not to have any withholding apply. Primary Share and Class A share
investors should consult their plan administrator or tax advisor for further
information.
MANAGEMENT OF THE FUND
Each Fund's officers are responsible for the operation of the Fund under
the direction of the Board of Directors. The officers and directors of the Funds
and their principal occupations during the past five years are set forth below.
An asterisk (*) indicates officers and/or directors who are "interested persons"
of the Funds as defined by the 1940 Act. The business address of each officer
and director is 100 Light Street, Baltimore, Maryland 21202, unless otherwise
indicated.
RAYMOND A. MASON* [9/28/36], CHAIRMAN OF THE BOARD AND DIRECTOR OF VALUE
TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST; Chairman of the Board
and President of Legg Mason, Inc. (financial services holding company); Director
of Environmental Elements Corporation (manufacturer of pollution control
equipment); Officer and/or Director of various other affiliates of Legg Mason.
- 51 -
<PAGE>
JOHN F. CURLEY, JR.* [7/24/39], PRESIDENT AND DIRECTOR OF VALUE TRUST,
TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST; CHAIRMAN OF THE BOARD AND
DIRECTOR OF INVESTORS TRUST; Retired Vice Chairman and Director of Legg Mason,
Inc. and Legg Mason Wood Walker, Incorporated; Chairman of the Board and
Director of three Legg Mason funds; Chairman of the Board, President and Trustee
of one Legg Mason fund; Chairman of the Board and Trustee of one Legg Mason
fund. Formerly: Director of Legg Mason Fund adviser, Inc. ("LMFA") and Western
Asset Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], DIRECTOR OF EACH FUND; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in the manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia Electric
Company); Director/Trustee of five other Legg Mason funds. Formerly: Senior Vice
President and Chief Financial Officer of Philadelphia Electric Company (now PECO
Energy Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company; and Director of
Finance, City of Philadelphia.
ARNOLD L. LEHMAN [7/18/44], DIRECTOR OF EACH FUND; . Director of the
Brooklyn Museum of Art; Director/Trustee of five other Legg Mason funds.
Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], DIRECTOR OF EACH FUND; 400 Seventh Street NW,
Washington, DC. Chief Executive Officer of the Marrow Foundation.
Director/Trustee of five other Legg Mason funds. Formerly: Executive Director of
the Baltimore International Festival (January 1991 - March 1993); and Senior
Assistant to the President of The Johns Hopkins University (1986-1991).
T. A. RODGERS [10/22/34], DIRECTOR OF EACH FUND; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director/Trustee of five other Legg Mason funds. Formerly: Director
and Vice President of Corporate Development, Polk Audio, Inc. (manufacturer of
audio components).
EDWARD A. TABER, III* [8/25/43], DIRECTOR OF EACH FUND; PRESIDENT OF THE
TRUST; Senior Executive Vice President of Legg Mason, Inc. and Legg Mason Wood
Walker, Inc.; Vice Chairman and Director of LMFA; President and/or
Director/Trustee of four Legg Mason funds.
The executive officers of the Funds, other than those who also serve as
directors, are:
MARIE K. KARPINSKI* [1/1/49], VICE PRESIDENT AND TREASURER OF EACH FUND;
Treasurer of the adviser; Vice President and Treasurer of six other Legg Mason
funds; Vice President of Legg Mason.
W. SHANE HUGHES* [4/24/68], SECRETARY OF INVESTORS TRUST; employee of Legg
Mason Wood Walker since May 1997. Formerly: Supervisor, C.W. Amos & Co.
(regional public accounting firm) 1990-1996.
SUSAN L. SILVA* [3/29/67], ASSISTANT SECRETARY OF EACH FUND; Assistant
Secretary of one other Legg Mason fund; employee of Legg Mason since January
1994.
The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of a Fund who are "interested persons" of the Fund
receive no salary or fees from the Fund. Each Director of a Fund who is not an
interested person of the Fund ("Independent Directors") receives an annual
retainer and a per meeting fee based on the average net assets of each Fund at
December 31, of the previous year.
[On July 1, 1999, the directors and officers of each Fund beneficially
owned in the aggregate less than 1% of that Fund's outstanding shares.]
- 52 -
<PAGE>
[On July 1, 1999, 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 %]
[On July 1, 1999, Wood County Trust Co, 181 2nd Street South, Wisconsin
Rapids, WI 54494, owned of record and beneficially ____% of the outstanding
shares of the Navigator Class of Value Trust. As of the same date, State Street
Bank & Trust Company, Trustee for the NCR Savings Plan, One Enterprise Drive,
North Quincy, MA, owned of record and beneficially ____% of the outstanding
shares of the Navigator Class of Value Trust.]
[As of the same date, SMICO & CO, P.O. Box 307, Smith Center, Kansas
66967, owned of record and beneficially ____% of the outstanding shares of the
Navigator Class of American Leading Companies.]
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31, 1999.
None of the Legg Mason funds has any retirement plan for its directors.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------
<S> <C> <C> <C> <C> <C>
AGGREGATE AGGREGATE TOTAL COMPENSATION
AGGREGATE AGGREGATE COMPENSATION COMPENSATION FROM EACH FUND
NAME OF COMPENSATION COMPENSATION FROM SPECIAL FROM AND FUND COMPLEX
PERSON AND FROM VALUE FROM TOTAL INVESTMENT INVESTORS PAID TO
POSITION TRUST* RETURN TRUST* TRUST* TRUST* DIRECTORS**
- ---------------------------------------------------------------------------------------------
Raymond A.
Mason -
Chairman of
the Board
and Director None None None None None
- ---------------------------------------------------------------------------------------------
John F.
Curley, Jr. -
President
and Director None None None None None
- ---------------------------------------------------------------------------------------------
Edward A.
Taber, III -
Director None None None None None
- ---------------------------------------------------------------------------------------------
Richard G. $3,340 $2,283 $3,340 $2,285 $35,100
Gilmore -
Director
- ---------------------------------------------------------------------------------------------
Charles F. $3,340 $2,283 $3,340 $2,285 $25,800
Haugh -
Director (A)
- ---------------------------------------------------------------------------------------------
</TABLE>
- 53 -
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------
<S> <C> <C> <C> <C> <C>
AGGREGATE AGGREGATE TOTAL COMPENSATION
AGGREGATE AGGREGATE COMPENSATION COMPENSATION FROM EACH FUND
NAME OF COMPENSATION COMPENSATION FROM SPECIAL FROM AND FUND COMPLEX
PERSON AND FROM VALUE FROM TOTAL INVESTMENT INVESTORS PAID TO
POSITION TRUST* RETURN TRUST* TRUST* TRUST* DIRECTORS**
- ---------------------------------------------------------------------------------------------
Arnold L. $3,340 $2,283 $3,340 $2,285 $30,600
Lehman -
Director
- ---------------------------------------------------------------------------------------------
Jill E. $3,340 $2,283 $3,340 $2,285 $35,100
McGovern -
Director
- ---------------------------------------------------------------------------------------------
T. A. $3,340 $2,283 $3,340 $2,285 $35,100
Rodgers-
Director
- ---------------------------------------------------------------------------------------------
</TABLE>
(A) Mr. Haugh retired as a director in September 1998.
* Represents fees paid to each director during the fiscal year ended March
31, 1999.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1998. There are eleven open-end
investment companies in the Legg Mason Complex (with a total of twenty
funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA, a Maryland Corporation, is located at 100 Light Street, Baltimore,
Maryland 21202. LMFA is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of Legg Mason, Bartlett and Legg Mason Capital Management, Inc.
("LMCM"). LMFA serves as manager and investment adviser to Value Trust, Total
Return Trust, Special Investment Trust and American Leading Companies and as
manager to Balanced Trust, Small-Cap Value, Basic Value and Financial Services
Fund under separate Management Agreements with each Fund ("Management
Agreement"). The Management Agreement for Value Trust originally became
effective as of April 19, 1982 and was last approved by the shareholders of
Value Trust on July 20, 1984. The Management Agreement for Total Return Trust
originally became effective as of August 5, 1985 and was last approved by the
shareholders of Total Return Trust on July 17, 1986. The Management Agreement
for Special Investment Trust originally became effective as of December 10, 1985
and was last approved by the shareholders of Special Investment Trust on July
17, 1986. The Management Agreement for American Leading Companies originally
became effective as of August 2, 1993. The Management Agreement for Balanced
Trust became effective on July 31, 1996. The Management Agreement for Small-Cap
Value became effective on May 1, 1998. The Management Agreements for Basic Value
and Financial Services Fund became effective on September ___, 1999.
The Management Agreements for each Fund (other than Basic Value and
Financial Services Fund) were most recently approved by each Fund's Board of
Directors, including a majority of the directors who are not "interested
persons" of the Fund or LMFA, on November 13, 1998. The Management Agreements
for Basic Value and Financial Services Fund were approved by the Board of
Directors on ________, 1999.
Each Management Agreement provides that, subject to overall direction by
the Fund's Board of Directors, LMFA manages or oversees the investment and other
affairs of each Fund. LMFA is responsible for managing each Fund consistent with
the Fund's investment objective and policies described in its Prospectuses and
this Statement of Additional Information. LMFA also is obligated to (a) furnish
the Fund with office space and executive and other personnel necessary for the
operation of each Fund; (b) supervise all aspects of each Fund's operations; (c)
bear the expense of certain informational and purchase and redemption services
- 54 -
<PAGE>
to each Fund's shareholders; (d) arrange, but not pay for, the periodic updating
of prospectuses, proxy material, tax returns and reports to shareholders and
state and federal regulatory agencies; and (e) report regularly to each Fund's
officers and directors. In addition, LMFA paid Value Trust's, Total Return
Trust's and Special Investment Trust's organizational expenses and has agreed to
reimburse Value Trust and Special Investment Trust for auditing fees and
compensation of those Funds' independent directors. LMFA and its affiliates pay
all compensation of directors and officers of each Fund who are officers,
directors or employees of LMFA. Each Fund pays all of its expenses which are not
expressly assumed by LMFA. These expenses include, among others, interest
expense, taxes, brokerage fees and commissions, expenses of preparing and
printing prospectuses, proxy statements and reports to shareholders and of
distributing them to existing shareholders, custodian charges, transfer agency
fees, distribution fees to Legg Mason, each Fund's distributor, compensation of
the independent directors, legal and audit expenses, insurance expense,
shareholder meetings, proxy solicitations, expenses of registering and
qualifying Fund shares for sale under federal and state law, governmental fees
and expenses incurred in connection with membership in investment company
organizations. Each Fund also is liable for such nonrecurring expenses as may
arise, including litigation to which the Fund may be a party. Each Fund may also
have an obligation to indemnify its directors and officers with respect to
litigation.
