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LEGG MASON
FOCUS
TRUST,
INC.
PROSPECTUS
JUNE 30, 1998
REVISED: DECEMBER 31, 1998
LEGG
MASON
FUNDS
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<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objective and Policies 6
How You Can Invest in the Fund 9
How Your Shareholder Account is Maintained 10
How You Can Redeem Your Shares 10
How Net Asset Value is Determined 12
Dividends and Other Distributions 12
Tax Treatment of Dividends and Other Distributions 12
Shareholder Services 13
The Fund's Management and Investment Adviser 14
The Fund's Distributor 15
Description of the Corporation and its Shares 16
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
250 W. Pratt Street
Baltimore, Maryland 21201
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
LEGG MASON FOCUS TRUST, INC.
This Prospectus sets forth concisely the information about the
fund that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the fund dated June 30, 1998 has been
filed with the Securities and Exchange Commission ("SEC") and, as
amended or supplemented from time to time, is incorporated herein by
reference. The Statement of Additional Information is available
without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers
listed below).
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE
NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
June 30, 1998
Revised: December 31, 1998
Legg Mason Wood Walker, Incorporated
100 Light Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
The LEGG MASON FOCUS TRUST, INC. ("Focus Trust" or "Fund") is a
non-diversified, open-end management investment company. The Fund seeks to
attain maximum long-term capital appreciation with minimum long-term risk
to principal by investing primarily in common stocks, preferred stocks and
securities convertible into or exchangeable for common stocks. Any income
realized will be incidental to the Fund's objective. The selection of
common stocks will be made through an investment strategy referred to as
"focus investing."
Of course, there can be no assurance that the Fund will achieve its
objective. The value of shares of the Fund will fluctuate and your
proceeds upon redemption can be less than your purchase price. See
"Investment Objectives and Policies," which also includes a discussion of
risks.
Shares of the Fund may be appropriate for investments by Individual
Retirement Accounts, Simplified Employee Pension Plans, Savings Incentive
Match Plans for Employees and other qualified retirement plans
(collectively referred to as "Retirement Plans").
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER:
Legg Mason Fund Adviser, Inc. ("LMFA")
PURCHASE METHODS:
Send bank/personal check or wire federal funds. There is a $1,000
minimum, generally, for initial purchases, and a $100 minimum, generally,
for subsequent purchases. Lower minimums for initial and subsequent
purchases apply for automatic investments. See "How You Can Invest in the
Fund."
REDEMPTION METHODS:
Redeem by calling your financial advisor or service provider, or
redeem by mail. See "How You Can Redeem Your Shares."
PUBLIC OFFERING PRICE PER SHARE:
Net asset value.
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege."
DIVIDENDS:
Declared and paid after the end of each taxable year. See "Dividends
and Other Distributions."
REINVESTMENT:
All dividends and other distributions are automatically reinvested in
shares of the Fund unless cash payments are requested.
2
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund
will bear directly or indirectly. The expenses and fees set forth below
are based on average net assets and annual Fund operating expenses for the
year ended December 31, 1997. Fees are adjusted for current expense limits
and fee waiver levels.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (A)(B)
(AS A % OF AVERAGE NET ASSETS)
<S><C>
Management fees 0.70 %
12b-1 fees 1.00 %
Other expenses (after fee waivers and
reimbursements) 0.20 %
-----
Total operating expenses (after fee waivers
and reimbursements) 1.90 %
=====
</TABLE>
---------------------
(A) LMFA has agreed to waive management and 12b-1 fees to the extent
necessary to limit total operating expenses (exclusive of taxes,
brokerage commissions, interest and extraordinary expenses) to 1.90%
of the Fund's average daily net assets at least until June 30, 2000.
In the absence of such waiver, the management fee, 12b-1 fee, other
estimated expenses and total estimated operating expenses for the
current fiscal year would have been as follows: .70%, 1.00%, 2.34% and
4.04% of average net assets, respectively.
(B) The expense information has been restated to reflect current fees and
expenses.
