LEGG MASON
FOCUS TRUST, INC.
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PROSPECTUS May 1, 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.
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TABLE OF CONTENTS
About the fund:
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<TABLE>
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1 Investment objective
3 Principal risks
4 Performance
5 Fees and expenses of the fund
6 Management
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About your investment:
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<TABLE>
<S> <C>
8 How to invest
9 How to sell your shares
10 Account policies
11 Services for investors
12 Dividends and taxes
13 Financial highlights
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LEGG MASON FOCUS TRUST, INC.
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INVESTMENT OBJECTIVE
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Investment Objective: maximum long-term capital appreciation with
minimum long-term risk to principal
Principal Investment Strategies:
The fund invests primarily in common stocks, preferred stocks and
securities convertible or exchangeable for common stocks, such as
convertible bonds and debentures. A convertible security entitles the
holder to receive the 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, such securities
ordinarily provide a stream of income with generally higher yields
than common stocks of the same or similar issuers, but lower than the
yield on non-convertible debt. 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. Any income realized will
be incidental to the fund's objective.
The fund's policy is to remain substantially invested in common stocks
or securities convertible into common stock.
The securities in which the fund invests will generally be listed on a
national stock exchange or traded on the over-the-counter market.
Under normal circumstances, the adviser expects to concentrate its
investments in a limited number of companies.
The selection of common stocks will be made through an investment
strategy referred to as "focus investing." Focus investing is an
investment strategy whereby companies (or businesses) are identified
and selected as eligible investments by examining all fundamental
quantitative and qualitative aspects of the company, its management
and its financial position as compared to its stock price. This is a
bottom up, fundamental method of analysis as opposed to technical
analysis, which is based on the study of trading volumes and prices.
Focus investing is based on the principle that a shareholder's return
from owning a stock is ultimately determined by the fundamental
economics of the underlying business. The adviser believes that a
focus investor should focus on the long-term economic progress of the
investment and disregard short-term nuances. The fund will only invest
in those companies which, in the adviser's opinion, are undervalued at
the time of purchase.
Legg Mason Focus Trust 1
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The portfolio manager sells securities when they have realized what
the manager believes is their potential value or when the portfolio
manager believes that they are not likely to achieve that value in a
reasonable period of time.
For temporary defensive purposes, the fund may temporarily invest up
to 100% of its assets in short-term U.S. Government securities, bank
certificates of deposit, prime commercial paper and other high quality
short-term fixed income securities and repurchase agreements with
respect to those securities. In addition, the fund may hold cash
reserves, when necessary, for anticipated securities purchases,
shareholder redemptions or temporarily during periods when the adviser
believes prevailing market conditions call for a defensive posture.
The fund may not achieve its investment objective when so invested.
2 Legg Mason Focus Trust
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PRINCIPAL RISKS
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An investment in the fund is not guaranteed; investors may lose money
by investing in the fund. The principal risks of investing in the fund
are described below. There is no guarantee that the fund will achieve
its objective.
Non-diversification risk -
The fund is non-diversified. The percentage of its assets invested in
any single issuer is not limited by the Investment Company Act of
1940. When the fund's assets are invested in the securities of a
limited number of issuers, the value of its shares will be more
susceptible to any single economic, political or regulatory event than
shares of a diversified fund.
Market risk -
Stock prices generally fluctuate more than those of other securities.
The 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.
The 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. Value stocks as a group may be
out of favor for a long period of time, while the market concentrates
on "growth" stocks. There is also a risk that other investors will not
see the potential value of the issuer, and the security will not
realize that potential.
Year 2000 -
Like other mutual funds (and most organizations around the world), the
fund could be adversely affected by computer problems related to the
year 2000. These could interfere with operations of the fund, its
adviser or distributor, or could impact companies in which the fund
invests.
While no one knows if these problems will have any impact on the fund
or on financial markets in general, the adviser and its affiliates are
taking steps to protect fund investors. These include efforts to
determine that the problem will not directly affect the systems used
by major service providers.
Whether these steps will be effective can only be known for certain in
the year 2000.
Legg Mason Focus Trust 3
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PERFORMANCE
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The information below provides an indication of the risks of investing
in the fund by showing changes in its performance from year to year.
Annual returns assume reinvestment of dividends and distributions.
Historical performance of the fund does not necessarily indicate what
will happen in the future.
Year by year total return as of December 31 of each year (%)
[GRAPHIC BAR APPEARS HERE]
1996 1997 1998
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17.14 29.10 41.47
During the past three calendar years:
Quarter Ended Total Return
- --------------------- ----------------------- --------------------
Best quarter: December 31, 1998 +36.94%
Worst quarter : September 30, 1998 -15.91%
In the following table, average annual returns as of December 31, 1998
are compared with the Standard & Poor's 500 Stock Composite Index.
1 Year Life of Fund
- -------------------- --------------- ----------------------
Focus Trust +41.47% +26.72%(a)
S&P 500 Index +28.58% +29.30%(b)
These figures include changes in principal value, reinvested dividends
and capital gain distributions, if any.
(a) April 17, 1995 (commencement of operations) to December 31, 1998.
(b) For the period April 30, 1995 to December 31, 1998.
4 Legg Mason Focus Trust
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FEES AND EXPENSES OF THE FUND
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The table below describes the fees and expenses you will incur
directly or indirectly as an investor in the fund. The fund pays
operating expenses directly out of its assets so they lower the fund's
share price and dividends. Other expenses include transfer agency,
custody, professional and registration fees. The fund has no initial
sales charge but is subject to a 12b-1 fee. The fund does not charge a
redemption fee.
The fees and expenses shown are for the fiscal year ended December 31,
1998, and are calculated as a percentage of average net assets.
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Annual Fund Operating Expenses
(expenses that are deducted from fund assets)(A)
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Management fees 0.70%
Distribution and/or Service (12b-1) fees 1.00%
Other expenses 1.39%
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Total Annual Fund Operating Expenses 3.09%
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(A) The manager has a voluntary agreement to waive fees so that expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses)
do not exceed an annual rate of 1.90% of the fund's average daily
net assets until June 30, 2000. This voluntary waiver may be
terminated at any time. With the waiver, management fees, 12b-1 fees
and total annual fund operating expenses for the fund would have
been 0.00%, 0.54% and 1.93% for the fiscal year ended December 31,
1998.
Example:
This example helps you compare the cost of investing in the 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. Actual returns may be higher or lower than 5% per
year.