LMFA receives for its services to each Fund a management fee, calculated
daily and payable monthly. LMFA receives from Value Trust and Special Investment
Trust a management fee at an annual rate of 1% of the average daily net assets
of that Fund for the first $100 million of average daily net assets, 0.75% of
average daily net assets between $100 million and $1 billion, and 0.65% of
average daily net assets exceeding $1 billion. LMFA receives from Total Return
Trust a management fee at an annual rate of 0.75% of the average daily net
assets of that Fund. LMFA receives from American Leading Companies a management
fee at an annual rate of 0.75% of the average daily net assets of that Fund.
LMFA receives from Balanced Trust a management fee at an annual rate of 0.75% of
the average daily net assets of that Fund. LMFA receives from Small-Cap Value a
management fee at an annual rate of 0.85% of the average daily net assets of
that Fund. LMFA receives from Basic Value a management fee at an annual rate of
0.75% of the average daily net assets of that Fund. LMFA receives from Financial
Services Fund a management fee at an annual rate of 1.00% of the average daily
net assets of that Fund. LMFA has agreed to waive its fees for Total Return
Trust, American Leading Companies, Balanced Trust and Small-Cap Value for
expenses related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of the following amounts: for Total Return
Trust and American Leading Companies, 1.95% of average net assets attributable
to Primary Shares indefinitely; for Balanced Trust, 1.85% of average net assets
attributable to Primary Shares until ____________; for Small-Cap Value, 2.00% of
average net assets attributable to Primary Shares until ____________; for Basic
Value, 1.90% of average net assets attributable to Primary Shares until May 1,
2000; and for Financial Services Fund, 2.25% of average net assets attributable
to Primary Shares until May 1, 2000. LMFA has agreed to waive its fees for Total
Return Trust, American Leading Companies, Balanced Trust and Small-Cap Value for
expenses related to Navigator Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) in excess of the following amounts: for Total Return
Trust and American Leading Companies, 0.95% of average net assets attributable
to Navigator Shares indefinitely; for Balanced Trust, 1.10% of average net
assets attributable to Navigator Shares until ____________; for Small-Cap Value,
1.00% of average net assets attributable to Navigator Shares until ____________;
for Basic Value and Financial Services Fund, 0.90% and 1.25%, respectively, of
average net assets attributable to Navigator Shares until May 1, 2000. LMFA has
agreed to waive its fees for Basic Value and Financial Services Fund for
expenses related to Class A shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of the following amounts: for Basic Value,
1.15%, and for Financial Services Fund, 1.50% until May 1, 2000.
For the fiscal years ended March 31, 1999, 1998 and 1997, management fees
of $45,014,441, $24,282,523, and $13,199,924, respectively were received from
Value Trust; $4,952,596, $4,031,818, and $2,404,297, respectively, were received
from Total Return Trust; and $11,608,871, $9,875,632, and $7,272,943,
respectively, were received from Special Investment Trust.
- 55 -
<PAGE>
For the fiscal years ended March 31, 1999, 1998 and 1997, LMFA received
management fees of $1,655,396, $1,190,729 (prior to fees waived of $69,496), and
$643,329 (prior to fees waived of $94,059), respectively, from American Leading
Companies.
For the fiscal years ended March 31, 1999, and 1998 LMFA received
management fees of $419,683 (prior to fees waived of $25,964) and $215,415
(prior to fees waived of $83,278) respectively for Balanced Trust. For the
period October 1, 1996 (commencement of operations) to March 31, 1997, all
management fees were waived by LMFA for Balanced Trust.
[For the period June 15, 1998 (commencement of operations) to March 31,
1999, LMFA received management fees of $_____________ from Small-Cap Value.]
Prior to September ____, 1999, Bartlett & Co. served as manager to Basic
Value and Financial Services Fund under compensation arrangements substantially
similar to those with LMFA. The following table depicts the advisory fees paid
by those funds to Barlett for the fiscal years ended December 31, 1998, 1997 and
March 31, 1997.
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1997* 1997 1996
Basic Value $827,068 $889,047 $1,468,801 $1,366,123
Financial Services Fund $17,081 n/a n/a n/a
* Reflects advisory fees paid by Basic Value for the nine months ended December
31, 1997.
Under each Advisory Agreement or (with respect to Balanced Trust,
Small-Cap Value, Basic Value and Financial Services Fund) Management Agreement,
each Fund has the non-exclusive right to use the name "Legg Mason" until that
Agreement is terminated, or until the right is withdrawn in writing by LMFA.
Gray, Seifert, 380 Madison Avenue, New York, New York, serves as
investment sub-adviser to Financial Services Fund under a Sub-Advisory Agreement
dated September ___, 1999 between Gray, Seifert and LMFA ("Financial Services
Sub-Advisory Agreement"). The Financial Services Sub-Advisory Agreement was
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" of the Corporation, LMFA, or Gray, Seifert, on
_______, 1999 and by the sole shareholder of Financial Services Fund on
__________, 1999. Prior to September __, 1999, Gray, Seifert served as
sub-adviser to the fund under arrangements with Bartlett substantially similar
to those with LMFA.
Gray, Seifert is responsible for providing investment advice to Financial
Services Fund in accordance with its investment objective and policies, and for
placing orders to purchase and sell portfolio securities pursuant to directors
from the Fund's officers. For Gray, Seifert's services to Financial Services
Fund, LMFA (not the Fund) pays Gray, Seifert a fee equal to 60% of the fee it
receives from the Fund for advisory and administrative services. For the fiscal
year ended December 31, 1998, Bartlett & Co. paid $10,249 to Gray, Seifert.
Under the Financial Services Sub-Advisory Agreement, Gray, Seifert will
not be liable for any error of judgment or mistake of law or for any loss
suffered by LMFA or by the fund in connection with the performance of the
Financial Services Sub-Advisory Agreement, except a loss resulting from a breach
of fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.
The Financial Services Sub-Advisory Agreement terminates automatically
upon assignment and is terminable at any time without penalty by vote of the
Corporation's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, by LMFA or by Gray, Seifert, on not less than 60
days' notice to the Fund and/or the other party(ies). The Financial Services
- 56 -
<PAGE>
Sub-Advisory Agreement terminates immediately upon any termination of the
Management Agreement between Financial Services and LMFA.
LMCM, 100 Light Street, Baltimore, MD 21202, an affiliate of Legg Mason,
also serves as an investment adviser to American Leading Companies pursuant to
an Investment Advisory Agreement dated August 2, 1993, between LMCM and LMFA
("Advisory Agreement"). The Advisory Agreement was most recently approved by the
Board of Directors, including a majority of the directors who are not
"interested persons" (as that term is defined in the 1940 Act) of Investors
Trust, LMFA or LMCM, on November 13, 1998. The Advisory Agreement was approved
by LMFA, Inc., as the Fund's sole shareholder, on August 2, 1993.
Under the Advisory Agreement, LMCM may provide the Fund with research and
investment advisory services for which LMFA (not the Fund) may pay a fee.
Currently, LMCM is not providing any services to the Fund.
For the fiscal years ended March 31, 1999, 1998 and 1997, LMFA paid
$______________, $610,704, and $219,733, respectively, to LMCM on behalf of the
Fund for such services.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, an affiliate of
Legg Mason, serves as investment adviser to Balanced Trust pursuant to an
Investment Advisory Agreement dated July 31, 1996, between Bartlett and LMFA
("Advisory Agreement"). The Advisory Agreement was most recently approved by the
Board of Directors, including a majority of the directors who are not
"interested persons" (as that term is defined in the 1940 Act) of the Trust,
Bartlett or the Manager, on November 13, 1998. The Advisory Agreement was
approved by LMFA, as the Fund's sole shareholder, on July 31, 1996.
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, net of any waivers by the Manager.
For the fiscal year ended March 31, 1999 and 1998, Bartlett received
$_______________ and $88,092 respectively in advisory fees on behalf of Balanced
Trust. For the period October 1, 1996 (commencement of operations) to March 31,
1997, Bartlett waived its advisory fees.
Bartlett serves as investment sub-adviser to Basic Value Fund under a
Sub-Advisory Agreement dated September __, 1999 between Bartlett and LMFA
("Basic Value Sub-Advisory Agreement"). The Basic Value Sub-Advisory Agreement
was approved by the Board of Directors of the Corporation, including a majority
of the directors who are not "interested persons" of the Corporation, LMFA or
Bartlett on ____________, 1999 and by the sole shareholder of Basic Value on
_____________, 1999.
Bartlett is responsible for providing investment advice to Basic Value in
accordance with its investment objective and policies, and for placing orders to
purchase and sell portfolio securities pursuant to directions from the Fund's
officers. For Bartlett's services to Basic Value, LMFA (not the Fund) pays
Bartlett a fee equal to 60% of the fee it receives from the Fund for advisory
services. Prior to September __, 1999, Bartlett served as Basic Value's
investment adviser and manager. For the fiscal year ended December 31, 1998,
Bartlett received $___________ from Basic Value for its services as investment
adviser and manager.
Under the Basic Value Sub-Advisory Agreement, Bartlett will not be liable
for any error of judgment or mistake of law or for any loss suffered by LMFA or
by the Fund in connection with the performance of the Basic Value Sub-Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations or duties thereunder.
- 57 -
<PAGE>
The Basic Value Sub-Advisory Agreement terminates automatically upon
assignment and is terminable at any time without penalty by vote of the
Corporation's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, by LMFA or by Bartlett, on not less than 60 days'
notice to the Fund and/or the other party(ies). The Basic Value Sub-Advisory
Agreement terminates immediately upon any termination of the Management
Agreement between Basic Value and LMFA.