For further information concerning the Fund's expenses, please see
"The Fund's Management and Investment Adviser" and "The Fund's
Distributor." Because the Fund pays 12b-1 fees, long-term investors in the
Fund may pay more in distribution expenses than the economic equivalent of
the maximum front-end sales charge permitted by the National Association
of Securities Dealers, Inc. ("NASD").
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in the Fund over various time periods assuming (1) a 5%
annual rate of return and (2) redemption at the end of each time period.
The Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S><C>
$9 $60 $103 $222
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
table and the assumption in the example of a 5% annual return are required
by regulations of the SEC applicable to all mutual funds. THE ASSUMED 5%
ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED
OR ACTUAL PERFORMANCE OF, THE FUND. THE ABOVE TABLE AND EXAMPLE SHOULD NOT
BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The actual expenses will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which LMFA waives its fee
and the extent to which the Fund incurs variable expenses, such as
transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. The Fund's financial
statements for the year ended December 31, 1997 and the report of Coopers &
Lybrand L.L.P. thereon are included in its annual report and are
incorporated by reference in the Statement of Additional Information. The
annual report is available to shareholders without charge by calling your
Legg Mason or affiliated financial advisor or Legg Mason's Funds Marketing
Department at 800-822-5544.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995(A)
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<S><C>
Net Asset Value, beginning of period $13.01 $11.17 $10.00
----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.11) (0.05) 0.06
Net realized and unrealized gain on investments 3.89 1.96 1.17
----------------------------------------
Total from investment operations 3.78 1.91 1.23
----------------------------------------
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income -- -- (0.06)
Dividends from net realized gain on investments (0.47) (0.07) --
----------------------------------------
Total distributions (0.47) (0.07) (0.06)
----------------------------------------
Net Asset Value, end of period $16.32 $13.01 $11.17
========================================
TOTAL RETURN 29.10% 17.14% 12.29%(D)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $8,093 $7,327 $5,061
Ratio of expenses to average net assets after reimbursement
of expenses by Adviser 2.00% 2.00% 1.92%(C,E)
Ratio of expenses to average net assets before reimbursement
of expenses by Adviser 4.04% 4.96% 7.89%(C)
Ratio of net investment income to average net assets after reimbursement
of expenses by Adviser (0.74)% (0.40)% 1.19%(C)
Ratio of net investment income to average net assets before reimbursement
of expenses by Adviser (2.78)% (3.36)% (4.78)%(C)
Portfolio turnover 14.47%(F) 8.47% 0.00%
Average commission rate paid(B) $ 0.1006 $ 0.0979 N/A
</TABLE>
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(A) FOR THE PERIOD APRIL 17, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1995.
(B) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE AVERAGE COMMISSION RATE PAID ON
SECURITIES PURCHASED AND SOLD BY THE FUND.
(C) ANNUALIZED
(D) NOT ANNUALIZED
(E) PRIOR TO SEPTEMBER 1, 1995, ANNUALIZED EXPENSES WERE CAPPED AT 1.75%.
(F) PORTFOLIO TURNOVER WAS HIGHER THAN ANTICIPATED DUE TO FUND SHARE
REDEMPTIONS.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund may quote the TOTAL RETURN of its shares in
advertisements or in reports or other communications to shareholders. A
mutual fund's total return is a measurement of the overall change in value
of an investment in the fund, including changes in share price and
assuming reinvestment of dividends and other distributions. CUMULATIVE
TOTAL RETURN shows the fund's performance over a specific period of time.
AVERAGE ANNUAL TOTAL RETURN is the average annual compounded return that
would have produced the same cumulative total return if the fund's
performance had been constant over the entire period. Average annual
returns, which differ from actual year-to-year results, tend to smooth out
variations in a fund's returns.
The investment return and principal value of an investment in the Fund
will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Returns of the Fund would have been
lower if its adviser had not waived certain fees for the fiscal years
ended December 31, 1997 and 1996 and the period April 17, 1995 through
December 31, 1995.
