ANNUAL REPORT
OCTOBER 31, 1999
LEGG MASON
LIGHT STREET
TRUST, INC.
MARKET NEUTRAL TRUST
PRIMARY CLASS
[LEGG MASON LOGO APPEARS HERE]
LEGG
MASON
FUNDS
THE ART OF INVESTING(SM)
<PAGE>
TO OUR SHAREHOLDERS,
We are pleased to provide you with the annual report for the Legg Mason
Light Street Trust, Inc. for the period ended October 31, 1999. Since its
inception on February 16, 1999, the Trust's first fund, Market Neutral Trust
("Fund"), has grown to almost $18 million in net assets. At October 31, 1999,
the net asset value of the Fund was $9.60.
Batterymarch Financial Management, Inc., the portfolio manager for the
Fund, is responsible for the day-to-day management of the Fund. The Fund seeks
long-term capital appreciation while minimizing exposure to general U.S. equity
market volatility. We are very excited about the addition of this new fund to
the Legg Mason Family of Funds, and we welcome those of you who are shareholders
of the Fund.
On the following pages, the portfolio manager for the Fund reviews the
portfolio's structure and investment philosophy, and comments on the outlook for
the market neutral investment approach. As always, historical performance is not
indicative of future results, and the principal value of our holdings will
continue to fluctuate so that shares, when redeemed, may be worth more or less
than their original cost.
PricewaterhouseCoopers LLP, the Fund's independent accountants, has
completed its annual examination, and audited financial statements for the
period from inception to October 31, 1999, are included in this report.
With less than three weeks to go until the end of the century, attention
continues to focus on the Year 2000 issue. As you know, the Year 2000 issue is a
computer programming problem that affects the ability of computers to correctly
process dates of January 1, 2000, and beyond. Legg Mason has developed and
implemented a plan designed to ensure that the Year 2000 date change will have
no adverse impact on Legg Mason's ability to service clients.
Legg Mason's Year 2000 Project consists of four phases: the inventory,
assessment, remediation and testing phases, which have all been completed. We
have tested all of our internal applications with positive results.
Industry-wide testing sponsored by the Securities Industry Association ("SIA")
was conducted in March and April of 1999 with tremendous success. Legg Mason's
brokerage subsidiaries, as well as its primary vendors, actively participated in
this testing. The test revealed only four Year 2000 problems -- out of more than
250,000 test results -- and the industry quickly fixed those problems. Although
individual customer testing was not available, we have successfully tested
models representing all forms of accounts maintained at Legg Mason, including
the Trust's shareholder accounts.
We hope you will consider using the Fund for investments of additional
funds as they become available. Many of our shareholders regularly add to their
Fund holdings by authorizing automatic, monthly transfers from their bank
checking or Legg Mason brokerage accounts. Your Legg Mason Financial Advisor
will be happy to help you make these arrangements if you would like to purchase
shares in this convenient way.
Sincerely,
/s/ EDWARD A. TABER, III
Edward A. Taber, III
President
December 13, 1999
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Legg Mason Light Street Trust, Inc.
MARKET NEUTRAL TRUST
Performance for the Fund has improved since our report six months ago. For
the six months ended October 31, 1999, the Fund's return(1) was +1.4%, compared
with +2.3% for 90-day U.S. Treasury Bills.(2) The S&P 500 for this period was
+2.7%.
Monthly performance for the Fund turned positive in June in response to the
broadening of the equity market. Our bottom-up fundamental approach to stock
selection was rewarded in this investment environment; specifically, companies
that generated cash experienced price appreciation, on average, while companies
that had negative cash flow depreciated in value. Importantly, the Fund's return
remained positive in July, up 2.1% for the month, in the face of deteriorating
conditions for equities due to fears of additional Fed rate increases, earnings
pre-announcements, a weakening dollar and increasing Y2K uncertainty. The S&P
declined -3.1% in July.
For the longer term, we are disappointed with the Fund's performance since
inception. From February 16, 1999 through October, the Fund's return was -3.2%,
compared with +3.3% for 90-day U.S. Treasury Bills. Performance over this period
was influenced by negative stock selection in the Fund's first three months, a
period characterized by extreme style rotation and a difficult investment
environment for most market neutral managers.
INVESTMENT PROCESS
We believe that the key to added value is a disciplined investment process
that incorporates rigorous stock selection and effective risk control.
The market neutral process is specifically designed to consistently add
value over the longer term regardless of market direction, buying "long" the
stocks ranked most highly by our stock selection model and selling "short" those
ranked least favorably. A market neutral portfolio contains both long and short
equity positions, with each long position matched to a short position in the
same industry sector, in equal dollar amounts. This balance is intended to
effectively neutralize market risk.
The goal of a market neutral manager is to pick the right stocks on both
the long and short sides of the portfolio--to make money on both the winners and
the losers. Portfolio returns result from the performance of the long plus the
short positions. The portfolio also earns interest from the invested proceeds of
the short sales.