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1 Year 3 Years 5 Years 10 Years
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$312 $ 954 $ 1,620 $ 3,402
</TABLE>
Under the fee waiver arrangements described above, your costs for the
one, three, five and ten year periods would have been $196, $606,
$1,042 and $2,254.
Legg Mason Focus Trust 5
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MANAGEMENT
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Management and Adviser:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland
21202, is the fund's adviser. The adviser is responsible for making
investment decisions and placing orders to buy or sell a particular
security. It is also obligated to provide the fund with investment
management and administrative services and to oversee the funds'
relationships with outside service providers, such as the custodian,
transfer agent, accountants, and lawyers. The adviser acts as manager
or adviser to investment companies with aggregate assets of $18.1
billion as of March 31, 1999.
For the period June 30, 1998 to December 31, 1998, the adviser waived
all of its fees.
From June 28, 1997 to June 30, 1998, Focus Capital Advisory, L.P.
served as the fund's investment adviser.
Portfolio Management:
Robert G. Hagstrom, Jr. serves as portfolio manager and has been
primarily responsible for overseeing all investments made by the fund
since its inception on April 17, 1995. From 1997 to June 30, 1998, he
was the General Partner of Focus Capital Advisory, L.P., the assets of
which were purchased by the adviser. From 1992 through 1997, he was a
Principal with Lloyd, Leith & Sawin, Inc., where he served as Vice
President from 1991 to 1992. Mr. Hagstrom is a Chartered Financial
Analyst and author of two books, titled THE WARREN BUFFET WAY:
INVESTMENT STRATEGIES OF THE WORLD'S GREATEST INVESTOR (John Wiley &
Sons, November, 1994) and THE NASCAR WAY: THE BUSINESS THAT DRIVES THE
SPORT (John Wiley & Sons, January, 1998).
Distributor of the fund's shares:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland 21202, is the distributor of the fund's shares. The fund has
adopted a plan that allows it to pay distribution fees and shareholder
service fees for the sale of its shares and for services provided to
shareholders. Under the plan, the fund may pay the distributor an
annual distribution fee equal to 0.75% of the fund's average daily net
assets and an annual service fee equal to 0.25% of its average daily
net assets.
6 Legg Mason Focus Trust
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Because these fees are paid out of the 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 may enter into agreements with other brokers to sell
shares of the fund. The distributor pays these brokers up to 90% of
the service fee that it receives from the fund for those sales.
The adviser and distributor are wholly owned subsidiaries of Legg
Mason, Inc., a financial services holding company.
Legg Mason Focus Trust 7
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HOW TO INVEST
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To open a regular account or a retirement account with the fund, contact a
Legg Mason financial advisor or other entity that has entered into an
agreement with the fund's distributor to sell shares of the Legg Mason family
of funds. A Legg Mason financial advisor will explain the shareholder services
available from our funds and answer any questions you may have. The minimum
initial investment for regular accounts and retirement accounts 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 advisor or other entity offering the funds to discuss which one
might be appropriate for you.
Once your account is open, you may use the following methods to add to your
account:
IN PERSON Give your financial advisor 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 advisor
TELEPHONE Call your financial advisor to transfer available cash balances in
OR WIRE 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 advisor to enroll in Legg
SYSTEMATIC Mason's Future First Systematic Investment Plan. Under this plan,
INVESTMENT you may arrange for automatic monthly investments in the fund of
PLAN $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 the fund.
AUTOMATIC Arrangements may be made with some employers and financial
INVESTMENTS institutions for regular automatic monthly investments of $50 or
more in shares of the fund. You may also reinvest dividends from
certain unit investment trusts in shares of the fund.
Call your financial advisor or another entity offering the fund 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.
Purchase orders received by your financial advisor or the entity offering the
fund 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.
8 Legg Mason Focus Trust
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HOW TO SELL YOUR SHARES
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Redemptions made through entities other than Legg Mason may be subject
to transaction fees or other conditions imposed by those entities.
Your 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 advisor 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 advisor has your bank account information on
file.
The fund 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 advisor or another entity.
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.
Legg Mason Focus Trust 9
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ACCOUNT POLICIES
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Calculation of Net Asset Value:
Net asset value per share is determined daily, as of the close of the
New York Stock Exchange on every day the exchange is open. To
calculate the fund's share price, the fund's assets are valued and
totaled, liabilities are subtracted, and the resulting net assets are
divided by the number of shares outstanding. The 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.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by the adviser to be the primary market. Securities with
remaining maturities of 60 days or less are valued at amortized cost.
The fund will value its foreign securities in U.S. dollars on the
basis of the then-prevailing exchange rates.
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.
The fund reserves the right to:
- reject any order for shares or suspend the offering of
shares for a period of time
- change its minimum investment amounts
- 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 fund may delay redemptions beyond seven days,
or suspend redemptions, only as permitted by the SEC.
10 Legg Mason Focus Trust
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SERVICES FOR INVESTORS
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For further information regarding any of the services below, please
contact your financial advisor or other entity offering the fund for
sale.
Confirmations and Account Statements:
You will receive from Legg Mason a confirmation after each transaction
(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 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.
Exchange Privilege:
Fund shares may be exchanged for 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. In
addition, an exchange of the fund's shares will be treated as a sale
of the shares and any gain on the transaction may be subject to tax.
The fund reserves the right to:
- terminate or limit the exchange privilege of any shareholder
who makes more than four exchanges from the fund in one
calendar year
- terminate or modify the exchange privilege after 60 days'
notice to shareholders
Legg Mason Focus Trust 11
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DIVIDENDS AND TAXES
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The fund declares and pays dividends from its net investment income
and net short-term capital gain annually. The fund distributes
substantially all net capital gain (the excess of net long-term
capital gain over net short-term capital loss) after the end of the
taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of
a federal excise tax.
Your dividends and distributions will be automatically reinvested in
additional shares of the fund. If you wish to receive dividends and/or
distributions in cash, you must notify the fund at least 10 days
before the next dividend and/or 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 distributions reinvested in fund shares. No
interest will accrue on amounts represented by uncashed distribution
or redemption checks.
Fund dividends and 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 of
net investment income and any net short-term capital gains will be
taxable as ordinary income. Distributions of the fund's net capital
gain will be 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 each investor at the end of each year
detailing the tax status of your distributions.
The 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. The 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 advisor about federal, state and local tax considerations.