Performance figures reflect past performance only and are not intended
to and do not indicate future performance. Further information about the
Fund's performance is contained in its Annual Report to Shareholders,
which may be obtained without charge by calling your Legg Mason or
affiliated financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544.
The average annual total return for the Fund for the period April 17,
1995 (commencement of operations) through December 31, 1997 was 21.59%.
For the fiscal year ended December 31, 1997, the annual total return for
the Fund was 29.10%.
Although U.S. equity markets have been very bullish, i.e., have
appreciated significantly in recent years, as measured by broad market
indexes, the average general equity growth fund, as reported by Lipper
Analytical Services, Inc. over the last 25 years, has had an average
annual total return of 13.2%, and in some years has shown a net decline in
value.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek maximum long-term capital
appreciation with minimum long-term risk to principal by investing
primarily in common stocks, preferred stocks and securities convertible
into or exchangeable for common stocks. Any income realized will be
incidental to the Fund's objective. The selection of common stocks will be
made through an investment strategy referred to as "focus investing," as
described below. There can be no assurance that the Fund's investment
objective will be achieved. The value of shares of the Fund will fluctuate
and your proceeds upon redemption can be less than your purchase price.
The value of the securities held by the Fund is subject to market
risk, including changes in economic conditions, growth rates, profits,
interest rates and the market's perception of these securities. The Fund's
net asset value will increase and decrease, reflecting fluctuations in the
value of securities held by the Fund. Investors should not invest in the
Fund unless they are prepared and able to lose a portion of their
investment or to maintain or add to their investment during periods of
adverse market conditions and should not rely on an investment in the Fund
for their short-term financial needs.
The investment objective of the Fund may not be changed without
shareholder approval. Unless otherwise stated in this Prospectus, the
Fund's investment policies may be changed by the Fund's Board of Directors
without shareholder approval. Additional investment policies and
restrictions are described in the Statement of Additional Information.
LMFA identifies eligible portfolio securities according to a
methodology known as "focus investing." Focus investing is an investment
strategy whereby companies (or businesses) are identified and selected as
eligible for investment by the examination of all fundamental quantitative
and qualitative aspects of the company, the company's management and
financial position as compared to its stock price. This is a bottom up,
fundamental method of analysis as opposed to technical analysis. Technical
analysis often depends on the identification of market cycles and timing
techniques.
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. Of course, investment results either can be
enhanced or diminished by changes in valuation. LMFA theorizes that in
shorter periods, changes in valuation tend to dominate investment returns,
but as the time horizon lengthens, the economic returns of the business
increasingly dominate the investment return.
A focus investor, according to LMFA, should disregard short-term
nuances and instead focus on the long-term economic progress of the
investment. The economic progress of a business is determined by its
earnings power. The return on shareholder's capital is one measure that
distinguishes the operating earnings power of a business.
LMFA believes that an outstanding business can be identified by
focusing on a company's economic competitive position, its financial
strength, and the capabilities of the company's management. There are
certain business, financial, and management tenets that encapsulate an
outstanding business such as those with favorable long-term prospects that
are operated by honest and competent people and are available at
attractive prices. Focus investors expend much energy determining the
difference between a company's intrinsic value and its current price in
the marketplace.
LMFA selects common stocks to be held by the Fund according to focus
investing. Such securities will be selected and held for the long term.
LMFA is less concerned with short-term price fluctuations and instead
seeks to achieve minimum risk to principal together with long-term capital
appreciation. For these purposes LMFA ignores technical stock market
studies and expends no energy attempting to forecast the general direction
of the stock market.
LMFA will seek maximum long-term capital appreciation for the Fund
primarily by purchasing common stocks through "focus investing," as
described above. The Fund may also purchase preferred stocks and
securities convertible into common stocks, such as convertible bonds and
debentures. The securities in which the Fund invests
6
<PAGE>
generally will be listed on a national stock exchange or traded on the
over-the-counter market. However, the Fund may invest up to 10% of its
total assets in securities for which there is no ready market, known as
illiquid securities.
Security selection for the Fund is based on LMFA's analysis of a
company's financial characteristics, economic competitive position and an
assessment of the quality and capability of the company's management.