Our bottom-up quantitative approach models the thought process and
disciplines of a "smart" fundamental investor. We screen a broad universe of
stocks for liquidity. The resulting universe is
- ------------------
(1)Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share plus dividends and any capital gain
distributions. It assumes that dividends and distributions were reinvested at
the time they were paid. Past performance does not guarantee future results.
(2)Although the Fund uses the T-bill as a benchmark, an investment in the Fund
differs because T-bills, unlike the Fund, are backed by the full faith and
credit of the United States Government, have a fixed rate of return when held
to maturity, a short duration, no credit risk of losing capital, and little
or no potential for appreciation.
2
<PAGE>
analyzed in detail using Batterymarch Financial Management, Inc.'s proprietary,
multi-factor stock selection model.
Designed to encompass the best of both quantitative and fundamental
approaches, the model incorporates the broad dimensions typically used by
fundamental analysts: cash flow, earnings growth, expectations, value, technical
factors and corporate signals. Run daily, the model ranks each stock in the
universe on a sector-neutral basis and is designed so that no single dimension
or set of factors dominates, a distinguishing feature of our investment style.
In addition to rigorous stock selection, we seek to add value through a
disciplined investment process that incorporates risk control. We manage the
neutrality of the Fund through risk control procedures that include the
monitoring of forecast tracking error and the targeting of zero net sector
exposures. The Fund seeks to be both industry sector and market capitalization
neutral, with the "longs" and "shorts" within each sector in near-equal
proportions. The portfolio is fully invested at all times--with a beta of almost
zero to the U.S. equity market.
A market neutral portfolio is a high turnover portfolio by design,
requiring real-time position monitoring and careful and timely trade execution.
Trades for the Fund are executed through our performance-based basket-trading
strategy, which helps us to time trades to best advantage and to minimize
trading costs.
In summary, while we are disappointed with the Fund's inception-to-date
performance, we are pleased that more recent results have improved
substantially. We remain confident in our ability to pick stocks over the longer
term and continue to believe that the Fund can provide important diversification
for long-term investors.
Batterymarch Financial Management, Inc.
December 10, 1999
3
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON LIGHT STREET TRUST, INC.
PERFORMANCE COMPARISON OF A $10,000 INVESTMENT AS OF OCTOBER 31, 1999
The returns shown on this page are based on historical results and are not
intended to indicate future performance. The investment return and principal
value of an investment in the Fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in a fund's return, so that they
differ from actual year-to-year results. No adjustment has been made for any
income taxes payable by shareholders.
The following graph compares the Fund's total returns against that of a
closely matched broad-based securities market index. The lines illustrate the
cumulative total return of an initial $10,000 investment for the periods
indicated. The line for the Fund represents the total return after deducting all
Fund investment management and other administrative expenses and the transaction
costs of buying and selling portfolio securities. The line representing the
securities market index does not include any transaction costs associated with
buying and selling securities in the index or other administrative expenses.
Both the Legg Mason Fund's results and the indices' results assume reinvestment
of all dividends and distributions.
The Market Neutral Trust has two classes of shares: Primary Class and
Navigator Class. The Navigator Class of Market Neutral Trust has not commenced
operations.
MARKET NEUTRAL TRUST -- PRIMARY CLASS
[BAR CHART APPEARS HERE]
Cumulative
Total Return
- -------------------------------------------
Life of Class(+) -3.20%
- -------------------------------------------
(+) Inception Date -- February 16, 1999
- -------------------------------------------
Label Market Neutral US Treasury
1 2/16/99 10000 10000
2 2/28/99 9990 10015
3 3/31/99 9920 10053
4 4/30/99 9550 10090
5 5/31/99 9440 10129
6 6/30/99 9500 10167
7 7/31/99 9700 10206
8 8/31/99 9660 10247
9 9/30/99 9680 10287
10 10/31/99 9680 10329
-----------------------------------------
..... Market Neutral Trust Primary Class
_____ U.S. Treasury Bill 3-Month Index(1)
-----------------------------------------
- ----------------
(1)This is the Salomon Smith Barney 3-month U.S. Treasury Bill index, as
calculated by the Frank Russell Company.
4
<PAGE>
STATEMENT OF NET ASSETS
Legg Mason Light Street Trust, Inc.