12 Legg Mason Focus Trust
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FINANCIAL HIGHLIGHTS
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The financial highlights table is intended to help you understand the fund's
financial performance since its inception. Total return represents the rate
that an investor would have earned (or lost) on an investment in the fund,
assuming reinvestment of all dividends and distributions. This information has
been audited by the fund's independent accountants, PricewaterhouseCoopers
LLP, whose report, along with the fund's 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.
<TABLE>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995(A)
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Net asset value, beginning of year $16.32 $ 13.01 $ 11.17 $ 10.00
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INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.06)(B) (.11)(B) (.05)(B) .06(B)
Net realized & unrealized gain on
investments 6.68 3.89 1.96 1.17
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Total from investment operations 6.62 3.78 1.91 1.23
DISTRIBUTIONS:
From net investment income -- -- -- (.06)
From net realized gain on investments (.94) (.47) (.07) --
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Total distributions (.94) (.47) (.07) (.06)
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Net asset value, end of year $22.00 $ 16.32 $ 13.01 $ 11.17
==============================================================
Total return 41.47% 29.10% 17.14% 12.29%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets 1.93%(B) 2.00%(B) 2.00%(B) 1.92%(B,D)
Net investment income (loss) to average
net assets (.89)%(B) (.74)%(B) (.40)%(B) 1.19%(B,D)
Portfolio turnover rate 21 % 14 % 8 % --%
Net assets, end of year
(in thousands) $ 47,089 $ 8,093 $ 7,327 $ 5,061
</TABLE>
(A) April 17, 1995 (commencement of operations) to December 31, 1995.
(B) Net of fees waived pursuant to a voluntary expense limitation of 1.75% of
average daily net assets through September 1, 1995; 2.00% through June 30,
1998 and 1.90% through June 30, 2000. If no fees had been waived, the
annualized ratio of expenses to average net assets for the period April 17,
1995 to December 31, 1995 and for the years ended December 31, 1996, 1997 and
1998 would have been 7.89%, 4.96%, 4.04% and 2.71%, respectively.
(C) Not annualized
(D) Annualized
Legg Mason Focus Trust 13
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Legg Mason Focus Trust, Inc.
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The following additional information about the 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) the prospectus. The SAI provides
additional details about the fund and its policies.
Annual and Semiannual Reports - additional information about the fund's
investments is available in the fund's annual and semiannual reports to
shareholders. These reports provide detailed information about the
fund's portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain
more information:
- call toll-free 1-800-822-5544
- visit us on the Internet via http://www.leggmason.com
- write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the 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 the 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-091 SEC file number: 811-8966
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LEGG MASON FOCUS TRUST, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus (dated May 1, 1999), which has been
filed with the Securities and Exchange Commission ("SEC"). The fund's annual
report is incorporated by reference into this Statement of Additional
Information. Copies of either the annual report or the Prospectus are available
without charge by writing to or calling the fund's distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
LEGG MASON WOOD WALKER,
INCORPORATED
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100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21202
(410) 539-0000 (800) 822-5544
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TABLE OF CONTENTS
PAGE
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Description of the Fund 3
Fund Policies 3
Investment Strategies and Risks 4
Management of the Fund 8
The Fund's Investment Adviser and Manager 10
The Fund's Distributor 11
Portfolio Transactions and Brokerage 12
Additional Purchase and Redemption Information 14
Valuation of Fund Shares 15
Additional Tax Information 16
Tax-Deferred Retirement Plans 18
Performance Information 19
Capital Stock Information 21
The Fund's Custodian and Transfer and Dividend-Disbursing Agent 21
The Fund's Legal Counsel 21
The Fund's Independent Accountants 21
Financial Statements 21
Appendix A A-1
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No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this Statement of Additional
Information in connection with the offerings made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. The Prospectus and the
Statement of Additional Information do not constitute offerings by the Fund or
by the distributor in any jurisdiction in which such offerings may not lawfully
be made.
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-2-
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DESCRIPTION OF THE FUND
Legg Mason Focus Trust, Inc. is a non-diversified open-end, management
investment company. The fund was established as a Maryland corporation on
January 27, 1995.
FUND POLICIES
The fund's investment objective is to seek maximum long-term capital
appreciation with minimum long-term risk to principal. The investment
restrictions set forth below, as well as the fund's investment objective, are
fundamental policies and may not be changed without the approval of a majority
of the outstanding voting shares (as defined in the Investment Company Act of
1940 Act ("1940 Act")) of the fund. Unless otherwise indicated, all percentage
limitations listed below apply to the fund only at the time of the transaction.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in the fund's total assets will not
be considered a violation.
The fund may not:
(1) Act as an underwriter of securities, except that, in
connection with the disposition of a security, the fund may be
deemed to be an "underwriter" as that term is defined in the
Securities Act of 1933;
(2) Purchase or sell real estate (but this restriction shall not
prevent the fund from investing directly or indirectly in
portfolio instruments secured by real estate or interests
therein or acquiring securities of real estate investment
trusts or other issuers that deal in real estate), interests
in oil, gas and/or mineral exploration or development programs
or leases;
(3) Purchase or sell commodities or commodity contracts;
(4) Make loans, except that this restriction shall not prohibit
(a) the purchase and holding of debt instruments in accordance
with the fund's investment objectives and policies, (b) the
lending of portfolio securities, or (c) entry into repurchase
agreements with banks or broker-dealers;
(5) Borrow money or issue senior securities, except that the fund
may borrow from banks and enter into reverse repurchase
agreements for temporary purposes in amounts up to one-third
of the value of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets,
except in connection with any such borrowing and in amounts
not in excess of the lesser of the dollar amounts borrowed or
5% of the value of the total assets of the fund at the time of
its borrowing. All borrowings will be done from a bank and
asset coverage of at least 300% is required;
(6) Sell securities short or purchase securities on margin, except
for such short-term credits as are necessary for the clearance
of transactions;
(7) Invest in puts, calls, straddles or combinations thereof;
(8) Participate on a joint or joint and several basis in any
securities trading account;
(9) Make investments in securities for the purpose of exercising
control;
(10) Purchase the securities of any one issuer if, immediately
after such purchase, the fund would own more than 25% of the
outstanding voting securities of such issuer;
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<PAGE>
(11) Invest more than 25% of the value of its total assets (taken
at market value at the time of each investment) in securities
of issuers whose principal business activities are in the same
industry. For this purpose, "industry" does not include the
U.S. Government, its agencies or instrumentalities; or
(12) Purchase securities of issuers having less than three years'
continuous operation, if such purchase would cause the value
of the fund's investments in all such issuers to exceed 5% of
the value of its total assets. Such three year periods shall
include the operation of any predecessor company or companies.