Companies acceptable for investment by the Fund typically possess, in the
opinion of LMFA, favorable long-term prospects, shareholder-oriented
management, and strong financial positions including high return on
capital, healthy balance sheets, predictability in the growth of earnings,
and cash generating abilities in excess of the company's operating needs.
The Fund will only invest in those companies which, in LMFA's opinion, are
undervalued at the time of purchase.
While it is the Fund's policy 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.
The Fund's investment in debt securities will be made only in those
considered to be investment grade. Investment grade securities include
those securities which are rated in one of the four highest rating
categories by a nationally recognized statistical rating organization
("NRSRO") at the time of purchase, or, if unrated, are determined to be of
comparable quality by LMFA. Securities rated in the fourth highest
category (e.g., BBB by Standard & Poor's or Baa by Moody's Investors
Service, Inc.), although considered investment grade, may have speculative
characteristics and may be subject to greater fluctuations in value than
higher rated securities. In the event a security held by the Fund is
downgraded below investment grade, LMFA will promptly reassess the risks
involved and take such actions as it determines will be in the best
interests of the Fund and its shareholders.
Under normal circumstances, LMFA expects to make concentrated
investments in a limited number of companies. The Fund is able to invest
more than 5% of its total assets at the time of purchase in the securities
of a single issuer. Thus, it would be more susceptible to losses or
underperformance if the securities of one or more large holdings declines.
This may also increase the volatility of Fund shares. See "Types of
Investments and Associated Risks." When purchasing portfolio securities
for the Fund, LMFA's philosophy is a buy and hold strategy versus buying
for short-term trading. Accordingly, the portfolio turnover rate is not
expected to exceed 25%.
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"). See
"Types of Investments and Associated Risks."
When, in the opinion of LMFA, a temporary defensive position is
warranted, the Fund is permitted to 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 the foregoing
securities. High quality securities are securities that have received a
rating from at least one NRSRO in one of the two highest rating categories
or, if not rated by any NRSRO, such as U.S. Government securities, have
been determined by LMFA to be of comparable quality. In addition, the Fund
may hold cash reserves, when necessary, for anticipated securities
purchases and redemptions or temporarily during periods when prevailing
market conditions call for a defensive posture. The Fund's investment
objective may not be achieved at such times when a temporary defensive
position is taken.
The Fund may not use any of the following forms of derivatives or
hedging instruments such as options, futures contracts, puts, calls or
options on futures contracts, and therefore will not be subject to the
risks inherent in these types of investments. The Fund may, however,
invest in forward commitments, when-issued securities and delayed-delivery
transactions which are considered derivative securities.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
All investments involve risk and there can be no guarantee against
loss resulting from an investment in the Fund, nor can there be any
assurance that the Fund's investment objective will be
7
<PAGE>
attained. The risks inherent in investing in the Fund are those risks
which are common to any mutual fund investment. These include the risks
that the net asset value will fluctuate in response to changes in economic
conditions, interest rates and the market's perception of the underlying
portfolio securities of the Fund.
The Fund is designed for long-term investors who are willing to accept
the risks entailed in seeking long-term growth of capital through
investment primarily in common stocks. The Fund is not meant to provide a
vehicle for playing short-term swings in the stock market nor is it
intended to be a complete investment program. The value of the Fund's
portfolio securities will fluctuate based on market and other conditions.
Consistent with a long-term investment approach, investors in the Fund
should be prepared and able to lose a portion of their investment or to
maintain or add to their investment during periods of adverse market
conditions and should not rely on an investment in the Fund for their
short-term financial needs.
The Fund is classified as a "non-diversified" investment company
within the meaning of the Investment Company Act of 1940, as amended (the
"1940 Act") which means, in general, that the Fund may invest more than 5%
of its total assets in the securities of a single issuer, but only if, at
the close of each quarter of the Fund's taxable year, the aggregate amount
of such holdings does not exceed 50% of the value of its total assets and
no more than 25% of the value of its total assets is invested in the
securities of a single issuer. An investment in the Fund therefore will
entail greater price risk than an investment in a diversified investment
company because a higher percentage of investments among fewer issuers may
result in greater fluctuation in the total market value of the Fund's
portfolio, and economic, political or regulatory developments may have a
greater impact on the value of the Fund's portfolio than would be the case
if the portfolio were diversified among more issuers.