October 31, 1999
(Amounts in Thousands)
MARKET NEUTRAL TRUST
Shares/Par Value
- --------------------------------------------------------------------------------
COMMON STOCKS AND EQUITY INTERESTS -- 99.4%
CAPITAL GOODS -- 6.5%
Borg-Warner Automotive, Inc. 2 $ 79
Commonwealth Industries, Inc. 6 64
Delphi Automotive Systems Corporation 10 158
Minnesota Mining and Manufacturing Company (3M) 1 105
Pentair, Inc. 2 90
Superior Industries International, Inc. 5 136
Tecumseh Products Company 3 158
The Manitowoc Company, Inc. 3 99
Tyco International Ltd. 2 72
United Technologies Corporation 3 169
-------
1,130
-------
COMMERCIAL SERVICES -- 2.6%
John H. Harland Company 6 116
U.S. Foodservice 4 85(A)
Valassis Communications, Inc. 4 174(A)
Wallace Computer Services, Inc. 4 84
-------
459
-------
CONSUMER DURABLES -- 3.6%
Cooper Tire & Rubber Company 2 39
Department 56, Inc. 5 88(A)
Fairfield Communities, Inc. 6 78(A)
National R.V. Holdings, Inc. 3 63(A)
NVR, Inc. 3 123(A)
Shaw Industries, Inc. 7 108
The Ryland Group, Inc. 6 128
-------
627
-------
CONSUMER NON-DURABLES -- 8.5%
Alberto-Culver Company 8 177
Anheuser-Busch Companies, Inc. 3 180
Authentic Fitness Corporation 4 70
Canandaigua Brands, Inc. 3 175(A)
Guess ?, Inc. 6 74(A)
IBP, inc. 5 120
International Home Foods, Inc. 4 84(A)
International Multifoods Corporation 6 123
Kimberly-Clark Corporation 3 208
Nabisco Holdings Corp. 5 179
Nike, Inc. 2 96
-------
1,486
-------
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
Legg Mason Light Street Trust, Inc.
MARKET NEUTRAL TRUST -- CONTINUED
Shares/Par Value
- --------------------------------------------------------------------------------
CONSUMER SERVICES-- 4.6%
Buffets Inc. 8 $ 75(A)
Central Newspapers, Inc. 4 159
Churchill Downs Incorporated 1 29(A)
Houghton Mifflin Company 4 182
Outback Steakhouse, Inc. 4 80(A)
RARE Hospitality International, Inc. N.M. 8(A)
Ruby Tuesday, Inc. 3 53
Speedway Motorsports, Inc. 2 87(A)
Tricon Global Restaurants, Inc. 2 96(A)
Univision Communications Incorporated 1 43(A)
-------
812
-------
ENERGY -- 4.1%
Amerada Hess Corporation 4 201
Apache Corporation 4 168
Mitchell Energy & Development Corp. 7 169
Vintage Petroleum, Inc. 10 107(A)
Western Gas Resources Incorporated 4 69
-------
714
-------
FINANCE -- 19.1%
Advanta Corp. 4 70
Amli Residential Properties Trust 5 98
Associates First Capital Corporation 2 58
AXA Financial, Inc. 4 128
CBL & Associates Properties, Inc. 8 171
Citigroup Inc. 4 211
Doral Financial Corporation N.M. 4
Federal Realty Investment Trust 8 149
General Growth Properties, Inc. 3 87
Glimcher Realty Trust 12 179
Golden State Bancorp Inc. 6 127(A)
Hudson United Bancorp 6 176
IRT Property Company 11 95
LaSalle Hotel Properties 8 94
MBNA Corporation 7 193
Morgan Stanley Dean Witter & Co. 2 177
Providian Financial Corporation 2 185
Rent-Way, Inc. 4 73(A)
The Chase Manhattan Corporation 2 184
The Goldman Sachs Group, Inc. 2 135
The John Nuveen Company 5 175
6
<PAGE>
Shares/Par Value
- --------------------------------------------------------------------------------
FINANCE --CONTINUED
The Macerich Company 6 $ 126
The Rouse Company 8 170
United Dominion Realty Trust, Inc. 10 114
Urban Shopping Centers, Inc. 7 170
-------
3,349
-------
HEALTH CARE -- 3.9%
AmeriSource Health Corporation 2 30(A)
Arrow International, Inc. 2 52
Cardinal Health, Inc. 1 56
Mallinckrodt Inc. 6 190
Mentor Corporation 3 66
ResMed Inc. 2 69(A)
Sybron International Corporation 7 169(A)
Wesley Jessen VisionCare, Inc. 2 59(A)
-------
691
-------
INDUSTRIAL SERVICES-- 1.6%
EMCOR Group, Inc. 4 82(A)
Fluor Corporation 2 72
Insituform Technologies, Inc. 3 60(A)
Offshore Logistics, Inc. 7 65(A)
-------
279
-------
INSURANCE -- 7.6%
Allmerica Financial Corporation 3 183
Ambac Financial Group, Inc. 3 173
AmerUs Life Holdings, Inc. 3 63
CIGNA Corporation 2 149
Delphi Financial Group, Inc. 6 189(A)
Professionals Group, Inc. 2 51(A)
RenaissanceRe Holdings Ltd. 5 182
The St. Paul Companies, Inc. 7 224
UICI 4 109(A)
-------
1,323
-------
METALS AND MINERALS -- 3.8%
Centex Construction Products, Inc. 2 75
Georgia-Pacific Corporation (Timber Group) 4 93
Georgia-Pacific Group 4 151
Johns Manville Corporation 6 69
USG Corporation 2 114
Weyerhaeuser Company 3 161
-------
663
-------
7
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
Legg Mason Light Street Trust, Inc.