Brandywine Asset Management, Inc. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware, an affiliate of Legg Mason, serves as investment adviser
to Small-Cap Value pursuant to an Investment Advisory Agreement dated May 1,
1998, between Brandywine and LMFA ("Advisory Agreement"). The Advisory Agreement
was approved by LMFA as the Fund's sole shareholder, on May 28, 1998.
Under the Advisory Agreement, Brandywine is responsible, subject to the
general supervision of LMFA and Investors Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
Brandywine's services to the Fund, LMFA (not the Fund) pays Brandywine a fee,
computed daily and payable monthly, at an annual rate equal to 0.50% of the
Fund's average daily net assets or 58.8% of the fee received by LMFA from the
Fund, net of any waivers by LMFA.
Under each Advisory Agreement and (with respect to Balanced Trust,
Small-Cap Value, Basic Value and Financial Services Fund) Management Agreement,
LMFA/LMCM/Bartlett/Brandywine/Gray, Seifert will not be liable for any error of
judgment or mistake of law or for any loss by a Fund in connection with the
performance of the Advisory Agreement or Management Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard of its obligations or duties under the respective Agreement.
Each Advisory Agreement and (with respect to Balanced Trust, Small-Cap
Value, Basic Value and Financial Services Fund) Management Agreement terminates
automatically upon assignment and is terminable at any time without penalty by
vote of the respective Fund's Board of Directors, by vote of a majority of the
Fund's outstanding voting securities, or by
LMFA/LMCM/Bartlett/Brandywine/Gray,Seifert, on not less than 60 days' notice to
the other party to the Agreement, and may be terminated immediately upon the
mutual written consent of all parties to the Agreement.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, each Corporation and LMFA have adopted policies that
restrict securities trading in the personal accounts of portfolio managers and
others who normally come into advance possession of information on portfolio
transactions. These policies comply, in all material respects, with the
recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the fiscal years ended March 31, 1999 and 1998, the
portfolio turnover rates for Value Trust were 19.3% and 12.9%, respectively; the
portfolio turnover rates for Total Return Trust were 44.2% and 20.6%,
respectively; the portfolio turnover rates for Special Investment Trust were
47.8% and 29.8%, respectively; the portfolio turnover rates for American Leading
Companies were 47.6% and 51.4%, respectively; and the portfolio turnover rates
for Balanced Trust were 50.0% and 34.5%, respectively. For the period June 15,
1998 to March 31, 1999, the portfolio turnover rate for Small-Cap Value Trust
was 29.5% (annualized). For the fiscal years ended December 31, 1998 and 1997,
the portfolio turnover rates for Basic Value were ___% and ___%, respectively,
and the portfolio turnover rates for Financial Services Fund were ___% and ___%,
respectively.
- 58 -
<PAGE>
Under the Advisory Agreement with each Fund, each Fund's adviser is
responsible for the execution of the Fund's portfolio transactions and must seek
the most favorable price and execution for such transactions, subject to the
possible payment, as described below, of higher brokerage commissions to brokers
who provide research and analysis. Each Fund may not always pay the lowest
commission or spread available. Rather, in placing orders for a Fund each Fund's
adviser also takes into account such factors as size of the order, difficulty of
execution, efficiency of the executing broker's facilities (including the
services described below), and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, each
Fund's adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to each Fund's adviser for its use, may
place orders with brokers who provide supplemental investment and market
research and securities and economic analysis and may pay to these brokers a
higher brokerage commission than may be charged by other brokers. Such services
include, without limitation, advice as to the value of securities; the
advisability of investing in, purchasing, or selling securities; advice as to
the availability of securities or of purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Such research and analysis may be useful to each Fund's adviser in connection
with services to clients other than the Fund whose brokerage generated the
service. LMFA's/Bartlett's/Brandywine's fee is not reduced by reason of its
receiving such brokerage and research services.
From time to time each Fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. Commissions
paid to Legg Mason will not exceed "usual and customary brokerage commissions."
Rule 17e-1 under the 1940 Act defines "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the over-the-counter
market, each Fund generally deals with responsible primary market-makers unless
a more favorable execution can otherwise be obtained.
For the fiscal years ended March 31, 1999, 1998 and 1997, Legg Mason
received $________, $3,120, and $0 from Value Trust, $______________, $1,134,
and $0 from Total Return Trust, and $_________________, $0, and $0,
respectively, from Special Investment Trust. Value Trust paid total brokerage
commissions of $ 432,152 $1,360,133, and $693,443, respectively; Total Return
Trust paid total brokerage commissions of $83,104, $477,779, and $386,786,
respectively; and Special Investment Trust paid total brokerage commissions of
$2,824,033, $1,333,903, and $1,066,917, respectively, during the fiscal years
ended March 31, 1999, 1998 and 1997.
For the fiscal years ended March 31, 1999, 1998 and 1997, American Leading
Companies paid total brokerage commissions of $365,317,644, $203,625, and
$120,631, respectively. Legg Mason received no brokerage commissions from
American Leading Companies for the same periods.
For the fiscal year ended March 31, 1999, and 1998 Balanced Trust paid
total brokerage commissions of $____________________ and $34,738 respectively.
For the period October 1, 1996 (commencement of operations) to March 31, 1997,
Balanced Trust paid total brokerage commissions of $23,144. Legg Mason received
no brokerage commissions from Balanced Trust for the same periods.
[For the period June 15, 1998 (commencement of operations) to March 31,
1999, Small-Cap Value paid total brokerage commissions of $________. Legg Mason
received no brokerage commissions from Small-Cap Value for that same period.]
For the fiscal years ended December 31, 1998 and 1997, Basic Value Fund
paid total brokerage commissions of $__________ and $__________, respectively;
and Financial Services Fund paid total brokerage commissions of $____________
and $_____________, respectively.
- 59 -
<PAGE>
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. Each Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. These procedures, among other things, limit
each Fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so that: a Fund together with all other registered investment
companies having the same adviser, may not purchase more than 25% of the
principal amount of the offering of such class . In addition, a Fund may not
purchase securities during the existence of an underwriting if Legg Mason is the
sole underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg Mason
from executing transactions on an exchange for its affiliates, such as the
Funds, unless the affiliate expressly consents by written contract. Each Fund's
Advisory Agreement expressly provides such consent.
Among the broker-dealers regularly used by each respective Fund during the
fiscal year ended March 31, 1999, Value Trust at that date owned shares of the
following parent companies: 1,654,000 shares of The Bear Stearns Companies, Inc.
at a market value of $84,961,000; Total Return Trust at that date owned shares
of the following parent companies: 397,000 shares of The Bear Stearns Companies,
Inc. at a market value of $20,382,000; Special Investment Trust at that date
owned shares of the following parent companies: 551,000 shares of The Bear
Stearns Companies, Inc. at a market value of $28,320,000. American Leading
Companies, Balanced Trust [Small-Cap Value, Basic Value and Financial Services
Fund] held no shares of their regular broker-dealers. Investment decisions for
each Fund are made independently from those of other funds and accounts advised
by LMFA, Bartlett, Brandywine or Gray, Seifert. 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.
Each Fund has adopted a Distribution and Shareholder Services Plan for
Primary Shares ("Primary Class Plans"), and Basic Value and Financial Services
Fund have also adopted a Distribution and Shareholder Services Plan for Class A
shares ("Class A Plans") which, among other things, permits the Fund to pay Legg
Mason fees for its services related to sales and distribution of Primary Shares
or Class A shares and the provision of ongoing services to holders of those
shares. Payments are made only from assets attributable to Primary Shares or
Class A shares. Under the Primary Class Plans, the aggregate fees may not exceed
an annual rate of each Fund's average daily net assets attributable to Primary
Shares as follows: 1.00% for Total Return Trust, Special Investment Trust,
American Leading Companies, Small-Cap Value, Basic Value and Financial Services
Fund, 0.75% for Balanced Trust and 0.95% for Value Trust. Distribution
activities for which such payments may be made include, but are not limited to,
compensation to persons who engage in or support distribution and redemption of
Shares, printing of prospectuses and reports for persons other than existing
shareholders, advertising, preparation and distribution of sales literature,
overhead, travel and telephone expenses, all with respect to Primary Shares
only. Under the Class A Plans, the aggregate fees may not exceed an annual rate
of 0.25% of Basic Value's and Financial Services Fund's average daily net assets
attributable to Class A shares.
- 60 -
<PAGE>
The Primary Class Plans were most recently approved by the shareholders of
Value Trust on July 20, 1984 and on July 17, 1986 for both the Total Return
Trust and Special Investment Trust. The Primary Class Plans were approved by
LMFA, as sole shareholder of: American Leading Companies, on August 2, 1993 and
Balanced Trust, on October 7, 1996 [Small-Cap Value on _________, and Basic
Value and Financial Services on _______, 1999]. The Primary Class Plans of Value
Trust, Total Return Trust and Special Investment Trust were amended, effective
July 1, 1993, to make clear that, of the aggregate 1.00% fees with respect to
Total Return Trust and Special Investment Trust, 0.75% is paid for distribution
services and 0.25% is paid for ongoing services to shareholders; and with
respect to Value Trust, 0.70% is paid for distribution services and 0.25% is
paid for ongoing services to shareholders. The amendments also specify that each
Fund may not pay more in cumulative distribution fees than 6.25% of total new
gross assets attributable to Primary Shares, plus interest, as specified in the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD"). Legg Mason may pay all or a portion of the fee to its financial
advisors. Continuation of the Primary Class Plans was most recently approved on
November 13, 1998 by the Board of Directors of each respective Fund including a
majority of the directors who are not "interested persons" of each Fund as that
term is defined in the 1940 Act and who have no direct or indirect financial
interest in the operation of the Plan or the Underwriting Agreement ("12b-1
Directors").
With respect to Primary Shares, Legg Mason has agreed to waive its fees
for Total Return Trust, American Leading Companies, Balanced Trust and Small-Cap
Value as described under "The Funds' Investment Adviser/Manager."
Each Class A Plan was adopted, as required by Rule 12b-1 under the 1940
Act, by a vote of the 12b-1 Directors on ______________, 1999. The Class A Plans
were approved by the sole shareholder of the Funds on ________________.