In attempting to achieve its investment objective, the Fund may, in
addition to the investment policies stated above, engage in the following
practices:
FOREIGN SECURITIES
The Fund may invest directly in the securities of foreign issuers.
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. 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. In addition, 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.
ADRS AND EDRS
For many foreign securities, there are U.S. dollar-denominated ADRs,
which are bought and sold in the United States 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 United States 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 currency of the underlying
security. The Fund has no current intention to invest in unsponsored ADRs
and EDRs.
8
<PAGE>
SECURITIES LENDING
The Fund may lend its portfolio securities on a short-term basis to
banks, broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned. The Fund will not lend portfolio securities in excess of 33% of
the value of its total assets. There may be risks of delay in receiving
additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities
fail financially. However, loans are made only to borrowers deemed by LMFA
to be of good standing and when, in its judgment, the income to be earned
from the loan justifies the attendant risks.
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 assets in shares of investment companies and up to 5% of its
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 Fund's shareholders) to bear proportionately the
costs incurred in connection with the investment companies' operations.
INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Fund policies, unless described as fundamental, can be changed
by action of the Board of Directors.
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of its total assets in the securities
of issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
HOW YOU CAN INVEST IN THE FUND
You may purchase shares of the Fund through a brokerage account with
Legg Mason, with an affiliate that has an agreement with Legg Mason, or
with an unaffiliated entity having an agreement with Legg Mason
("Financial Advisor or Service Provider"). Your Financial Advisor or
Service Provider will be pleased to explain the shareholder services
available from the Fund and answer any questions you may have. Documents
available from your Financial Advisor or Service Provider should be
completed if you invest in shares of the Fund through a Retirement Plan.
Investors who are considering establishing a Retirement Plan may wish
to consult their attorneys or tax advisers with respect to individual tax
questions. Your Financial Advisor or Service Provider can make available
to you forms of plans. The option of investing in these plans through
regular payroll deductions may be arranged with Legg Mason and your
employer. Additional information with respect to these plans is available
upon request from a Financial Advisor or Service Provider.
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.
The minimum initial investment in a Fund account, including
investments made by exchange from other Legg Mason funds and investments
in a Retirement Plan, is $1,000, and the minimum investment for each
purchase of additional shares
9
<PAGE>
is $100, except as noted below. For those investing through the Fund's
Future First Systematic Investment Plan, payroll deduction plans and plans
involving automatic payment of funds from financial institutions or
automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. The Fund may change
these minimum amount requirements at its discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in the Fund:
1. THROUGH A FINANCIAL ADVISOR OR SERVICE PROVIDER
Shares may be purchased through a Financial Advisor or Service
Provider. A Financial Advisor or Service Provider will be pleased to open
an account for you, explain to you the shareholder services available from
the Fund and answer any questions you may have. After you have established
an account, you can order shares from your Financial Advisor or Service
Provider in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Fund 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. Please contact a Financial Advisor or Service Provider
for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Fund through a Financial Advisor or
Service Provider.
Share purchases will be processed at the net asset value next
determined after your Financial Advisor or Service Provider has received
your order; payment must be made within three business days to Legg Mason.
Orders received by your Financial Advisor or Service Provider before the
close of regular trading on the New York Stock Exchange ("Exchange")
(normally 4:00 p.m. Eastern time) ("close of the Exchange") on any day the
Exchange is open will be executed at the net asset value determined as of
the close of the Exchange on that day. Orders received by your Financial
Advisor or Service Provider after the close of the Exchange or on days the
Exchange is closed will be executed at the net asset value determined as
of the close of the Exchange on the next day the Exchange is open. See
"How Net Asset Value is Determined." The Fund reserves the right to reject
any order for its shares or to suspend the offering of shares for a period
of time. Some Service Providers may place other conditions on the purchase
of shares. Consult their program literature for further information.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. Shares may not be held in, or
transferred to, an account with any brokerage firm that does not have an
agreement with Legg Mason. The Fund does not issue share certificates.