MARKET NEUTRAL TRUST -- CONTINUED
Shares/Par Value
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES-- 6.9%
BMC Industries, Inc. 4 $ 26
Boise Cascade Corporation 3 117
Ferro Corporation 6 126
H.B. Fuller Company 2 88
Longview Fibre Company 12 139
Pittway Corporation 4 142
Shorewood Packaging Corporation 10 122(A)
The Geon Company 4 97
The Sherwin-Williams Company 9 199
Willamette Industries, Inc. 4 145
-------
1,201
-------
RETAIL -- 3.6%
bebe stores, inc. 1 26(A)
Charming Shoppes, Inc. 11 54(A)
Dayton Hudson Corporation 2 149
Ross Stores, Inc. 4 74
The Cato Corporation 5 59
The Talbots, Inc. 3 132
The TJX Companies 5 144
-------
638
-------
TECHNOLOGY -- 5.3%
Atmel Corporation 3 124(A)
AVX Corporation 3 116
Cohu, Inc. 5 91
Cypress Semiconductor Corp. 2 61(A)
Integrated Device Technology, Inc. 6 113(A)
International Rectifier Corporation 10 194(A)
National Semiconductor Corporation 2 57(A)
Teradyne, Inc. 2 69(A)
Vishay Intertechnology, Inc. 4 107(A)
-------
932
-------
TECHNOLOGY SERVICES-- 5.4%
Adobe Systems Incorporated 1 98
CACI International Inc. 5 103(A)
Inet Technologies, Inc. 2 69(A)
Oracle Corporation 2 86(A)
QRS Corporation 3 183(A)
SERENA Software, Inc. 7 131(A)
Sybase, Inc. 8 104(A)
8
<PAGE>
Shares/Par Value
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES--CONTINUED
Symantec Corporation 2 $ 86(A)
The Santa Cruz Operation, Inc. 6 76(A)
-------
936
-------
TRANSPORTATION -- 3.6%
Arkansas Best Corporation 13 180(A)
Midwest Express Holdings, Inc. 3 100(A)
Roadway Express, Inc. 6 125
Werner Enterprises, Inc. 6 102
Yellow Corporation 8 131(A)
-------
638
-------
UTILITIES -- 8.7%
Allegheny Energy, Inc. 6 178
Dominion Resources, Inc. 4 188
DTE Energy Company 6 183
Duke Energy Company 2 90
Energy East Corporation 8 189
FirstEnergy Corp. 7 185
NSTAR 4 151
Public Service Enterprise Group Incorporated 5 186
UtiliCorp United Inc. 8 177
-------
1,527
-------
Total Common Stocks and Equity Interests
(Identified Cost -- $17,235) 17,405
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.1%
State Street Bank & Trust Company
3.50%, dated 10/29/99, to be repurchased at $187 on
11/1/99 (Collateral: $190 Federal Home Loan Bank,
5.875%, due 8/15/01, value $192) $187 187
-------
Total Repurchase Agreement (Identified Cost-- $187) 187
- --------------------------------------------------------------------------------
Total Investments-- 100.5% (Identified Cost-- $17,422) 17,592
Deposits With Brokers for Securities Sold Short-- 98.4% 17,226
Receivable From Brokers for Securities Sold Short-- 2.0% 357
Securities Sold Short (Proceeds $18,088)-- (99.2)% (17,371)
Other Assets Less Liabilities-- (1.7)% (291)
-------
Net assets-- 100% $ 17,513
-------
9
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
Legg Mason Light Street Trust, Inc.
MARKET NEUTRAL TRUST -- CONTINUED
- --------------------------------------------------------------------------------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
1,824 shares outstanding $18,143
Undistributed net investment income 86
Accumulated net realized gain/(loss) on investments (1,603)
Unrealized appreciation/(depreciation) of investments 887
------
Net assets -- 100% $17,513
------
NET ASSET VALUE PER SHARE: $9.60
------
- --------------------------------------------------------------------------------
(A)Non-income producing.
N.M. - Not meaningful.
See notes to financial statements.
10
<PAGE>
SCHEDULE OF SECURITIES SOLD SHORT
Legg Mason Light Street Trust, Inc.