For temporary defensive purposes, the fund may temporarily invest up to
100% of its assets in short-term U.S. Government securities, bank certificates
of deposit, prime commercial paper and other high quality short-term fixed
income securities and repurchase agreements with respect to those securities. In
addition, the fund may hold cash reserves, when necessary, for anticipated
securities purchases and redemptions or temporarily during periods when the
adviser believes prevailing market conditions call for a defensive posture. The
fund may not achieve its investment objective when so invested.
INVESTMENT STRATEGIES AND RISKS
The investment practices described below, except for the discussion of
portfolio loan transactions, are not fundamental and may be changed by the Board
of Directors without the approval of the shareholders of the fund. Shareholders,
however, will be notified within thirty (30) days of any changes in the
investment policies.
CONVERTIBLE SECURITIES
The fund may invest in convertible securities. Common stock occupies
the most junior position in a company's capital structure. Convertible
securities entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified prices
within a certain period of time and to receive interest or dividends until the
holder elects to convert. The provisions of any convertible security determine
its ranking in a company's capital structure. In the case of subordinated
convertible debentures, the holder's claims on assets and earnings are
subordinated to the claims of other creditors, and are senior to the claims of
preferred and common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claims on assets and earnings are
subordinated to the claims of all creditors but are senior to the claims of
common shareholders.
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security. If
the conversion value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition, may sell at some
premium over its conversion value. At such times the price of the convertible
security will tend to fluctuate directly with the price of the underlying equity
security.
BORROWING
The fund has a fundamental policy that it may not borrow money, except
(1) from banks for temporary or emergency purposes and not for leveraging or
investment and (2) to enter into reverse repurchase agreements for any purpose,
so long as the aggregate amount of borrowings and reverse repurchase agreements
does not exceed one-third of the fund's total assets less liabilities (other
than borrowings). In the event that such asset coverage shall at any time fall
below 300%, the fund shall, within three business days thereafter or such longer
period as the U.S. Securities and Exchange Commission ("SEC") may prescribe by
rules and regulations, reduce the amount of its borrowings to such
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<PAGE>
an extent that the asset coverage of such borrowings shall be at least 300%.
Investment securities will not be purchased while the fund has an outstanding
borrowing that exceeds 5% of the fund's net assets.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" and "delayed delivery"
basis. These transactions involve a commitment by the fund to purchase or sell
particular securities with payment and delivery taking place at a future date.
They involve the risk that the price or yield available in the market may be
less favorable than the price or yield available when the delivery takes place.
The fund's when-issued purchases, forward commitments and delayed delivery
transactions in total will not exceed 5% of the value of the fund's net assets.
This 5% limitation reflects the value of the underlying obligation together with
its initial payment.
Although the fund may purchase securities on a when-issued basis, or
purchase or sell securities on a forward commitment basis or purchase securities
on a delayed delivery basis, the fund does not have the current intention of
doing so in the foreseeable future. The fund will normally realize a capital
gain or loss in connection with these transactions.
When the fund purchases securities on a when-issued, delayed delivery
or forward commitment basis, the Fund's custodian will maintain in a segregated
account: cash, U.S. Government securities or other high grade liquid debt
obligations having a value (determined daily) at least equal to the amount of
the fund's purchase commitments. In the case of a forward commitment to sell
portfolio securities, the custodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to ensure that the fund will maintain sufficient assets
at all times to cover its obligations under when-issued purchases, forward
commitments and delayed delivery transactions.
LOANS OF PORTFOLIO SECURITIES
The fund may lend portfolio securities to broker-dealers and financial
institutions, although at the present time it has no intention of lending
portfolio securities in the foreseeable future. The fund may lend portfolio
securities, provided: (1) the loan is secured continuously by collateral
marked-to-market daily and maintained in an amount at least equal to the current
market value of the securities loaned; (2) the fund may call the loan at any
time and receive the securities loaned; (3) the fund will receive any interest
or dividends paid on the loaned securities; and (4) the aggregate market value
of securities loaned will not at any time exceed 33% of the total assets of the
fund. When the fund loans a security to another party, it runs the risk that the
other party will default on its obligation, and that the value of the collateral
will decline before the fund can dispose of it.
ILLIQUID SECURITIES
The fund may invest up to 10% of its net assets in securities that are
illiquid. Illiquid securities are assets which may not be sold or disposed of in
the ordinary course of business within seven days at approximately the price at
which they are valued by the fund. Due to the absence of an active trading
market, the fund may experience difficulty in valuing or disposing of illiquid
securities. Repurchase agreements with deemed maturities in excess of seven days
and certain securities that are not registered under the Securities Act of 1933
but that may be purchased by institutional buyers under SEC Rule 144A (known as
"restricted securities") are subject to this 10% limit. The adviser determines
the liquidity of the fund's securities, under supervision of the Board of
Directors.
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<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate for the fund is calculated by dividing the
lesser of purchases or sales of portfolio investments for the reporting period
by the monthly average value of the portfolio investments owned during the
reporting period.
The calculation excludes all securities whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the fund to receive favorable tax treatment. In any event, the annual
portfolio turnover for the fund is not expected to exceed 25%. This relatively
low portfolio turnover rate reflects the adviser's buy and hold strategy for the
portfolio securities held by the fund.
Generally, the fund will purchase portfolio securities for capital
appreciation and not for short-term trading profits. Due to the nature of "focus
investing," however, the adviser anticipates that the portfolio turnover levels
will be held at low levels. The rate of portfolio turnover will not be a
limiting factor in making portfolio decisions. A high rate of portfolio turnover
may result in the realization of substantial capital gains and involves
correspondingly greater transaction costs. Portfolio turnover rates may vary
from year to year as well as within a particular year.
REPURCHASE AGREEMENTS
The fund may enter into repurchase agreements. The fund may only enter
into repurchase agreements with financial institutions that are deemed to be
creditworthy by LMFA, pursuant to guidelines established by the fund's Board of
Directors. During the term of any repurchase agreement, LMFA will continue to
monitor the creditworthiness of the seller. Repurchase agreements are considered
under the 1940 Act to be collateralized loans by the fund to the seller secured
by the securities transferred to the fund. Repurchase agreements under the 1940
Act will be fully collateralized by securities in which the fund may invest
directly. Such collateral will be marked-to-market daily. If the seller of the
underlying security under the repurchase agreement should default on its
obligation to repurchase the underlying security, the fund may experience delay
or difficulty in exercising its right to realize upon the security and, in
addition, may incur a loss if the value of the security should decline, as well
as disposition costs in liquidating the security. The fund will not invest more
than 10% of its net assets in repurchase agreements maturing in more than seven
days.