HOW YOU CAN REDEEM YOUR SHARES
There are two ways you can redeem your shares. First, you may give
your Financial Advisor or Service Provider an order for redemption of your
shares in person or by telephone. 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. Second, you
may send a written request for redemption to: Legg Mason Focus
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Trust, Inc., c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore,
Maryland 21203-1476.
Requests for redemption received by your Financial Advisor or Service
Provider before the close of the Exchange on any day when the Exchange is
open, will be transmitted to the Fund's transfer agent for redemption at
the net asset value per share determined as of the close of the Exchange
on that day. Requests for redemption received by your Financial Advisor or
Service Provider after the close of the Exchange will be executed at the
net asset value determined as of the close of the Exchange on its next
trading day. A redemption request received by your Financial Advisor or
Service Provider may be treated as a request for repurchase and, if it is
accepted, your shares will be purchased at the net asset value per share
determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your brokerage account
two business days after trade date. The proceeds of your redemption or
repurchase may be more or less than your original cost. If the shares to
be redeemed or repurchased were paid for by check (including certified or
cashier's checks), within 10 business days of the redemption or repurchase
request, the proceeds will not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
Written requests for redemption must be in "good order." A redemption
request will be considered to be received in "good order" only if:
1. You have indicated in writing the number of shares (or dollar
amount) to be redeemed, the complete Fund name and your shareholder
account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Financial
Advisor or Service Provider.
The Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. The Fund may request identifying
information from callers or employ identification numbers. The Fund may be
liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders. Shareholders who do not wish
to have telephone redemption privileges should call their Financial
Advisor or Service Provider for further instructions.
Because of the relatively high cost of maintaining small accounts, the
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
you. However, the Fund will not redeem accounts that fall below $500
solely as a result of a reduction in net asset value per share. If the
Fund elects to redeem the shares in your account, you will be notified
that your account is below $500 and will be allowed 60 days to make an
additional investment to avoid having your account closed.
To the extent permitted by law, the Fund reserves the right to take up
to seven days to make payment upon redemption if, in the judgment of its
adviser, the Fund could be adversely affected by immediate payment. (The
Statement of Additional Information describes several other circumstances
in which the date of payment may be postponed or the right of redemption
suspended.) Some Service Providers may have other procedures for
redemption, either in addition to, or
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instead of, those described above. Consult your Service Provider's
literature for more information.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per share of the Fund is determined daily as of the
close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to Fund shares from the total
assets attributable to such shares and dividing the result by the number
of shares outstanding. Securities owned by the Fund for which market
quotations are readily available are valued at current market value. In
the absence of readily available market quotations, securities are valued
at fair value as determined by the Fund's Board of Directors. Where a
security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by
the Fund's adviser to be the primary market. Securities with remaining
maturities of 60 days or less are valued at amortized cost. The Fund will
value its foreign securities in U.S. dollars on the basis of the
then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to distribute its net investment income annually in
December. Any net realized gain from the sale of portfolio securities is
distributed at least once each year unless it is used to offset losses
carried forward from prior years, in which case no such gain will be
distributed.
Dividends and other distributions, if any, on Fund shares held in a
Retirement Plan and by shareholders maintaining a Systematic Withdrawal
Plan generally are reinvested in Fund shares on the payment dates. Other
shareholders may elect to:
1. Receive both dividends and other distributions in Fund shares;
2. Receive dividends in cash and other distributions in Fund shares;
3. Receive dividends in Fund shares and other distributions in cash;
or
4. Receive both dividends and other distributions in cash.
If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to
having all dividends and other distributions reinvested in additional Fund
shares. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Legg Mason fund. Please contact your
Financial Advisor or Service Provider for additional information about
this option.