October 31, 1999
(Amounts in Thousands)
MARKET NEUTRAL TRUST
Shares/Par Value
- --------------------------------------------------------------------------------
COMMON STOCKS AND EQUITY INTERESTS SOLD SHORT -- 99.2%
CAPITAL GOODS -- 4.7%
Danaher Corporation 4 $ 179
Deere & Company 5 170
Flowserve Corporation 5 91
Kaydon Corporation 5 127
Lockheed Martin Corporation 3 50
Loral Space & Communications Ltd. 6 89(A)
Orbital Sciences Corporation 8 112(A)
------
818
------
COMMERCIAL SERVICES -- 2.5%
CoStar Group Inc. 2 39(A)
Moore Corporation Ltd. 17 138
MSC Industrial Direct Co., Inc. 1 12
Robert Half International Inc. 4 116(A)
StaffMark, Inc. 6 40(A)
The Ackerley Group, Inc. 5 84
------
429
------
CONSUMER DURABLES -- 4.2%
Harley-Davidson, Inc. 3 190
Newell Rubbermaid, Inc. 7 225
SPX Corporation 2 144(A)
The Goodyear Tire & Rubber Company 4 153
Universal Electronics Inc. 1 27(A)
------
739
------
CONSUMER NON-DURABLES-- 8.5%
American Greetings Corporation 4 91
Beringer Wine Estates Holdings, Inc. 2 68(A)
Campbell Soup Company 4 184
Flowers Industries, Inc. 11 181
Hershey Foods Corporation 4 182
H.J. Heinz Company 1 57
International Flavors & Fragrances Inc. 5 191
PepsiCo, Inc. 4 121
The Clorox Company 1 49
The Coca-Cola Company 4 212
Wm. Wrigley Jr. Company 2 160
------
1,496
------
11
<PAGE>
SCHEDULE OF SECURITIES SOLD SHORT-- CONTINUED
Legg Mason Light Street Trust, Inc.
MARKET NEUTRAL TRUST-- CONTINUED
Shares/Par Value
- --------------------------------------------------------------------------------
CONSUMER SERVICES -- 5.2%
Anchor Gaming 1 $ 67(A)
Carmike Cinemas, Inc. 8 97(A)
CKE Restaurants, Inc. 6 38
Landry's Seafood Restaurants, Inc. 12 93(A)
Mirage Resorts, Incorporated 13 185(A)
Paxson Communications Corporation 8 89(A)
Prime Hospitality Corp. 10 77(A)
Service Corporation International 7 62
Time Warner Inc. 3 202
------
910
------
ENERGY -- 4.5%
CONSOL Energy Inc. 13 153
Devon Energy Corporation 3 117
Evergreen Resources, Inc. 7 158(A)
Exxon Corporation 2 126
Nuevo Energy Company 4 53
Plains Resources Inc. 3 48(A)
Sunoco, Inc. 5 125
------
780
------
FINANCE -- 18.4%
AMCORE Financial, Inc. 8 191
BRE Properties, Inc. 8 173
Carolina First Corporation 4 89
CCB Financial Corporation 3 156
Centura Banks, Inc. 4 200
Chittenden Corporation 6 192
Citizens Banking Corporation 7 180
F&M National Corporation 7 198
First Union Corporation 1 60
F.N.B. Corporation 7 180
Home Properties of New York, Inc. 6 173
IndyMac Mortgage Holdings, Inc. 13 185
Investment Technology Group 2 42
Keystone Financial, Inc. 8 191
Meditrust Companies 17 140
People's Bank 6 152
Republic Security Financial Corporation 9 74
RFS Hotel Investors, Inc. 16 187
Ryder System, Inc. 9 188
Starwood Hotels & Resorts Worldwide, Inc. 6 126
Washington Mutual Inc. 4 151
------
3,228
------
12
<PAGE>
Shares/Par Value
- --------------------------------------------------------------------------------
HEALTH CARE -- 3.0%
Alkermes, Inc. 2 $ 85(A)
American Home Products Corporation 4 204
Cyberonics, Inc. 4 60(A)
Guilford Pharmaceuticals Inc. 5 71(A)
Triangle Pharmaceuticals, Inc. 6 98
------
518
------
INDUSTRIAL SERVICES -- 2.0%
Marine Drilling Companies, Inc. 5 87(A)
R&B Falcon Corporation 4 44(A)
Stolt Comex Seaway, S.A. 4 45(A)
Waste Management Inc. 5 84
Weatherford International, Inc. 3 85(A)
------
345
------
INSURANCE -- 6.6%
Aegon N.V. 1 110
Cincinnati Financial Corporation 5 168
Fidelity National Financial, Inc. 7 115
LandAmerica Financial Group, Inc. 6 113
Markel Corporation 1 156(A)
Ohio Casualty Corporation 8 134
The Progressive Corporation 2 194
Transatlantic Holdings, Inc. 2 173
------
1,163
------
METALS AND MINERALS -- 2.9%
Carpenter Technology Corporation 6 149
Cleveland-Cliffs Inc. 6 188
Texas Industries, Inc. 5 179
------
516
------
PROCESS INDUSTRIES -- 6.7%
Air Products and Chemicals, Inc. 6 151
Bowater Incorporated 3 179
Georgia Gulf Corporation 9 192
IMC Global Inc. 9 117
OM Group, Inc. 4 165
Optical Coating Laboratory, Inc. 1 53
Owens-Illinois, Inc. 3 72(A)
Potash Corporation of Saskatchewan Inc. 3 137
Praxair, Inc. 2 98
------
1,164
------
13
<PAGE>
SCHEDULE OF SECURITIES SOLD SHORT-- CONTINUED
Legg Mason Light Street Trust, Inc.