The repurchase price under the repurchase agreements described above
generally equals the price paid by the fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the securities underlying the repurchase agreement). Repurchase agreements are
considered loans by the fund under the 1940 Act.
The financial institutions with which the fund may enter into
repurchase agreements are banks and non-bank dealers of U.S. Government
securities that are listed on the Federal Reserve Bank of New York's list of
reporting dealers and banks, if such banks and non-bank dealers are deemed
creditworthy by LMFA. LMFA will continue to monitor the creditworthiness of the
seller under a repurchase agreement, and will require the seller to maintain
during the term of the agreement the value of the securities subject to the
agreement at not less than the repurchase price. The fund will only enter into a
repurchase agreement where the market value of the underlying security,
including interest accrued, will be at all times equal to or exceed the value of
the repurchase agreement.
REVERSE REPURCHASE AGREEMENTS
The fund may enter into reverse repurchase agreements but it does not
currently have the intention of doing so in the foreseeable future. Reverse
repurchase agreements involve the sale of securities held by the fund pursuant
to the Fund's agreement to repurchase the securities at an agreed upon price,
date and rate of interest. Such agreements are considered to be borrowings under
the 1940
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<PAGE>
Act, and may be entered into only for temporary or emergency purposes. While
reverse repurchase transactions are outstanding, the fund will maintain in a
segregated account cash, U.S. Government securities or other liquid, high grade
debt securities in an amount at least equal to the market value of the
securities, plus accrued interest, subject to the agreement. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
fund may decline below the price the fund is obligated to pay upon their
repurchase.
RESTRICTED SECURITIES AND RULE 144A SECURITIES
Restricted securities cannot be sold to the public without registration
under the Securities Act of 1933 (the "1933 Act"). Unless registered for sale,
these securities can only be sold in privately negotiated transactions or
pursuant to an exemption from registration. Some restricted securities may be
illiquid securities.
The fund may invest in securities that are exempt under SEC Rule 144A
from the registration requirements of the Securities Act of 1933. Those
securities, purchased under Rule 144A, are traded among qualified institutional
investors and may be subject to the fund's limitation on illiquid investment.
Investing in securities under Rule 144A could have the effect of
increasing the levels of the fund's illiquidity if qualified institutional
buyers become, for a time, uninterested in purchasing these securities. The fund
will limit its investment in securities which the fund is restricted from
selling to the public without registration under the Securities Act of 1933 to
no more than 10% of the fund's total assets, excluding restricted securities
eligible for resale pursuant to Rule 144A that have been determined to be liquid
by the fund's Board of Directors.
FOREIGN SECURITIES
While the fund has no present intention to invest in foreign
securities, the fund may invest up to 25% of its total assets in foreign
securities, either directly or indirectly through the purchase of American
Depositary Receipts ("ADRs") or European Depositary Receipts ("EDRs").
There are certain risks and costs involved in investing in securities
of companies and governments of foreign nations, which are in addition to the
usual risks inherent in U.S. investments. Foreign investments may include
additional risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks may be
subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements. Investments in foreign securities
involve higher costs than investments in U.S. securities, including higher
transaction costs as well as the imposition of additional taxes by foreign
governments.
ADRs and EDRs
For many foreign securities, there are U.S. dollar-denominated ADRs,
which are bought and sold in the U.S. and are issued by domestic banks. ADRs
represent the right to receive securities of foreign issuers deposited in the
domestic bank or a correspondent bank. ADRs do not eliminate all the risk
inherent in investing in the securities of foreign issuers. By investing in ADRs
rather than directly in a foreign issuer's stock, the fund may avoid currency
risks during the settlement period for either purchases or sales. In general,
there is a large, liquid market in the U.S. for most ADRs. The fund may also
invest in EDRs which are receipts evidencing an arrangement with a European bank
similar to that for ADRs and are designed for use in the European securities
markets. EDRs are not necessarily denominated in the
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<PAGE>
currency of the underlying security. The fund has no current intention to invest
in unsponsored ADRs and EDRs.
SECURITIES OF OTHER INVESTMENT COMPANIES
The fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. The fund may invest up to 10% of
its total assets in shares of investment companies and up to 5% of its total
assets in any one investment company so long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
Investments in other investment companies will cause the fund (and, indirectly
the shareholders) to bear proportionately the costs incurred in connection with
the investment companies' operations.
OTHER INVESTMENTS
Even though the fund's policy is to remain substantially invested in
common stocks or securities convertible into common stock, it may invest in
non-convertible preferred stock and non-convertible debt securities. Investment
in debt securities will be rated investment grade.
Subject to prior disclosure to shareholders, the Board of Directors
may, in the future, authorize the Fund to invest in securities other than those
listed here and in the prospectus, provided that such investment would be
consistent with the fund's investment objective and that it would not violate
any fundamental investment policies or restrictions applicable to the fund.
MANAGEMENT OF THE FUND
The 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 fund,
their date of birth 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 fund as defined by the 1940 Act. The business
address of each officer and director is 100 Light Street, Baltimore, Maryland
21202, unless otherwise indicated.
JOHN F. CURLEY, JR.* [7/24/39], Chairman of the Board and Director;
President and/or Chairman of the Board and Director/Trustee of nine Legg Mason
funds; Retired Vice Chairman and Director of Legg Mason, Inc. and Legg Mason
Wood Walker, Inc. Formerly: Director of Legg Mason Fund Adviser, Inc. and
Western Asset Management Company (each a registered investment adviser); Officer
and/or Director of various other affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], Director; 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 all 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; 200 Eastern Parkway, Brooklyn,
New York. Director of the Brooklyn Museum of Art; Director/Trustee of all Legg
Mason funds. Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], Director, 400 Seventh Street, N.W.,
Washington, DC. Chief Executive Officer of the Marrow Foundation.
Director/Trustee of all 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).
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<PAGE>
T.A. RODGERS [10/22/34], Director; 2901 Boston Street, Baltimore,
Maryland. Principal, T.A. Rodgers & Associates (management consulting);
Director/Trustee of all Legg Mason funds. Formerly: Director and Vice President
of Corporate Development, Polk Audio, Inc. (manufacturer of audio components).