If no election is made, both dividends and other distributions are
credited to your Fund account in Fund shares at the net asset value of the
shares determined as of the close of the Exchange on the reinvestment
date. Shares received pursuant to any of the first three (reinvestment)
elections above also are credited to your account at that net asset value.
Shareholders electing to receive dividends and/or other distributions in
cash will be sent a check or will have their Legg Mason account credited
after the payment date. You may elect at any time to change your option by
notifying the Fund in writing at: Legg Mason Focus Trust, Inc., c/o Legg
Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
Your election must be received at least 10 days before the record date in
order to be effective for dividends and other distributions paid to
shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Code") so that it will be relieved of federal income tax on that part of
its investment company taxable income and net capital gain that it
distributes to its shareholders.
Dividends from the Fund's investment company taxable income (whether
paid in cash or reinvested in Fund shares) are taxable to its shareholders
(other than Retirement Plans and other tax-exempt or tax-deferred
investors) as ordinary income to the extent of the Fund's earnings and
profits. Distributions of the Fund's net capital gain
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(whether paid in cash or reinvested in Fund shares), when designated as
such, are taxable to those shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Under the
Taxpayer Relief Act of 1997, different maximum tax rates apply to a
noncorporate taxpayer's net capital gain depending on the holding period
of the security and the taxpayer's marginal rate of federal income
tax -- generally, 28% for gain recognized on capital assets held for more
than a year but not more than 18 months, and 20% (10% for taxpayers in the
15% marginal tax bracket) for gain recognized on capital assets held for
more than 18 months. In the case of a regulated investment company such as
the Fund, the relevant holding period is determined by how long the Fund
has held the portfolio security on which the gain was earned, not by how
long you have held your Fund shares.
The Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. The notice
will tell you what portion of the capital gains falls into each of the
different tax rate categories mentioned above.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and
certain other noncorporate shareholders who do not provide the Fund with a
certified taxpayer identification number. The Fund also is required to
withhold 31% of all dividends and capital gain distributions payable to
such shareholders who otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of any other Legg Mason fund
generally will have similar tax consequences. See "Shareholder Services
-- Exchange Privilege." If Fund shares are purchased within 30 days
before or after redeeming at a loss other shares of the same Fund
(regardless of class), all or part of that loss will not be deductible and
instead will increase the basis of the newly purchased shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Fund, depending on the laws of your home
state and locality. A portion of the dividends paid by the Fund
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions; the Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Fund shares (except a reinvestment of dividends, capital gain
distributions and shares purchased through the Future First Systematic
Investment Plan or through automatic investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares only through the
Future First Systematic Investment Plan or through automatic investments,
in which case an account statement will be sent quarterly. Reports will be
sent to the Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report for the Fund will
contain financial statements audited by its independent accountants.
Shareholder inquiries should be addressed to: Legg Mason Focus Trust,
Inc., c/o Legg Mason
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Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of the Fund while they are participating in the Systematic
Withdrawal Plan with respect to the Fund. Please contact your Financial
Advisor or Service Provider for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Fund shares
for the corresponding class of shares of any of the Legg Mason funds,
provided that (i) such shares are eligible for sale in your state of
residence and (ii) the shares are held in a Legg Mason brokerage account
or an account at a Financial Advisor or Service Provider eligible to
purchase shares of the Legg Mason fund into which you wish to exchange.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a fund on which the same
or higher initial sales charge previously was paid.
There is no charge for the exchange privilege, but the Fund reserves
the right to terminate or limit the exchange privilege of any shareholder
who makes more than four exchanges from the Fund in one calendar year. To
obtain further information concerning the exchange privilege and
prospectuses of other Legg Mason funds, or to make an exchange, please
contact your Financial Advisor or Service Provider.
To effect an exchange by telephone, please call your Financial Advisor
or Service Provider with the information described in "How You Can Redeem
Your Shares." The other factors relating to telephone redemptions
described in that section apply also to telephone exchanges. Please read
the prospectus for the other fund(s) carefully before you invest by
exchange. The Fund reserves the right to modify or terminate the exchange
privilege upon 60 days' notice to shareholders. Some Service Providers may
not offer all of the Legg Mason funds for exchange.