MARKET NEUTRAL TRUST-- CONTINUED
Shares/Par Value
- --------------------------------------------------------------------------------
RETAIL -- 4.0%
Central Garden & Pet Company 11 $ 78(A)
Gerald Stevens, Inc. 3 46(A)
J.C. Penney Company, Inc. 4 91
Kohl's Corporation 2 157(A)
O'Reilly Automotive, Inc. 3 122(A)
Rite Aid Corporation 5 41
Ruddick Corporation 2 38
ValueVision International, Inc. 2 66(A)
Williams Sonoma, Inc. 1 70(A)
------
709
------
TECHNOLOGY -- 6.9%
Advanced Micro Devices 4 73(A)
American Tower Corporation 8 152(A)
Cisco Systems, Inc. 3 215(A)
Compaq Computer Corp. 8 144
Ingram Micro Inc. 5 57(A)
Mentor Graphics Corporation 15 120(A)
NCR Corporation 3 103(A)
Quantum Corporation 5 77(A)
Silicon Valley Group, Inc. 5 58(A)
SpeedFam-IPEC, Inc. 6 66(A)
Storage Technology Corporation 4 65(A)
World Access, Inc. 7 86(A)
------
1,216
------
TECHNOLOGY SERVICES -- 6.9%
Autodesk, Inc. 4 75
Automatic Data Processing, Inc. 4 212
Cadence Design Systems, Inc. 7 103(A)
Cambridge Technology Partners, Inc. 6 66(A)
Computer Horizons Corp. 6 65(A)
Concentric Network Corporation 2 61(A)
iTurf Inc. 11 112(A)
J.D. Edwards & Company 2 53(A)
Networks Associates, Inc. 3 53(A)
PeopleSoft, Inc. 7 108(A)
Policy Management Systems Corporation 4 79(A)
Spyglass, Inc. 3 47(A)
Structural Dynamics Research Corporation 8 75(A)
Systems & Computer Technology Corporation 9 100(A)
------
1,209
------
14
<PAGE>
Shares/Par Value
- --------------------------------------------------------------------------------
TRANSPORTATION -- 3.6%
Eagle USA Airfreight, Inc. 3 $ 94(A)
Expeditors International of Washington, Inc. 4 135
Forward Air Corporation 2 50(A)
Norfolk Southern Corporation 6 154
Overseas Shipholding Group, Inc. N.M. 3
SEACOR SMIT Inc. 1 41(A)
US Airways Group, Inc. 6 154(A)
------
631
------
UTILITIES -- 8.6%
AGL Resources Inc. 11 194
Atmos Energy Corporation 4 88
Cinergy Corp. 6 181
Kinder Morgan Inc. 8 169
OGE Energy Corp. 8 184
RGS Energy Group Inc. 7 182
South Jersey Industries, Inc. 5 138
The Montana Power Company 6 173
The United Illuminating Company 4 191
------
1,500
------
Total Common Stocks and Equity Interests Sold Short (Proceeds--$18,088)$17,371
- --------------------------------------------------------------------------------
(A)Non-income producing.
N.M. - Not meaningful.
See notes to financial statements.
15
<PAGE>
STATEMENT OF OPERATIONS
Legg Mason Light Street Trust, Inc.
For the Period Ended October 31, 1999*
(Amounts in Thousands)
MARKET NEUTRAL TRUST
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $1) $ 230
Interest 525
-------
Total Income $ 755
EXPENSES:
Investment advisory fee 222
Distribution and service fees 117
Dividend expense for securities sold short 206
Audit and legal fees 28
Custodian fee 126
Offering expense 32
Registration expense 20
Reports to shareholders 18
Transfer agent and shareholder servicing expense 9
Trustees' fees 4
-------
782
Less fees waived (226)
-------
Total expenses, net of waivers 556
-------
NET INVESTMENT INCOME 199
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON:
Realized gain/(loss) on:
Investments 1,435
Securities sold short (3,038)
Change in unrealized appreciation/(depreciation) of:
Investments 170
Securities sold short 717
-------
887
-------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND SECURITIES SOLD SHORT (716)
- --------------------------------------------------------------------------------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $(517)
- --------------------------------------------------------------------------------
*Commencement of operations--February 16, 1999.
See notes to financial statements.
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Legg Mason Light Street Trust, Inc.