The executive officers of the Fund are:
EDWARD A. TABER, III* [8/25/43], President; Senior Executive Vice
President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice Chairman
and Director of Legg Mason Fund Adviser, Inc.; President and/or Director/Trustee
of seven other Legg Mason funds. Formerly: Executive Vice President of T. Rowe
Price-Fleming International, Inc. (1986-1992) and Director of the Taxable Fixed
Income Division at T. Rowe Price Associates, Inc. (1973-1992).
MARIE K. KARPINSKI* [1/1/49], Vice President and Treasurer; Treasurer
of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of all Legg Mason
funds, Bartlett Capital Trust and LM Institutional Fund Advisors I and II, Inc.;
Vice President of Legg Mason Wood Walker, Inc.
KATHI D. BAIR* [12/15/64], Secretary; Secretary of the Legg Mason
funds, Bartlett Capital Trust and LM Institutional Fund Advisors II, Inc.;
Assistant Treasurer of three Legg Mason funds; employee of Legg Mason Wood
Walker, Inc. since March 1988.
W. SHANE HUGHES* [4/24/68], Assistant Secretary; employee of Legg Mason
Wood Walker, Inc. since May 1997. Formerly: Supervisor, C. W. Amos & Co.
(regional public accounting firm) (1990-1996).
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 the fund who are "interested persons" of the
fund, as defined in the 1940 Act, receive no salary or fees from the fund. Each
Director of the fund who is not an interested person of the Fund ("Independent
Director") receives an annual retainer and a per meeting fee based on the
average net assets of the Fund at December 31 of the previous year.
As of April 1, 1999, the directors and officers of the Fund
beneficially owned in the aggregate less than 1% of the fund's outstanding
shares. As of April 1, 1999, no persons owned 5% or more of the outstanding
voting shares of the fund.
The following table provides certain information relating to the
compensation of the fund's directors for the fiscal year ended December 31,
1998. None of the Legg Mason funds has any retirement plan for its directors.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
NAME OF PERSON AND AGGREGATE COMPENSATION FUND AND FUND COMPLEX
POSITION FROM FUND* PAID TO DIRECTORS**
- -------- ---------- -------------------
<S> <C> <C>
John F. Curley, Jr. - Director None None
Richard G. Gilmore - Director $680 $35,100
Arnold L. Lehman - Director $680 $30,600
Jill E. McGovern - Director $680 $35,100
T. A. Rodgers - Director $680 $35,100
</TABLE>
* Represents fees paid to each director during the fiscal year ended
December 31, 1998.
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** Represents aggregate compensation paid to each director during the year
ended December 31, 1998. There are eleven open-end investment companies in
the Legg Mason Complex (with a total of twenty funds).
THE FUND'S INVESTMENT ADVISER AND MANAGER
Legg Mason Fund Adviser, Inc. ("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. LMFA
serves as manager and investment adviser to the fund under an Investment
Advisory and Management Agreement with the fund ("Investment Advisory and
Management Agreement"). The Investment Advisory and Management Agreement was
approved by the Directors, including a majority who are not "interested persons"
of the fund or LMFA, on May 11, 1998 and by the shareholders on June 24, 1998.
From June 27, 1997 to June 30, 1998, Focus Capital Advisory, L.P. served as the
fund's investment adviser under an investment advisory agreement with the fund.
Prior to June 27, 1997, Lloyd, Leith & Sawin, Inc. served as the fund's
investment adviser under an investment advisory agreement with the fund.
The Investment Advisory and 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 the fund. LMFA is responsible for managing
the fund consistent with the fund's investment objective and policies described
in its Prospectus and this Statement of Additional Information. LMFA also is
obligated to (a) furnish the fund with office space and executive and other
personnel necessary for the operation of the fund; (b) supervise all aspects of
the fund's operations; (c) bear the expense of certain informational and
purchase and redemption services to the fund's shareholders; (d) arrange, but
not pay for, the periodic updating of prospectuses, proxy material, tax returns
and reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to the fund's officers and directors. LMFA and its affiliates
pay all compensation of directors and officers of the fund who are officers,
directors or employees of LMFA. The 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, the 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. The fund also is liable for such nonrecurring expenses as may
arise, including litigation to which the fund may be a party. The fund may also
have an obligation to indemnify its directors and officers with respect to
litigation.
LMFA receives for its services to the fund a management fee, calculated
daily and payable monthly. LMFA receives from the fund a management fee at an
annual rate of 0.70% of the average daily net assets of the fund. LMFA has
agreed to waive its fees to the extent necessary to limit the fund's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) to 1.90% of
average net assets until at least June 30, 2000.
For the period June 30, 1998 through December 31, 1998, LMFA was
entitled to receive advisory fees of $107,897. However, LMFA waived all of its
fees. For the period June 28, 1997 through June 30, 1998, Focus Capital
Advisory, L.P. served as the fund's investment adviser. For that period, the
adviser was entitled to receive advisory fees of $26,721. However, the adviser
agreed to waive its fees and reimburse expenses so that the fund's annual
operating expenses would not exceed 2.00%. Prior to June 28, 1997, Lloyd, Leith
&
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<PAGE>
Sawin, Inc. served as investment adviser to the fund. For the fiscal year
ended December 31, 1996 and the period January 1, 1997 through June 27, 1997,
Lloyd, Leith & Sawin, Inc. was entitled to receive advisory fees of $43,364, and
$26,527, respectively. However, Lloyd, Leith & Sawin, Inc. waived its fees to
reimburse the fund for expenses so that the Fund's expenses would not exceed
2.00%.
Under the Investment Advisory and Management Agreement, the fund has
the non-exclusive right to use the name "Legg Mason" until that Agreement is
terminated, or until the right is withdrawn in writing by LMFA.
Under the Investment Advisory and Management Agreement, LMFA will not
be liable for any error of judgment or mistake of law or for any loss by the
fund in connection with the performance of the Investment Advisory and
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 Agreement.
The Investment Advisory and Management Agreement terminates
automatically upon assignment and is terminable at any time without penalty by
vote of the fund's Board of Directors, by vote of a majority of the fund's
outstanding voting securities, or by LMFA, 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 the fund will be affected by personal
trading of employees, the fund 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.
THE FUND'S DISTRIBUTOR
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland 21202, acts as distributor of the fund's shares pursuant to an
Underwriting Agreement with the 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.