In approving the establishment or continuation of each Plan, in accordance
with the requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that each Plan would benefit the respective Fund and its
Primary Class or Class A shareholders. The directors considered, among other
things, the extent to which the potential benefits of the Plan to the Fund's
Primary Class or Class A shareholders could offset the costs of the Plan; the
likelihood that the Plan would succeed in producing such potential benefits; the
merits of certain possible alternatives to the Plan; and the extent to which the
retention of assets and additional sales of each Fund's Primary Shares or Class
A shares would be likely to maintain or increase the amount of compensation paid
by that Fund to the adviser/LMFA.
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/LMFA 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 Class A shares and to maintain and enhance the
level of services they provide to each Fund's Primary Class and Class A
shareholders. These efforts, in turn, could lead to increased sales and reduced
redemptions, eventually enabling each Fund to achieve economies of scale and
lower per share operating expenses. Any reduction in such expenses would serve
to offset, at least in part, the additional expenses incurred by each Fund in
connection with its Plan. Furthermore, the investment management of each Fund
could be enhanced, as net inflows of cash from new sales might enable its
portfolio manager to take advantage of attractive investment opportunities, and
reduced redemptions could eliminate the potential need to liquidate attractive
securities positions in order to raise the funds necessary to meet the
redemption requests.
- 61 -
<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 or Class A 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, 1999, 1998 and 1997, Value Trust paid
Legg Mason $60,265,880, $32,477,903, and $16,863,796, 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
$6,436,510, $5,232,873, and $3,120,818, respectively; Special Investment Trust
paid Legg Mason $15,329,259, $12,733,789, and $8,965,838, respectively; and
American Leading Companies paid Legg Mason $2,206,663, $1,587,015, and $857,522,
respectively, in fees under the Plan. For the fiscal year ended March 31, 1999
and 1998, Balanced Trust paid Legg Mason $419,683, and $215,415 in fees under
the Plan and for the period October 1, 1996 (commencement of operations) to
March 31, 1997, Balanced Trust paid distribution and service fees of $45,587
(prior to fees waived of $26,398). For the period June 15, 1998 (commencement of
operations) to March 31, 1999, Small-Cap Value paid distribution and service
fees of $ ______________.
- 62 -
<PAGE>
During the year ended March 31, 1999, Legg Mason incurred the following
expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total Special American Small
Return Investment Leading Balanced Cap Value
Value Trust Trust Trust Companies Trust Trust*
-------------------------------------------------------------------------
Compensation to
sales personnel $35,389,000 $3,987,000 $9,354,000 $1,268,000 $241,000 $144,000
Advertising $431,000 $149,000 $142,000 $92,000 $122,000 $108,000
Printing and
mailing of
prospectuses to
prospective
shareholders $586,000 $207,000 $219,000 $119,000 $171,000 $99,000
Other $12,467,000 $2,231,000 $4,492,000 $1,192,000 $855,000 $606,000
--------------------------------------------------------------------------
Total expenses $48,873,000 $6,574,000 $14,207,000 $2,671,000 $1,389,000 $957,000
==========================================================================
</TABLE>
* June 15, 1998 (commencement of operations) to March 31, 1999.
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
Shares.
CAPITAL STOCK INFORMATION
Value Trust has authorized capital of 500 million shares of common stock,
par value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special Investment
Trust has authorized capital of 150 million shares of common stock, par value
$0.001 per share. The Articles of Incorporation of Investors Trust authorize
issuance of 500 million shares of par value $.001 per share of American Leading
Companies, 250 million shares of par value $.001 per share of Balanced Trust,
100 million shares of par value $.001 per share of Small-Cap Value, three
hundred seventy five million shares of par value $.001 per share of Basic Value
and three hundred seventy five million shares of par value $.001 per share of
Financial Services Fund. Each corporation may issue additional series of shares.
Each Fund currently offers two Classes of Shares - Primary Shares and Navigator
Shares. Basic Value and Financial Services Fund each offers a third class of
shares: Class A shares. Each class represents interests in the same pool of
assets. A separate vote is taken by a Class of Shares of a Fund if a matter
affects just that Class of Shares. Each Class of Shares may bear certain
differing Class-specific expenses and sales charges, which may affect
performance.
Investors may obtain more information concerning the Navigator Class from
their financial advisor or any person making available to them shares of the
Primary Class or Class A, or by calling 1-800-822-5544.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts
02105, serves as custodian of each Fund's assets. Boston Financial Data
Services, P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent, and administrator of various shareholder services.
Legg Mason assists BFDS with certain of its duties as transfer agent and
receives compensation from BFDS for its services. Shareholders who request an
historical transcript of their account will be charged a fee based upon the
number of years researched. Each Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative costs.
- 63 -
<PAGE>
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036-1800, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
PricewaterhouseCoopers LLP, has been selected by the Directors to serve as
independent accountants for Value Trust, Total Return Trust Special Investment
Trust, Basic Value Fund and Financial Services Fund. _______________,
___________________, has been selected by the Directors to serve as independent
auditors for American Leading Companies Trust, Balanced Trust and Small-Cap
Value Trust.
FINANCIAL STATEMENTS
The Statement of Net Assets as of March 31, 1999; the Statements of
Operations for the year ended March 31, 1999; the Statements of Changes in Net
Assets for the years ended March 31, 1999 and 1998; the Financial Highlights for
all periods; the Notes to Financial Statements and the Report of the Independent
Accountants, each with respect to Value Trust, Total Return Trust and Special
Investment Trust, are included in the combined annual report for the year ended
March 31, 1999, and are hereby incorporated by reference in this Statement of
Additional Information.
The Statement of Net Assets as of December 31, 1998; the Statements of
Operations for the period ended December 31, 1998; the Statements of Changes in
Net Assets for the period ended December 31, 1988; the nine months ended
December 31, 1997 for Basic Value; and the year ended March 31, 1997 for Basic
Value; the Financial Highlights for all periods; the Notes to Financial
Statements and the Report of Independent Public Accountants, each with respect
to Basic Value and Financial Services Fund, are included in the combined annual
report for the year ended December 31, 1998, and are hereby incorporated by
reference in this Statement of Additional Information.
- 64 -
<PAGE>
Appendix A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
- -------------------------------------------------------------------------
RATINGS:
- --------
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
- ----------------------------------------------------------------
AAA-This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
- 65 -
<PAGE>
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
D-Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
- 66 -
<PAGE>
Legg Mason Investors Trust, Inc.
Part C. Other Information
Item 23.EXHIBITS
(a) (i) Articles of Incorporation (3)
(ii) Articles Supplementary (3)
(iii) Articles Supplementary (3)
(iv) Articles Supplementary (4)
(v) Articles of Amendment - filed herewith
(b) By-Laws as amended July 19, 1993 (3)
(c) Specimen security -- not applicable
(d) (i) Investment Advisory and Management Agreement -- American
Leading Companies Trust (3)
(ii) Investment Advisory Agreement -- Balanced Trust (3)
(iii) Advisory Agreement -- American Leading Companies Trust (3)
(iv) Management Agreement -- Balanced Trust (3)
(v) Advisory Agreement -- U.S. Small-Cap Value Trust (5)
(vi) Management Agreement -- U.S. Small-Cap Value Trust (5)
(vii) Form of Investment Advisory and Administration Agreement -
Basic Value Fund - filed herewith
(viii) Form of Sub-Advisory Agreement - Basic Value Fund - filed
herewith
(ix) Form of Investment Advisory and Administration Agreement -
Financial Services Fund - filed herewith
(x) Form of Sub-Advisory Agreement - Financial Services Fund - filed
herewith
(e) (i) Underwriting Agreement -- American Leading Companies Trust (3)
(ii) Amended Underwriting Agreement -- American Leading Companies Trust
(2)
(ii) Underwriting Agreement -- Balanced Trust (2)
(iii) Underwriting Agreement -- U.S. Small-Cap Value Trust (5)
(iv) Dealer Agreement with respect to Navigator Shares (2)
(v) Form of Distribution Agreement - Basic Value Fund - filed herewith
(vi) Form of Distribution Agreement - Financial Services Fund - filed
herewith
(f) Bonus, profit sharing or pension plans - none
(g) Custodian agreement (1)
(h) (i) Transfer Agent Agreement (1)
(ii) Credit Agreement (6)
(i) (i) Opinion and consent of counsel with respect to American Leading
Companies Trust (7)
(ii) Opinion and consent of counsel with respect to Balanced Trust
(2)
(iii) Opinion and consent of counsel with respect to U.S. Small-Cap
Value Trust (5)
(iv) Opinion and consent of Counsel with respect to Basic Value Fund
and Financial Services Fund - filed herewith
(j) Accountants' consent - filed herewith
(k) Financial statements omitted from Item 22 -- none
(l) Agreement for providing initial capital (3)
(m) (i) Plan pursuant to Rule 12b-1 -- American Leading
Companies Trust (3)
(ii) Amended Plan pursuant to Rule 12b-1 -- American Leading
Companies Trust (2)
(iii) Plan pursuant to Rule 12b-1 -- Balanced Trust (2)
(iv) Plan pursuant to Rule 12b-1 -- U.S. Small-Cap Value Trust (5)
(v) Form of Distribution Plan - Basic Value Fund Class A shares -
filed herewith
(vi) Form of Distribution Plan - Basic Value Fund Primary Class
shares - filed herewith
(vii) Form of Distribution Plan - Financial Services Fund Class A
shares - filed herewith
(viii) Form of Distribution Plan - Financial Services Fund Primary
Class shares - filed herewith
(n) Financial Data Schedule - not applicable
<PAGE>
(o) (i) Form of Plan Pursuant to Rule 18f-3 - Basic Value Fund - filed
herewith
(ii) Form of Plan Pursuant to Rule 18f-3 - Financial Services Fund -
filed herewith
(1) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 4 to the registration statement, SEC File No. 33-62174, filed May
17, 1996.
(2) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 5 to the registration statement, SEC File No. 33-62174, filed July
31, 1996.
(3) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 6 to the registration statement, SEC File No. 33-62174, filed
January 31, 1997.
(4) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 9 to the registration statement, SEC File No. 33-62174, filed
March 18, 1998.
(5) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 10 to the Registration Statement, SEC File No. 33-62174, filed May
29, 1998.