(Amounts in Thousands)
MARKET NEUTRAL TRUST
For the Period Ended
October 31, 1999(A)
- --------------------------------------------------------------------------------
CHANGE IN NET ASSETS:
Net investment income $ 199
Net realized loss on investments and securities sold short (1,603)
Change in unrealized appreciation/(depreciation) of investments
and securities sold short 887
---------
Change in net assets resulting from operations (517)
Distributions to shareholders from net investment income (145)
Change in net assets from Fund share transactions 18,165
---------
Change in net assets 17,503
NET ASSETS:
Beginning of period 10
---------
End of period $17,513
---------
Undistributed net investment income, end of period $ 86
- --------------------------------------------------------------------------------
(A)Commencement of operations--February 16, 1999.
See notes to financial statements.
--------------------------------------
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions
-------------------------------------------------- ---------------------------------------
From
Net Asset Net Net Realized Total From Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Period (Loss) Investments Operations Income Investments Distributions Period
- ------------------------------------------------------------------------------------------------------------------------------------
Period Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(A) $10.00 $.11B $(.43) $(.32) $(.08) $ -- $(.08) $9.60
Ratios/Supplemental Data
- --------------------------------------------------------------
Net
Investment Net Assets,
Expenses Income (Loss) Portfolio End of
Total to Average to Average Turnover Period
Return Net Assets Net Assets Rate (in thousands)
- --------------------------------------------------------------------
<C> <C> <C> <C> <C>
(3.20)%(B,C) 3.00%(B,D) 1.70%(B,D) 481.5%(D) $17,513
</TABLE>
(A) For the period February 16, 1999 (commencement of operations) to October 31,
1999.
(B) Net of fees waived pursuant to a voluntary expense limitation of 3.00% of
average daily net assets through July 31, 2000. If no fees had been waived
by Legg Mason Fund Adviser, Inc., the annualized ratio of expenses to
average net assets for the period, including dividend expense for securities
sold short, would have been 6.70%.
(C) Not annualized.
(D) Annualized.
See notes to financial statements.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Legg Mason Light Street Trust, Inc.
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Light Street Trust, Inc. ("Corporation"), consisting of the
Market Neutral Trust ("Fund"), is registered under the Investment Company Act of
1940, as amended, as an open-end, diversified investment company.
The Fund consists of two classes of shares: Primary Class, offered since
February 16, 1999; and Navigator Class, offered to certain institutional
investors. The Navigator Class has not commenced operations.
SECURITY VALUATION
Securities owned and securities sold short by the Fund for which market
quotations are readily available are valued at current market value. In the
absence of readily available market quotations, securities are valued at fair
value as determined by the Fund's Board of Directors. Where a security is traded
on more than one market, which may include foreign markets, the securities are
generally valued on the market considered by the Fund's adviser to be the
primary market. The Fund will value its foreign securities in U.S. dollars on
the basis of the then-prevailing exchange rates. Securities with remaining
maturities of 60 days or less are valued at amortized cost.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax purposes.
Bond discounts, other than original issue and zero-coupon bonds, are not
amortized. Dividend income and distributions to shareholders are allocated at
the class level and are recorded on the ex-dividend date. Dividends from net
investment income, if available, will be paid quarterly. Net capital gain
distributions, which are calculated at the Fund level, are declared and paid
after the end of the tax year in which the gain is realized. Distributions are
determined in accordance with federal income tax regulations, which may differ
from those determined in accordance with generally accepted accounting
principles; accordingly, reclassifications are made within the Fund's capital
accounts to reflect income and gains available for distribution under federal
income tax regulations.
SECURITY TRANSACTIONS
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis for
both financial reporting and federal income tax purposes. At October 31, 1999,
receivables for securities sold and payables for securities purchased were as
follows:
Receivable for Payable for
Securities Sold Securities Purchased
- ---------------------------------------------------
$1,107 $1,001
SHORT SALES
The Fund is authorized to engage in short-selling, which obligates the Fund
to replace the security borrowed by purchasing the security at current market
value sometime in the future. The Fund will incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund
18
<PAGE>
- --------------------------------------------------------------------------------
replaces the borrowed security. The Fund will realize a gain if the price
of the security declines between those dates. Until the Fund replaces the
borrowed security, the Fund will maintain a segregated account with cash
and/or liquid securities sufficient to cover its short position on a daily
basis. At October 31, 1999, the value of securities sold short amounted to
$17,371, against which collateral of $34,818 was held. The collateral
includes the Morgan Stanley deposit account, State Street Bank & Trust
repurchase agreement and the securities held long, as shown in the
statement of net assets. Dividends declared on securities sold short are
recorded on the ex-dividend date.
DEFERRED OFFERING AND ORGANIZATIONAL COSTS
Deferred offering costs of $32 were fully expensed at October
31, 1999. Organization costs of the Fund have been expensed as incurred. At
October 31, 1999, organization costs of the Fund of $90 have been borne by
LMFA.
FEDERAL INCOME TAXES
No provision for federal income or excise taxes is required since the
Fund intends to qualify as a regulated investment company and distribute
substantially all of its taxable income to its shareholders. At October 31,
1999, the Fund had capital loss carryforwards for federal income tax
purposes of $1,542 expiring in 2007.