The fund has adopted a Distribution Plan ("Plan") which, among other
things, permits the fund to pay Legg Mason fees for its services related to
sales and distribution of shares and the provision of ongoing services to fund
shareholders. Under the Plan, the aggregate fees may not exceed an annual rate
of 1.00% of the fund's average daily net assets. Distribution activities for
which such payments may be made include, but are not limited to, compensation to
persons who engage in or support distribution and redemption of shares, printing
of prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses.
The Plan was approved by the shareholders on June 24, 1998. The Plan
makes clear that, of the aggregate 1.00% fees, 0.75% is paid for distribution
services and 0.25% is paid for ongoing services to shareholders. The Plan also
specifies that the fund may not pay more in cumulative distribution fees than
6.25% of total new gross assets attributable to fund shares, plus interest, as
specified in the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD"). Legg Mason may pay all or a portion of the fee to its
financial advisors. The Plan was approved on May 11, 1998 by the Board of
Directors of the fund including a majority of the directors who are not
"interested persons" of the 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").
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<PAGE>
In approving the Plan, in accordance with the requirements of Rule
12b-1, the directors determined that there was a reasonable likelihood that the
Plan would benefit the fund and its shareholders. The directors considered,
among other things, the extent to which the potential benefits of the Plan to
the fund's shareholders 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 the fund's shares would be likely to maintain
or increase the amount of compensation paid by the fund to LMFA.
In considering the cost of the Plan, the directors gave particular
attention to the fact that any payments made by the fund to Legg Mason under the
Plan would increase the fund's level of expenses in the amount of such payments.
Further, the directors recognized that LMFA would earn greater management fees
if the fund's assets were increased, because such fees are calculated as a
percentage of the fund's assets and thus would increase if net assets increase.
The directors further recognized that there can be no assurance that any of the
potential benefits described below would be achieved if the Plan was
implemented.
Among the potential benefits of the Plan, the directors noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
the fund's shares and to maintain and enhance the level of services they provide
to the fund's shareholders. These efforts, in turn, could lead to increased
sales and reduced redemptions, eventually enabling the fund to achieve economies
of scale and lower per share operating expenses. Any reduction in such expenses
would serve to offset, at least in part, the additional expenses incurred by the
fund in connection with the Plan. Furthermore, the investment management of the
fund could be enhanced, as net inflows of cash from new sales might enable its
portfolio manager to take advantage of attractive investment opportunities, and
reduced redemptions could eliminate the potential need to liquidate attractive
securities positions in order to raise the funds necessary to meet the
redemption requests.
The Plan will continue in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting shares. Any change in the 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, the 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.
Prior to the approval of the Plan by shareholders on June 24, 1998, the
fund had no distribution plan. For the period June 30, 1998 to December 31,
1998, Legg Mason was entitled to receive distribution and service fees of
$95,814; however, Legg Mason waived $12,830 of these fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory and Management Agreement with the fund,
LMFA 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. The fund may not always pay the
lowest commission or spread available. Rather, in placing orders for the fund
LMFA 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.
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Consistent with the policy of most favorable price and execution, LMFA
may give consideration to research, statistical and other services furnished by
brokers or dealers to LMFA 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
LMFA in connection with services to clients other than the fund whose brokerage
generated the service. LMFA's fee is not reduced by reason of its receiving such
brokerage and research services.
While in the future the fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities, the fund has no
intention of doing so prior to June 30, 2000.
For the fiscal years ended December 31, 1998, 1997 and 1996, the fund
incurred aggregate brokerage commissions of $28,298, $9,663 and $8,781,
respectively. The increase in total commissions paid in fiscal year 1998 was due
to the growth in assets from July 1998 through December 1998 when LMFA became
the fund's investment adviser.
Except as permitted by SEC rules or orders, the fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. The 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
the fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so that: the 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, the 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
fund, unless the affiliate expressly consents by written contract. The fund's
Investment Advisory and Management Agreement expressly provides such consent.
Investment decisions for the fund are made independently from those of
other funds and accounts advised by LMFA. 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.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Clients of certain institutions that maintain omnibus accounts with the
fund's transfer agent may obtain shares through those institutions. Such
institutions may receive payments from the fund's distributor for account
servicing, and may receive payments from their clients for other services
performed. Investors can purchase fund shares from Legg Mason without receiving
or paying for such other services.
FUTURE FIRST SYSTEMATIC INVESTMENT PLAN AND TRANSFER OF FUNDS FROM FINANCIAL
INSTITUTIONS
If you invest in the fund, the Prospectus explains that you may buy
shares through the Future First Systematic Investment Plan. Under this plan you
may arrange for automatic monthly investments in fund shares of $50 or more by
authorizing the fund's transfer agent to transfer funds each month from your
Legg Mason account or from your checking account to be used to buy fund 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 fund shares may also buy fund 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 the 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 fund 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 fund 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 fund shares in your
account must be automatically reinvested in fund shares. You may terminate the
Systematic Withdrawal Plan at any time without charge or penalty. The fund, its
transfer agent, and Legg Mason 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
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tax basis of the shares sold. If the periodic withdrawals exceed reinvested
dividends and distributions, the amount of your original investment may be
correspondingly reduced.
Ordinarily, you should not purchase additional shares of the fund if
you maintain a Systematic Withdrawal Plan, because you may incur tax liabilities
in connection with such purchases and withdrawals. The fund will not knowingly
accept purchase orders from you for additional shares if you maintain a
Systematic Withdrawal Plan unless your purchase is equal to at least one year's
scheduled withdrawals. In addition, if you maintain a Systematic Withdrawal Plan
you may not make periodic investments under the Future First Systematic
Investment Plan.
OTHER INFORMATION REGARDING REDEMPTION
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, by the 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 the fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
The 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. The fund does not redeem "in kind" under normal circumstances,
but would do so where LMFA determines that it would be in the best interests of
the fund's shareholders as a whole.
VALUATION OF FUND SHARES
Net asset value of a fund share is determined daily as of the close of
the Exchange, on every day the Exchange is open, by dividing the value of the
total assets, less liabilities, by the number of shares outstanding. Pricing
will not be done on days when the Exchange is closed. The Exchange currently
observes the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. As described in the Prospectus, securities for
which market quotations are readily available are valued at current market
value. Securities traded on an exchange or NASDAQ Stock Market securities are
normally valued at last sale prices. Other over-the-counter securities, and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), are valued at the mean of latest closing bid and
asked prices. Securities with remaining maturities of 60 days or less are valued
at amortized cost. Securities and other assets quoted in foreign currencies will
be valued in U.S. dollars based on the currency exchange rates prevailing at the
time of the valuation. All other securities are valued at fair value as
determined by or under the direction of the fund's Board of Directors. Premiums
received on the sale of call options are included in the net asset value of the
fund, and the current market value of options sold by the fund will be
subtracted from its net assets.