(6) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 13 to the registration statement of Legg Mason Value Trust, Inc.,
SEC File No. 2-75766, filed May 28, 1999.
(7) Incorporated by reference to the corresponding exhibit of Post-Effective
Amendment No. 11 to the Registration Statement, SEC File No. 33-62174, filed May
28, 1999.
Item 24. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
None.
Item 25. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 6 to the registration statement, SEC File No.
33-62174, filed January 31, 1997.
Item 26. Business and Other Connections of Investment Adviser and Subadviser
-------------------------------------------------------------------
I. Legg Mason Fund Adviser, Inc. ("LMFA"), investment manager to
Balanced Trust, is a registered investment adviser incorporated on January 20,
1982. LMFA is engaged primarily in the investment advisory business. It serves
as manager and/or investment adviser to seventeen open-end investment companies
or portfolios. Information as to the officers and directors of the Manager is
included in its Form ADV filed June 24, 1998 with the Securities and Exchange
Commission (Registration Number 801-16958) and is incorporated herein by
reference.
II. Legg Mason Capital Management, Inc. ("LMCM"), also an 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 filed September 23, 1997 with the Securities and
Exchange Commission (Registration Number 801-18115) and is incorporated herein
by reference.
<PAGE>
III. Bartlett & Co. ("Bartlett"), investment adviser to Balanced Trust
and investment sub-adviser to Basic Value Fund, 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 12, 1999 with the
Securities and Exchange Commission (Registration Number 801-21) and is
incorporated herein by reference.
IV. Brandywine Asset Management, Inc. ("Brandywine"), investment
adviser to Small-Cap Value, is a registered investment adviser incorporated on
May 26, 1986. Information as to the officers and directors of Brandywine is
included in its Form ADV filed April 30, 1999 with the Securities and Exchange
Commission (Registration Number 801-27797 ) and is incorporated herein by
reference.
IV. Gray, Seifert & Co., Inc. ("Gray, Seifert"), investment sub-adviser
to Financial Services Fund, is a registered investment adviser incorporated on
January 2, 1980. Information as to the officers and directors of Gray, Seifert
is included in its Form ADV filed June 24, 1998 with the SEC (registration
number 801-15065) and is incorporated herein by reference.
Item 27. 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
Legg Mason Focus Trust, Inc.
Legg Mason Light Street Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each director
and officer of the Registrant's principal underwriter, Legg Mason Wood
Walker, Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
----------------- -------------------- ------------
Raymond A. Mason Chairman of the
Board None
John F. Curley, Jr. Retired Vice Chairman Chairman of
of the Board the Board and
Director
James W. Brinkley President and None
Director
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
----------------- -------------------- ------------
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice President and
President and Director Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
----------------- -------------------- ------------
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
Joseph Sullivan Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Seth J. Lehr Senior Vice None
173 5 Market St President
Philadelphia, PA 19103
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
----------------- -------------------- ------------
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
----------------- -------------------- ------------
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
----------------- -------------------- ------------
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an affiliated
person of the Registrant or an affiliated person of such an affiliated person.
Item 28. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105-1713
Item 29. Management Services
- -------- -------------------
None.
Item 30. Undertakings
------------
None.
<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 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 2nd day of July, 1999.
Legg Mason Investors Trust, Inc.
By:/s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 12 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
- --------- ----- ----
Chairman of the Board
/s/John F. Curley, Jr.* and Director July 2, 1999
- -----------------------------
John F. Curley, Jr.
/s/Edward A. Taber, III President and Director July 2, 1999
- -----------------------------
Edward A. Taber, III
/s/Richard G. Gilmore* Director July 2, 1999
- -----------------------------
Richard G. Gilmore*
/s/Arnold L. Lehman* Director July 2, 1999
- -----------------------------
Arnold L. Lehman*
/s/Jill E. McGovern* Director July 2, 1999
- -----------------------------
Jill E. McGovern*
/s/T.A. Rodgers* Director July 2, 1999
- -----------------------------
T. A. Rodgers*
/s/Marie K. Karpinski Vice President July 2, 1999
- ----------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
May 8, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of the following investment companies:
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, KATHI D. BAIR, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and
lawful attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, any Registration
Statements on Form N-1A, all Pre-Effective Amendments to any Registration
Statements of the Funds, any and all subsequent Post-Effective Amendments to
said Registration Statements, any supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933 and the Investment Company Act of 1940, all
related requirements of the Securities and Exchange Commission and all
requirements of appropriate states and territories. I hereby ratify and confirm
all that said attorney-in-fact or their substitutes may do or cause to be done
by virtue hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
- --------- ----
/s/ Richard G. Gilmore May 8, 1998
- --------------------------
Richard G. Gilmore
/s/ T. A. Rodgers May 8, 1998
- --------------------------
T. A. Rodgers
/s/ Charles F. Haugh May 8, 1998
- --------------------------
Charles F. Haugh
/s/ Arnold L. Lehman May 8, 1998
- --------------------------
Arnold L. Lehman
/s/ Jill E. Mcgovern May 8, 1998
- --------------------------
Jill E. Mcgovern
/s/ Edward A. Taber, III May 8, 1998
- --------------------------
Edward A. Taber, III
/s/ Edmund J. Cashman, Jr. May 8, 1998
- --------------------------
Edmund J. Cashman, Jr.
/s/ John F. Curley, Jr. May 8, 1998
- --------------------------
John F. Curley, Jr.
/s/ Raymond A. Mason May 8, 1998
- --------------------------
Raymond A. Mason
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON INVESTORS TRUST, INC.
FIRST: The Board of Directors of Legg Mason Investors Trust, Inc., a
Maryland corporation ("Corporation") organized on May 5, 1993, has, by action on
June 28, 1999, changed the name of the class of shares heretofore known as "Legg
Mason American Leading Companies Trust, Class A shares" to "Legg Mason American
Leading Companies Trust, Primary Class shares;" changed the name of the class of
shares heretofore known as "Legg Mason American Leading Companies Trust, Class Y
shares" to "Legg Mason American Leading Companies Trust, Navigator Class
shares;" changed the name of the class of shares heretofore known as "Legg Mason
Balanced Trust, Class A shares" to "Legg Mason Balanced Trust, Primary Class
shares;" changed the name of the class of shares heretofore known as "Legg Mason
Balanced Trust, Class Y shares" to "Legg Mason Balanced Trust, Navigator Class
shares;" changed the name of the class of shares heretofore known as "Legg Mason
U.S. Small-Capitalization Value Trust, Class A shares" to "Legg Mason U.S.
Small-Capitalization Value Trust, Primary Class shares;" and changed the name of
the class of shares heretofore known as "Legg Mason U.S. Small-Capitalization
Value Trust, Class Y shares" to "Legg Mason U.S. Small-Capitalization Value
Trust, Navigator Class shares."
SECOND: The Board has, by action on June 28, 1999, increased the aggregate
number of shares of capital stock that the Corporation has authority to issue
from one billion (1,000,000,000) to one billion six hundred million
(1,600,000,000) shares. The par value of the shares of capital stock of the
Corporation remains one tenth of one cent ($0.001) per share. Immediately before
the increase in the aggregate number of authorized shares and the
classification, designation and renamings described herein, the aggregate par
value of all of the authorized shares was one million (1,000,000) dollars; as
increased, the aggregate par value of all of the shares is one million six
hundred thousand (1,600,000) dollars.
<PAGE>
THIRD: The Board has, by action on June 28, 1999, under authority
contained in the Corporation's charter, created and established two new series
of stock of the Corporation, one such series to be known as Legg Mason Basic
Value Fund, and the other such series to be known as Legg Mason Financial
Services Fund.
One hundred fifty million (150,000,000) shares of previously authorized,
but previously unissued and unclassified, capital stock of the Corporation and
two hundred twenty five million (225,000,000) shares of capital stock that the
Corporation is newly authorized to issue have been classified by the Board under
authority contained in the Corporation's charter as the series to be known as
Legg Mason Basic Value Fund. Of these three hundred seventy five million
(375,000,000) shares, the Board has designated one hundred twenty five million
(125,000,000) shares as Legg Mason Basic Value Fund, Class A shares, one hundred
twenty five million (125,000,000) shares as Legg Mason Basic Value Fund, Primary
Class shares, and one hundred twenty five million (125,000,000) shares as Legg
Mason Basic Value Fund, Navigator Class shares.
Three hundred seventy five million (375,000,000) shares of capital stock
that the Corporation is newly authorized to issue have been classified by the
Board under authority contained in the Corporation's charter as the series to be
known as Legg Mason Financial Services Fund. Of these three hundred seventy five
million (375,000,000) shares, the Board has designated one hundred twenty five
million (125,000,000) shares as Legg Mason Financial Services Fund, Class A
shares, one hundred twenty five million (125,000,000) shares as Legg Mason
Financial Services Fund, Primary Class shares, and one hundred twenty five
million (125,000,000) shares as Legg Mason Financial Services Fund, Navigator
Class shares.
FOURTH: Each Class A, Primary Class and Navigator Class share of each of
Legg Mason Basic Value Fund and Legg Mason Financial Services Fund (each, a
"Series") shall represent investment in the same pool of assets as every other
share of its respective Series and shall have the same preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as every other share of
its respective Series, except as provided in the Corporation's Articles of
Incorporation and as set forth below:
-2-
<PAGE>
(1) The net asset values of Class A, Primary Class and Navigator Class
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 U.S. Securities and Exchange Commission
("SEC") rule or order and as the Board shall deem appropriate;
(c) All other fees and expenses applicable to a Series shall be
charged to all classes of that Series, in the proportion that the
net asset value of that class bears to the net asset value of that
Series, except as the SEC may otherwise require;
(2) Dividends and other distributions shall be paid on Class A, Primary
Class and Navigator Class shares at the same time. The amounts of all
dividends and other distributions shall be calculated separately for Class
A, Primary Class and Navigator Class 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 shall deem
appropriate;
(c) All other fees and expenses applicable to a Series shall be
charged to each class of that Series, in the proportion that the
net asset value of that class bears to the net asset value of that
Series, as appropriate, except as the SEC may otherwise require;
(3) Each class of a Series shall vote separately on matters pertaining
only to that class, as the directors shall from time to
-3-
<PAGE>
time determine. On all other matters, all classes of a Series shall vote
together, and every share of a Series, regardless of class, shall have an
equal vote with every other share of that Series.