USE OF ESTIMATES
Preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
2. INVESTMENT TRANSACTIONS:
For the period ended October 31, 1999, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds From Sales
-------------------------------------
$68,636 $52,836
At October 31, 1999, cost/proceeds, aggregate gross unrealized
appreciation and gross unrealized depreciation based on the cost of
securities for federal income tax purposes for the Fund were as follows:
Net
Cost/ Appreciation/
Proceeds Appreciation Depreciation (Depreciation)
- --------------------------------------------------------------------------------
Investments $17,297 $1,103 $(995) $108
Short Sales 18,088 1,319 (602) 717
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
3. REPURCHASE AGREEMENTS:
All repurchase agreements are fully collateralized by obligations
issued by the U.S. Government or its agencies, and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Fund's investment adviser,
acting under the supervision of its Board of Directors, reviews the value
of the collateral and the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential
risks.
4. TRANSACTIONS WITH AFFILIATES:
The Fund has a management agreement with Legg Mason Fund Adviser, Inc.
("LMFA"). Pursuant to its agreement, LMFA provides the Fund with investment
management and administrative services for which the Fund pays a fee of
1.90% of its average daily net assets, computed daily and payable monthly.
Under the terms of the investment management agreement, LMFA is required to
bear any expenses through July 31, 2000, including organization costs,
which would cause the Fund's ratio of expenses to average net assets to
exceed a certain set percentage as described below ("percentage").
Thereafter, through July 31, 2002, the Fund is required to reimburse LMFA
for the expenses, provided that average net assets have grown or expenses
have declined sufficiently to allow reimbursement without causing the
Fund's ratio of expenses to average net assets to exceed the percentage.
Through the period ended October 31, 1999, LMFA had waived $222, which is
subject to recapture.
LMFA has agreed to waive its fees in any month (exclusive of taxes,
interest, brokerage and extraordinary expenses) as shown in the following
chart:
Period Ended
October 31, 1999(*) At October 31, 1999
-------------- --------------
Expense Expense Limitation Management Management
Limitation Expiration Date Fees Waived Fees Payable
--------------------------------------------------------------------------
3.00% July 31, 2000 $222 $--
Batterymarch Financial Management, Inc. ("Advisor") serves as
investment advisor to the Fund. The Advisor is responsible for the actual
investment activity of the Fund. LMFA pays the Advisor a fee, computed
daily and payable monthly at an annual rate of 78.9% of the fee received by
LMFA, or 1.5% of the Fund's average daily net assets, not to exceed the fee
received by LMFA.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the
New York Stock Exchange, serves as distributor for the Fund. Legg Mason
receives an annual distribution fee and an annual service fee based on the
Fund's Primary Class's average daily net assets, computed daily and payable
monthly as follows:
Period Ended
October 31, 1999(*) At October 31, 1999
------------------------ ------------------------
Distribution Service Distribution and Service Distribution and Service
Fee Fee Fees Waived Fees Payable
---------------------------------------------------------------------------
0.75% 0.25% $4 $54
--------------
(*)Commencement of operations--February 16, 1999.
20
<PAGE>
- --------------------------------------------------------------------------------
No brokerage commissions were paid by the Fund to Legg Mason or its
affiliates during the period ended October 31, 1999.
Legg Mason also has an agreement with the Fund's transfer agent to
assist it with some of its duties. For this assistance, the transfer agent
paid Legg Mason a nominal amount (less than $1) for the period ended
October 31, 1999.
LMFA, Legg Mason and Batterymarch are corporate affiliates and wholly
owned subsidiaries of Legg Mason, Inc.
5. LINE OF CREDIT:
The Fund, along with certain other Legg Mason Funds, participates in a
$200 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each
participating fund is liable only for principal and interest payments
related to borrowings made by that Fund. Borrowings under the line of
credit bear interest at prevailing short-term interest rates. For the
period ended October 31, 1999, the Fund had no borrowings under the line of
credit.
6. FUND SHARE TRANSACTIONS:
At October 31, 1999, there were 450,000 shares authorized at $.001 par
value for the Fund. Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
--------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1999 2,508 $24,722 14 $137 (699) $(6,694) 1,823 $18,165
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF LEGG MASON LIGHT STREET TRUST, INC.:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Market Neutral Trust (one of the funds comprising Legg Mason Light Street Trust,
Inc., hereafter referred to as the "Fund") at October 31, 1999, and the results
of its operations, the changes in its net assets and the financial highlights
for the fiscal period presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at October 31, 1999, by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
December 2, 1999
22
<PAGE>
(This page intentionally left blank)
<PAGE>
INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
INVESTMENT ADVISER
Batterymarch Financial Management, Inc.
Boston, MA
BOARD OF DIRECTORS
John F. Curley, Jr., Chairman
Edward A. Taber, III, President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
G. Peter O'Brien
T. A. Rodgers
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, D.C.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR ACCOMPANIED BY
A PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-233
12/99