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ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state, local or foreign taxes that may apply to them.
GENERAL
To continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), the fund
must distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, net investment income and net short-term
capital gain) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities, or other income derived with respect to its business
of investing in securities; (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 does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If the 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
would be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
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.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
The fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by the 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 the 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
may not exceed the aggregate dividends received by the fund 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 do not qualify for the dividends-received deduction.
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FOREIGN SECURITIES
Foreign Taxes. Interest and dividends received by the 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 taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign investors.
Passive Foreign Investment Companies. The fund may invest in the stock
of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation -- 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 the
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, the fund will be subject to federal income
tax on a portion of any "excess distribution" received on the stock of a PFIC or
of any gain on disposition of the 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.
If the 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 those earnings and
gain were not received by the Fund from the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
The 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 the
fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also may 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. The 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 (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs).
ORIGINAL ISSUE DISCOUNT AND PAY-IN-KIND SECURITIES
The fund may purchase zero coupon or other debt securities issued with
original issue discount ("OID"). As a holder of those securities, the fund must
include in its income the OID that accrues thereon during the taxable year, even
if it receives no corresponding payment on the securities during the year.
Similarly, the fund must include in its gross income securities it receives as
"interest" on pay-in-kind securities. Because the fund annually must distribute
substantially all of its investment company taxable income, including any OID
and other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
fund may realize capital gains or losses from those dispositions, which would
increase or decrease its investment company taxable income and/or net capital
gain.
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TAX-DEFERRED RETIREMENT PLANS
Investors may invest in fund shares through IRAs, SEPs, SIMPLEs and
other qualified retirement plans. In general, income earned through the
investment of assets of qualified retirement accounts and plans is not taxed to
the beneficiaries thereof until the income is distributed to them. Investors who
are considering establishing such a plan should consult their attorneys or other
tax advisors with respect to individual tax questions. Please contact Legg Mason
or your affiliated financial advisor for further information with respect to
these plans.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAs
Traditional IRA. Certain investors may obtain tax advantages by
establishing an IRA. 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 in
such a plan 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.
However, 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 SIMPLE, permits voluntary contributions and meets certain requirements, you
may make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Fund shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your 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,
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,
Education IRAs provide 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 $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).
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SIMPLIFIED EMPLOYEE PENSION PLAN - SEP
Legg Mason also makes available to corporate and other employers a SEP
for investment in Fund 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 matching contributions up
to 3% of each such employee's salary or a 2% non-elective contribution.
Withholding at the rate of 20% is required for federal income tax
purposes on distributions eligible for rollover (which excludes, 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 or to 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. Investors should consult their plan administrator or tax
advisor for further information.
PERFORMANCE INFORMATION
GENERAL
From time to time, the fund may include general comparative
information, such as statistical data regarding inflation, securities indices or
the features or performance of alternative investments, in advertisements, sales
literature and reports to shareholders. The fund may also include calculations,
such as hypothetical compounding examples or tax-free compounding examples,
which describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of the Fund.
From time to time, the total return of the fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
TOTAL RETURN CALCULATION
Current yield and total return quotations used by the fund are based on
standardized methods of computing performance mandated by SEC Rules. As the
following formula indicates, the average annual total return is determined by
multiplying a hypothetical initial purchase order of $1,000 by the average
compound rate of return (including capital appreciation/depreciation and
dividends and distributions paid and reinvested) for the stated period less any
fees charged to all shareholder accounts and annualizing the result. The
calculation assumes that all dividends and distributions are reinvested at the
net asset value on the reinvestment dates during the period. The quotation
assumes the account was completely redeemed at the end of each period and
deduction of applicable charges and fees. This calculation can be expressed as
follows:
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Average Annual Total Return = P(1+T)/n/ = ERV
Where: ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of years.
T = average annual total return
The fund computes its aggregate total return by determining the
aggregate compounded rate of return during the specified period that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = [ (ERV) - 1 ]
----
P
Where: ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. Based upon the foregoing
calculations, the average annual total return for the fund for the period April
17, 1995 (commencement of operations) through December 31, 1998 was 26.72%. For
the fiscal year ended December 31, 1998, the annual total return for the fund
was 41.47%.
Since performance will fluctuate, performance data for the fund should
not be used to compare an investment in the fund's shares with bank deposits,
savings accounts and similar investment alternatives which often provide an
agreed-upon or guaranteed fixed yield for a stated period of time. Shareholders
should remember that performance is generally a function of the kind and quality
of the instruments held in a portfolio, portfolio maturity, operating expenses
and market conditions.
PERFORMANCE AND ADVERTISEMENTS
From time to time, in marketing and other fund literature, the fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The fund will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings. The fund's
performance may also be compared to the average performance of its Lipper
category.
The fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which ranks funds on the basis of historical
risk and total return. Morningstar's rankings range from five stars (highest) to
one star (lowest) and represent Morningstar's assessment of the historical risk
level and total return of a fund as a weighted average for three, five and ten
year periods. Ranks are not absolute or necessarily predictive of future
performance.
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In assessing such comparisons of total return, or volatility, an
investor should keep in mind that the composition of the investments in the
reported indices and averages is not identical to those of the fund, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
fund to calculate its figures.
CAPITAL STOCK INFORMATION
The fund has authorized capital of 100 million shares of common stock,
par value $0.001 per share and may issue additional series of shares. The fund
currently offers one class of shares. Shareholders are entitled to one vote per
share and fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the fund are fully paid and nonassessable and have no
preemptive or conversion rights.
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P,O. Box 1713, Boston,
Massachusetts, serves as custodian for the fund's assets. The custodian acts as
the fund's depository, safekeeps its portfolio securities, collects all income
and other payments with respect thereto, disburses funds at the fund's request
and maintains records in connection with its duties.
Boston Financial Data Services ("BFDS"), 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. The Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036, serves as counsel to the Fund.
THE FUND'S INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, Maryland,
has been selected by the Directors to serve as independent accountants for the
Fund.
FINANCIAL STATEMENTS
Focus Trust's Financial Statements, including the notes thereto, dated
as of December 31, 1998, and the report of PricewaterhouseCoopers LLP thereon
are incorporated herein by reference to Focus Trust's 1998 Annual Report to
Shareholders.
<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.
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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.
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