FIFTH: 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.
SIXTH: The amendments contained herein were approved by a majority of the
entire Board of Directors of the Corporation. The changes in name and
designation made herein are limited to changes expressly permitted by Section
2-605(a)(4) of the Maryland Corporations and Associations Code to be made
without action by the stockholders of the Corporation.
SEVENTH: The total number of shares of capital stock that the Corporation
has authority to issue has been increased by the Board of Directors in
accordance with Section 2-105(c) of the Maryland Corporations and Associations
Code.
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Investors
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation, and further states under the penalties of perjury that, to
the best of her knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Dated: June 30, 1999 LEGG MASON INVESTORS TRUST, INC.
By: /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President
Attest: /s/ W. Shane Hughes
-------------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 30th day of June, 1999.
/s/ Laura V. Atwater
- --------------------
Notary Public
FORM OF
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
This INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT ("Agreement") is
made this ___ day of ______, 1999, by and between Legg Mason Investors Trust,
Inc., a Maryland corporation (the "Corporation"), on behalf of Legg Mason Basic
Value Fund ("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 (the
"1940 Act"), currently consisting of one portfolio; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
THEREAS, 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 the Manager 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
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 goals and policies of the Fund. The Manager 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
<PAGE>
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 from and to brokers and dealers 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 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 or 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, including
compensation, in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Sub-Advisory Agreement") with
an investment sub-adviser in which the Manager delegates to such investment
sub-adviser any or all of its duties specified in Paragraph 3 above, provided
that such Sub-Advisory Agreement imposes on the investment sub-adviser bound
thereby all duties and conditions to which the Manager is subject hereunder, and
further provided that such Sub-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 maintain or 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 Fund, and further agrees to surrender promptly to the
Fund any of such records upon the Fund's request. The 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:
organizational expenses of the Fund; advisory fees; distribution fees; interest;
taxes; governmental fees; fees, voluntary assessments and other expenses
- 2 -
<PAGE>
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 relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying the Fund's shares for sale under applicable
federal and state law; expenses of preparing, setting in print, printing and
distributing prospectuses, reports, notices and dividends to the Fund's
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. Any and all expenses of the Fund paid by the
Manager shall be reimbursed by the Fund at such time or times agreed to by the
Fund and the Manager.
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 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
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
0.75% 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 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 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.
- 3 -
<PAGE>
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, nor to 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 term "net assets" shall have the
meaning ascribed to it 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.
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
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 sixty (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 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.
- 4 -
<PAGE>
15. Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
16. 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.
17. 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. 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
on and shall inure to the benefit of the parties hereto and their respective
successors.
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: _____________________________________
- 5 -
FORM OF
SUB-ADVISORY AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
AGREEMENT made this ___ day of ________, 1999 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 the Legg Mason Basic Value Fund
("Fund"), a series 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
Fund; 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 Adviser 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
_____________ 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 Adviser as investment adviser and approving this
Agreement;
<PAGE>
(d) The Corporation's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, and the 1940 Act (File No. 811-7692)
as filed with the Securities and Exchange Commission on ________ ___,
1999, 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 the 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, the 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, the 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 the 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 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 the Adviser.
(b) The Adviser will maintain or 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 has authorized any entity or person associated with
the Adviser which is a member of a national securities exchange to effect any
- 2 -
<PAGE>
transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 or 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,
including compensation, 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 the Adviser shall be free to render similar services to
others. It is understood that persons employed by the 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 the Adviser to engage in and devote time and
attention to other business 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, the 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 period 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, the 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 the Adviser will render to the
Manager and the Fund under this Agreement, the Manager will pay the Adviser a
fee, computed daily and paid monthly, at an annual rate equal to 60% of the fee
received by the Manager from the Fund, net of any waivers or reimbursements by
the Manager of its fee. Fees due to the Adviser hereunder shall be paid promptly
to the 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 the Manager or by the
Fund in connection with the performance of this Agreement; provided, that
nothing in this Agreement shall protect the Adviser against any liability to the
Manager, the Fund or its shareholders for 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
- 3 -
<PAGE>
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
________ ___, 1999, 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 ________ ___, 2001.
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 with respect
to the Fund of the Investment Advisory and Administration Agreement between
Manager and the Fund dated __________ ___, 1999 or upon the mutual written
consent of the Adviser, the Manager, and the Fund. Termination 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 constitution 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 on and shall inure to the
benefit of the parties hereto and their respective successors.
- 4 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON FUND ADVISER, INC.
By: ______________________________ By: ______________________________________
Attest: BARTLETT & CO.
By: ______________________________ By: ______________________________________
- 5 -
FORM OF
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
This INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT ("Agreement") is
made this ___ day of ______, 1999, by and between Legg Mason Investors Trust,
Inc., a Maryland corporation (the "Corporation"), on behalf of Legg Mason
Financial Services Fund ("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 (the
"1940 Act"), currently consisting of one 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 the Manager 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
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 goals and policies of the Fund. The Manager will place orders
pursuant to its investment determinations for the Fund either directly with the
<PAGE>
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 from and to brokers and dealers 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 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 or 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, including
compensation, in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Sub-Advisory Agreement") with
an investment sub-adviser in which the Manager delegates to such investment
sub-adviser any or all of its duties specified in Paragraph 3 above, provided
that such Sub-Advisory Agreement imposes on the investment sub-adviser bound
thereby all duties and conditions to which the Manager is subject hereunder, and
further provided that such Sub-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 maintain or 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 Fund, and further agrees to surrender promptly to the
Fund any of such records upon the Fund's request. The 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:
organizational expenses of the Fund; advisory fees; distribution fees; interest;
- 2 -
<PAGE>
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 relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying the Fund's shares for sale under applicable
federal and state law; expenses of preparing, setting in print, printing and
distributing prospectuses, reports, notices and dividends to the Fund's
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. Any and all expenses of the Fund paid by the
Manager shall be reimbursed by the Fund at such time or times agreed to by the
Fund and the Manager.
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 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
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
1.00% 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 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 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
- 3 -
<PAGE>
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, nor to 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 term "net assets" shall have the
meaning ascribed to it 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.
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
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 sixty (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 so long as this Agreement is effective or until such
notice is given.
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<PAGE>
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.
15. Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
16. 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.
17. 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. 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
on and shall inure to the benefit of the parties hereto and their respective
successors.
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
SUB-ADVISORY AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
AGREEMENT made this ___ day of ________, 1999 by and between Legg Mason
Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Gray, Seifert & Co.,
Inc. ("Adviser"), a New York corporation, each of which is registered as an
investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of the Legg Mason Financial Services Fund
("Fund"), a series 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
Fund; 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 Adviser 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
_____________ 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 Adviser as investment adviser and approving this
Agreement;
<PAGE>
(d) The Corporation's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, and the 1940 Act (File No. 811-7692)
as filed with the Securities and Exchange Commission on ________ ___,
1999, 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 the 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, the 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, the 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 the 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 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 the Adviser.
(b) The Adviser will maintain or 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 has authorized any entity or person associated with
the Adviser which is a member of a national securities exchange to effect any
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<PAGE>
transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 or 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,
including compensation, 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 the Adviser shall be free to render similar services to
others. It is understood that persons employed by the 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 the Adviser to engage in and devote time and
attention to other business 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, the 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 period 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, the 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 the Adviser will render to the
Manager and the Fund under this Agreement, the Manager will pay the Adviser a
fee, computed daily and paid monthly, at an annual rate equal to 60% of the fee
received by the Manager from the Fund, net of any waivers or reimbursements by
the Manager of its fee. Fees due to the Adviser hereunder shall be paid promptly
to the 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 the Manager or by the
Fund in connection with the performance of this Agreement; provided, that
nothing in this Agreement shall protect the Adviser against any liability to the
Manager, the Fund or its shareholders for 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
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<PAGE>
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
________ ___, 1999, 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 ________ ___, 2001.
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 with respect
to the Fund of the Investment Advisory and Administration Agreement between
Manager and the Fund dated __________ ___, 1999 or upon the mutual written
consent of the Adviser, the Manager, and the Fund. Termination 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 constitution 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 on and shall inure to the
benefit of the parties hereto and their respective successors.
- 4 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON FUND ADVISER, INC.
By: ______________________________ By: ______________________________________
Attest: GRAY, SEIFERT & CO., INC.
By: ______________________________ By: ______________________________________
- 5 -
FORM OF
DISTRIBUTION AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
This DISTRIBUTION AGREEMENT, made this __ day of ________________, 1999 by
and between Legg Mason Investors Trust, Inc., a Maryland corporation
("Corporation"), on behalf of Legg Mason Basic Value Fund ("Fund"), and Legg
Mason Wood Walker, Inc., a Maryland corporation ("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
of the Fund for sale to the public under the Securities Act of 1933 (the "1933
Act") and filed appropriate notices under 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, and
the Distributor accepts the appointment. 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 as are actually sold. The 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.
<PAGE>
(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 Conduct Rule
2830 of the National Association of Securities Dealers, Inc. ("NASD")
(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, as well as Shareholder 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, except for the limited purpose of determining the
time as of which Shares are to be priced, and then only if the agreement
expressly provides in writing that it shall so act.
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 Distribution Plans ("Plans") adopted by the Corporation
with respect to the Fund, as such Plans are 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 unless permitted under the rules of the NASD,
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
- 2 -
<PAGE>
additional information with respect to such 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 representative 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 the 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 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 as 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
- 3 -
<PAGE>
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, 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, or limit the offering of Shares, by written
notice to the Distributor at its principal office.
11. The Corporation shall not issue certificates representing 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.
- 4 -
<PAGE>
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 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, 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.
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, INC.
By: By: ______________________________________
- 5 -
FORM OF
DISTRIBUTION AGREEMENT
LEGG MASON INVESTORS TRUST, INC.
This DISTRIBUTION AGREEMENT, made this __ day of ________________, 1999 by
and between Legg Mason Investors Trust, Inc., a Maryland corporation
("Corporation"), on behalf of Legg Mason Financial Services Fund ("Fund"), and
Legg Mason Wood Walker, Inc., a Maryland corporation ("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
of the Fund for sale to the public under the Securities Act of 1933 (the "1933
Act") and filed appropriate notices under 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, and
the Distributor accepts the appointment. 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 as are actually sold. The 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.
<PAGE>
(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 Conduct Rule
2830 of the National Association of Securities Dealers, Inc. ("NASD")
(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, as well as Shareholder 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, except for the limited purpose of determining the
time as of which Shares are to be priced, and then only if the agreement
expressly provides in writing that it shall so act.
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 Distribution Plans ("Plans") adopted by the Corporation
with respect to the Fund, as such Plans are 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 unless permitted under the rules of the NASD,
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
- 2 -
<PAGE>
additional information with respect to such 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 representative 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 the 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 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 as 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
- 3 -
<PAGE>
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, 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, or limit the offering of Shares, by written
notice to the Distributor at its principal office.
11. The Corporation shall not issue certificates representing 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.
- 4 -
<PAGE>
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 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, 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.
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, INC.
By: By: ______________________________________
- 5 -
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, DC 20036
ARTHUR J. BROWN
(202) 778-9046
[email protected]
July 2, 1999
Legg Mason Investors Trust, Inc.
100 Light Street
Baltimore, MD 21202
Dear Sir or Madam:
Legg Mason Investors Trust, Inc. (the "Corporation") is a corporation
organized under the laws of the State of Maryland by Articles of Incorporation
dated May 5, 1993. You have requested our opinion as to certain matters
regarding the issuance of the newly designated Class A, Primary Class and
Navigator Class shares of common stock of the series of the Corporation listed
below during the time that Post-Effective Amendment No. 12 to the Corporation's
Registration Statement is effective and has not been superseded by another
post-effective amendment. These series of the Corporation are Legg Mason Basic
Value Fund and Legg Mason Financial Services Fund.
We have, as counsel, participated in various corporate and other matters
relating to the Corporation. We have examined certified copies of the Articles
of Incorporation and By-Laws, the minutes of meetings of the directors and other
documents relating to the organization and operation of the Corporation, and we
are generally familiar with its business affairs. Based upon the foregoing, it
is our opinion that the issuance of the Shares has been duly authorized by the
Corporation and that, when sold in accordance with the Corporation's Articles of
Incorporation, By-Laws and the terms contemplated by Post-Effective Amendment
No. 12 to the Corporation's Registration Statement, the Shares will have been
legally issued, fully paid and nonassessable by the Corporation.
<PAGE>
Legg Mason Investors Trust, Inc.
July 2, 1999
Page 2
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 12 to the Corporation's Registration Statement on
Form N-1A (File No. 33-62174) being filed with the Securities and Exchange
Commission. We also consent to the reference to our firm in the Statement of
Additional Information filed as part of the Registration Statement.
Sincerely,
KIRKPATRICK & LOCKHART LLP
/s/ Arthur J. Brown
--------------------
Arthur J. Brown
CONSENT OF INDEPENDENT ACCOUNTANTS
-------
We consent to the incorporation by reference in this Post-Effective Amendment
No. 12 (File No. 33-62174) under the Securities Act of 1933 and Amendment No. 13
(File No. 811-7692) under the Investment Company Act of 1940 to the Registration
Statement on Form N-1A of the Legg Mason Equity Funds of our report dated
February 5, 1999 on our audits of the financial statements and financial
highlights of Bartlett Basic Value Fund and Bartlett Financial Services Fund
(comprising two portfolios of Bartlett Capital Trust) as of December 31, 1998
and of our report dated April 30, 1999 on our audits of the financial statements
and financial highlights of Legg Mason Value Trust, Inc., Legg Mason Total
Return Trust, Inc. and Legg Mason Special Investment Trust, Inc. as of March 31,
1999 and for the respective periods then ended, which reports are included in
the Annual Reports to Shareholders.
We also consent to the reference to our firm under the captions "Financial
Highlights" in each Prospectus and "The Funds' Independent Accountants/Auditors"
in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 2, 1999
FORM OF
DISTRIBUTION PLAN OF
LEGG MASON INVESTORS TRUST, INC.
CLASS A SHARES
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 a _____
Series of shares of common stock of the Corporation: Legg Mason Basic Value Fund
(the "Fund");
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. The Fund shall pay to Legg Mason, as compensation for ongoing
services provided to the investors in Class A Shares of the Fund, a service fee
at the rate of 0.25% on an annualized basis of the average daily net assets
attributable to Class A Shares of the Fund, such fees to be calculated and
accrued daily and paid monthly or at such other intervals as the Board shall
determine.
B. The Corporation may pay a service fee to Legg Mason at a lesser
rate than the fee specified in paragraph 1.A of this Plan, as agreed upon by the
Board and Legg Mason and as approved in the manner specified in paragraph 3 of
this Plan. The service fee payable hereunder is payable without regard to the
aggregate amount that may be paid over the years, provided that, so long as the
limitations set forth in Conduct Rule 2830 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
<PAGE>
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 take effect on _________ ___, 1999 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.
4. 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 "service activities," as defined in this
paragraph 4, to the Board in support of the service fee payable hereunder.
For purposes of this Plan, "service activities" shall mean activities
covered by the definition of "service fee" contained in Conduct Rule 2830 of the
NASD, 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 "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such service activities.
5. 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.
6. After the issuance of Class A Shares of the Fund, this Plan may not be
amended to increase materially the amount of service fees provided for in
paragraph 1.A. 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 Fund,
and no material amendment to the Plan shall be made unless such amendment is
approved in the manner provided for continuing approval in paragraph 3 hereof.
7. 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.
8. 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
- 2 -
<PAGE>
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: _________ ___, 1999 LEGG MASON INVESTORS TRUST, INC.
Attest:______________________________ By: __________________________________
By: _________________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: ________________________________
- 3 -
FORM OF
DISTRIBUTION PLAN OF
LEGG MASON INVESTORS TRUST, INC.
PRIMARY CLASS PLAN
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 a ______
Series of shares of common stock of the Corporation: Legg Mason Basic Value Fund
(the "Fund");
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. The Fund shall pay to Legg Mason, as compensation for Legg Mason's
services as principal underwriter of the Fund's Primary Class 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 Fund 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 to Primary Shares of the Fund, such fees 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 Conduct Rule 2830 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.
<PAGE>
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 take effect on _________ ___, 1999 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.
4. 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 ______ ___, 1999, by and between the
Corporation and Legg Mason, with respect to the Fund, that are not deemed
"service activities." As used herein, "distribution activities" also include
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 Conduct Rule
2830 of the NASD, 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.
- 2 -
<PAGE>
5. 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.
6. After the issuance of Primary Shares of the Fund, 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 Fund, and no
material amendment to the Plan shall be made unless such amendment is approved
in the manner provided for continuing approval in paragraph 3 hereof.
7. 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.
8. 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: _________ ___, 1999 LEGG MASON INVESTORS TRUST, INC.
Attest: __________________________ By: _________________________________
By: __________________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: __________________________________
- 3 -
FORM OF
DISTRIBUTION PLAN OF
LEGG MASON INVESTORS TRUST, INC.
CLASS A SHARES
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 a _____
Series of shares of common stock of the Corporation: Legg Mason Financial
Services Fund (the "Fund");
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. The Fund shall pay to Legg Mason, as compensation for ongoing
services provided to the investors in Class A Shares of the Fund, a service fee
at the rate of 0.25% on an annualized basis of the average daily net assets
attributable to Class A Shares of the Fund, such fees to be calculated and
accrued daily and paid monthly or at such other intervals as the Board shall
determine.
B. The Corporation may pay a service fee to Legg Mason at a lesser
rate than the fee specified in paragraph 1.A of this Plan, as agreed upon by the
Board and Legg Mason and as approved in the manner specified in paragraph 3 of
this Plan. The service fee payable hereunder is payable without regard to the
aggregate amount that may be paid over the years, provided that, so long as the
limitations set forth in Conduct Rule 2830 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
<PAGE>
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 take effect on _________ ___, 1999 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.
4. 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 "service activities," as defined in this
paragraph 4, to the Board in support of the service fee payable hereunder.
For purposes of this Plan, "service activities" shall mean activities
covered by the definition of "service fee" contained in Conduct Rule 2830 of the
NASD, 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 "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such service activities.
5. 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.
6. After the issuance of Class A Shares of the Fund, this Plan may not be
amended to increase materially the amount of service fees provided for in
paragraph 1.A. 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 Fund,
and no material amendment to the Plan shall be made unless such amendment is
approved in the manner provided for continuing approval in paragraph 3 hereof.
7. 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.
8. 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
- 2 -
<PAGE>
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: _________ ___, 1999 LEGG MASON INVESTORS TRUST, INC.
Attest:_________________________ By: ____________________________________
By: ____________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: ________________________________
- 3 -
FORM OF
DISTRIBUTION PLAN OF
LEGG MASON INVESTORS TRUST, INC.
PRIMARY CLASS PLAN
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 a ______
Series of shares of common stock of the Corporation: Legg Mason Financial
Services Fund (the "Fund");
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. The Fund shall pay to Legg Mason, as compensation for Legg Mason's
services as principal underwriter of the Fund's Primary Class 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 Fund 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 to Primary Shares of the Fund, such fees 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 Conduct Rule 2830 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.
<PAGE>
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 take effect on _________ ___, 1999 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.
4. 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 ______ ___, 1999, by and between the
Corporation and Legg Mason, with respect to the Fund, that are not deemed
"service activities." As used herein, "distribution activities" also include
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 Conduct Rule
2830 of the NASD, 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.
- 2 -
<PAGE>
5. 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.
6. After the issuance of Primary Shares of the Fund, 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 Fund, and no
material amendment to the Plan shall be made unless such amendment is approved
in the manner provided for continuing approval in paragraph 3 hereof.
7. 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.
8. 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: _________ ___, 1999 LEGG MASON INVESTORS TRUST, INC.
Attest: _______________________ By: ___________________________________
By: __________________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: __________________________________
- 3 -
FORM OF
MULTIPLE CLASS PLAN
LEGG MASON INVESTORS TRUST, INC.
Legg Mason Investors Trust, Inc. hereby adopts this Multiple Class Plan
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"), on behalf of Legg Mason Basic Value Fund (the "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
------------------------------------------------
1. CLASS A SHARES. Class A shares of the Fund are generally offered and
sold subject to an initial sales charge. This initial sales charge may be waived
for certain eligible purchasers and reduced for certain other eligible
purchasers.
Class A shares of the Fund are available to all investors except those
qualified to purchase Navigator Class shares.
The maximum sales charge is 4.75% of the public offering price for Class A
shares of the Fund.
Class A shares of the Fund which were purchased pursuant to the sale
charge waiver for purchases of $1 million or more are subject to a contingent
deferred sales charge ("CDSC") of 1.00% of net asset value of the Class A shares
of the Fund at the time of the purchase or sale, whichever is less, on shares
redeemed within one year of such purchase. Class A shares of the Fund held one
year or longer and Class A shares of the Fund acquired through reinvestment of
dividends or capital gains distributions on shares otherwise subject to this
Class A CDSC are not subject to the CDSC.
Class A shares of the Fund are subject to an annual service fee of 0.25%
of the average daily net assets of the Class A shares of the Fund under a plan
of distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
2. PRIMARY CLASS SHARES. Primary Class shares of the Fund are offered and
sold without imposition of an initial sales charge or a contingent deferred
sales charge.
Primary Class shares of the Fund are available to all investors except
those qualified to purchase Navigator Class shares.
Primary Class shares of the Fund are subject to an annual distribution fee
of up to 0.75% of the average daily net assets of the Primary Class shares of
the Fund and an annual service fee of 0.25% of the average daily net assets of
the Primary Class shares of the Fund under a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
<PAGE>
3. NAVIGATOR CLASS SHARES. Navigator Class shares are offered and sold
without imposition of an initial sales charge or a contingent deferred sales
charge and are not subject to any service or distribution fees.
Navigator Class shares of the Fund are available for purchase only by: (i)
institutional clients of Legg Mason Trust Company ("Trust Company") for which
Trust Company exercises discretionary investment management responsibility and
accounts of the customers with such Institutional Clients; (ii) qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million; (iii) clients of Bartlett & Co. who, as of December 19,
1996, were shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed
Income Fund and for whom Bartlett acts as an ERISA fiduciary; (iv) certain
institutions that were clients of Fairfield Group, Inc. as of February 28, 1999
for investment of their own monies and monies for which they act in a fiduciary
capacity; (v) Class Y shareholders of the Bartlett Funds on September __, 1999;
and (vi) any qualified retirement plan of Legg Mason, Inc. or any of its
affiliates. Navigator Class shares are also available for purchase by exchange,
as described below.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
----------------------------------
Certain expenses may be attributable to a particular Class of shares of
the Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the following other expenses:
(1) legal, printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, and proxies to current shareholders of a
specific Class;
(2) Blue Sky fees incurred by a specific Class of shares;
(3) SEC registration fees incurred by a specific Class of shares;
(4) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(5) Directors' fees incurred as a result of issues relating to a
specific Class of shares;
(6) litigation expenses or other legal expenses relating to a
specific Class of shares;
(7) transfer agent fees and shareholder servicing expenses
identified as being attributable to a specific Class; and
- 2 -
<PAGE>
(8) such other expenses actually incurred in a different amount by
a Class or related to a Class' receipt of services of a
different kind or to a different degree than another Class.
C. EXCHANGE PRIVILEGES:
--------------------
Class A, Primary Class and Navigator Class shares of the Fund may be
exchanged for shares of the corresponding Class of other Legg Mason funds, or
may be acquired through an exchange of shares of the corresponding Class of
other Legg Mason funds.
Legg Mason U.S. Government Money Market Portfolio, Legg Mason Cash Reserve
Trust and Legg Mason Tax Exempt Trust (collectively referred to as "Legg Mason
Money Market Funds") currently offer only one class of shares. So long as a Legg
Mason Money Market Fund offers only a single class of shares, Class A, Primary
Class and Navigator Class shares of the Fund may be exchanged for shares of that
Legg Mason Money Market Fund, or may be acquired through an exchange of shares
of that Money Market Fund. An investor exchanging from a Legg Mason Money Market
Fund may exchange only into the class of shares the investor is eligible to
purchase.
These exchange privileges may be modified or terminated by the Fund in
certain instances, and exchanges may be made only into funds that are legally
available for sale in the investor's state of residence.
D. CLASS DESIGNATION:
------------------
Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its Classes of shares.
E. ADDITIONAL INFORMATION:
-----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable Classes; provided, however, that none
of the terms set forth in any such prospectus shall be inconsistent with the
terms of the Classes contained in this Plan. The prospectus for the Fund
contains additional information about the Classes and the Fund's multiple class
structure.
F. DATE OF EFFECTIVENESS:
----------------------
This Multiple Class Plan is effective on _______________, 1999, provided
that this Plan shall not become effective with respect to the Fund unless such
action has first been approved by the vote of a majority of the Board of
Directors of Legg Mason Investors Trust, Inc. and by vote of a majority of those
directors who are not interested persons.
__________, 1999
- 3 -
FORM OF
MULTIPLE CLASS PLAN
LEGG MASON INVESTORS TRUST, INC.
Legg Mason Investors Trust, Inc. hereby adopts this Multiple Class Plan
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"), on behalf of Legg Mason Financial Services Fund (the "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
------------------------------------------------
1. CLASS A SHARES. Class A shares of the Fund are generally offered and
sold subject to an initial sales charge. This initial sales charge may be waived
for certain eligible purchasers and reduced for certain other eligible
purchasers.
Class A shares of the Fund are available to all investors except those
qualified to purchase Navigator Class shares.
The maximum sales charge is 4.75% of the public offering price for Class A
shares of the Fund.
Class A shares of the Fund which were purchased pursuant to the sale
charge waiver for purchases of $1 million or more are subject to a contingent
deferred sales charge ("CDSC") of 1.00% of net asset value of the Class A shares
of the Fund at the time of the purchase or sale, whichever is less, on shares
redeemed within one year of such purchase. Class A shares of the Fund held one
year or longer and Class A shares of the Fund acquired through reinvestment of
dividends or capital gains distributions on shares otherwise subject to this
Class A CDSC are not subject to the CDSC.
Class A shares of the Fund are subject to an annual service fee of 0.25%
of the average daily net assets of the Class A shares of the Fund under a plan
of distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
2. PRIMARY CLASS SHARES. Primary Class shares of the Fund are offered and
sold without imposition of an initial sales charge or a contingent deferred
sales charge.
Primary Class shares of the Fund are available to all investors except
those qualified to purchase Navigator Class shares.
Primary Class shares of the Fund are subject to an annual distribution fee
of up to 0.75% of the average daily net assets of the Primary Class shares of
the Fund and an annual service fee of 0.25% of the average daily net assets of
the Primary Class shares of the Fund under a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
<PAGE>
3. NAVIGATOR CLASS SHARES. Navigator Class shares are offered and sold
without imposition of an initial sales charge or a contingent deferred sales
charge and are not subject to any service or distribution fees.
Navigator Class shares of the Fund are available for purchase only by: (i)
institutional clients of Legg Mason Trust Company ("Trust Company") for which
Trust Company exercises discretionary investment management responsibility and
accounts of the customers with such Institutional Clients; (ii) qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million; (iii) clients of Bartlett & Co. who, as of December 19,
1996, were shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed
Income Fund and for whom Bartlett acts as an ERISA fiduciary; (iv) certain
institutions that were clients of Fairfield Group, Inc. as of February 28, 1999
for investment of their own monies and monies for which they act in a fiduciary
capacity; (v) Class Y shareholders of the Bartlett Funds on September __, 1999;
and (vi) any qualified retirement plan of Legg Mason, Inc. or any of its
affiliates. Navigator Class shares are also available for purchase by exchange,
as described below.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
----------------------------------
Certain expenses may be attributable to a particular Class of shares of
the Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the following other expenses:
(1) legal, printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, and proxies to current shareholders of a
specific Class;
(2) Blue Sky fees incurred by a specific Class of shares;
(3) SEC registration fees incurred by a specific Class of shares;
(4) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(5) Directors' fees incurred as a result of issues relating to a
specific Class of shares;
(6) litigation expenses or other legal expenses relating to a
specific Class of shares;
(7) transfer agent fees and shareholder servicing expenses
identified as being attributable to a specific Class; and
- 2 -
<PAGE>
(8) such other expenses actually incurred in a different amount by
a Class or related to a Class' receipt of services of a
different kind or to a different degree than another Class.
C. EXCHANGE PRIVILEGES:
--------------------
Class A, Primary Class and Navigator Class shares of the Fund may be
exchanged for shares of the corresponding Class of other Legg Mason funds, or
may be acquired through an exchange of shares of the corresponding Class of
other Legg Mason funds.
Legg Mason U.S. Government Money Market Portfolio, Legg Mason Cash Reserve
Trust and Legg Mason Tax Exempt Trust (collectively referred to as "Legg Mason
Money Market Funds") currently offer only one class of shares. So long as a Legg
Mason Money Market Fund offers only a single class of shares, Class A, Primary
Class and Navigator Class shares of the Fund may be exchanged for shares of that
Legg Mason Money Market Fund, or may be acquired through an exchange of shares
of that Money Market Fund. An investor exchanging from a Legg Mason Money Market
Fund may exchange only into the class of shares the investor is eligible to
purchase.
These exchange privileges may be modified or terminated by the Fund in
certain instances, and exchanges may be made only into funds that are legally
available for sale in the investor's state of residence.
D. CLASS DESIGNATION:
------------------
Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its Classes of shares.
E. ADDITIONAL INFORMATION:
-----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable Classes; provided, however, that none
of the terms set forth in any such prospectus shall be inconsistent with the
terms of the Classes contained in this Plan. The prospectus for the Fund
contains additional information about the Classes and the Fund's multiple class
structure.
F. DATE OF EFFECTIVENESS:
----------------------
This Multiple Class Plan is effective on _______________, 1999, provided
that this Plan shall not become effective with respect to the Fund unless such
action has first been approved by the vote of a majority of the Board of
Directors of Legg Mason Investors Trust, Inc. and by vote of a majority of those
directors who are not interested persons.
__________, 1999
- 3 -