THE FUND'S MANAGEMENT AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction
of its Board of Directors.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Fund has an investment advisory and management agreement with LMFA
which was approved by the Fund's Board of Directors ("Investment Advisory
and Management Agreement"). Under the Investment Advisory and Management
Agreement, LMFA has responsibility for making investment decisions and
placing orders to buy or sell a particular security. It also is obligated
to provide the Fund with investment management and administrative
services, and to oversee the Fund's relationships with outside service
providers, such as the custodian, transfer agent, accountants, and
lawyers.
For the period June 28, 1997 to June 30, 1998, Focus Capital Advisory,
L.P. ("Focus Capital") served as the Fund's investment adviser. Prior to
June 28, 1997, Lloyd, Leith & Sawin, Inc. served as investment adviser to
the Fund.
For services under the Investment Advisory and Management Agreement,
LMFA receives a fee from the Fund, calculated daily and payable monthly,
at an annual rate of 0.70% of the Fund's average daily net assets. During
the period January 1, 1997 through June 27, 1997, Lloyd, Leith & Sawin,
Inc. was entitled to receive advisory fees of $26,527, all of which were
waived by Lloyd, Leith & Sawin, Inc.; during the period June 28, 1997
14
<PAGE>
through December 31, 1997, Focus Capital was entitled to receive advisory
fees of $26,721, all of which were waived by Focus Capital.
LMFA acts as adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of approximately
$12 billion as of April 30, 1998. LMFA's address is 100 Light Street,
Baltimore, Maryland 21202. LMFA is a wholly owned subsidiary of Legg
Mason, Inc., a financial services holding company.
Like other mutual funds, financial and business organizations around
the world, the Fund could be adversely affected if the computer systems
used by LMFA and other service providers do not properly process and
calculate date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." LMFA is taking
steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Fund.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent the
Fund's expenses (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during that month an annual rate of 1.90% of the Fund's
average daily net assets, at least until June 30, 2000. The Fund pays all
its other expenses which are not assumed by LMFA.
EXPENSE RATIOS
For the fiscal year ending December 31, 1997, the ratio of the Fund's
expenses to its average net assets (after application of any fee waivers)
was 2.00%.
PORTFOLIO MANAGEMENT
Robert G. Hagstrom, Jr. serves as Portfolio Manager of the Fund and
has been primarily responsible for overseeing all investments made by the
Fund since its inception on April 17, 1995. From 1997 to the date of this
Prospectus, he was the General Partner of Focus Capital, the assets of
which were purchased by LMFA. 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 received his B.A. and M.A. from Villanova
University. He is a member of the Association of Investment Management and
Research and the Financial Analysts of Philadelphia. Mr. Hagstrom is a
Chartered Financial Analyst and author of two books, titled THE WARREN
BUFFETT 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).
BROKERAGE
The Fund may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
THE FUND'S DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of the Fund's shares pursuant to an Underwriting Agreement.
The Underwriting Agreement obligates Legg Mason to pay certain expenses in
connection with the offering of shares, including any compensation to its
financial advisors, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at the Fund's
expense, and for any supplementary sales literature and advertising costs.
The Board of Directors of the Fund has adopted a Distribution Plan
("Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan provides that
as compensation for its ongoing services to investors in Fund shares and
its activities and expenses related to the sale and distribution of
shares, Legg Mason receives from the Fund an annual distribution fee
payable from the assets attributable to Fund shares, of up to 0.75% of the
average daily net assets attributable to Fund shares; and an annual
service fee equal to 0.25% of
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<PAGE>
the average daily net assets attributable to Fund shares. The distribution
fee and service fee are calculated daily and paid monthly. The fees
received by Legg Mason during any year may be more or less than its cost
of providing distribution and shareholder services for Fund shares. Legg
Mason has also agreed to waive at least until June 30, 2000 distribution
fees in any month to the extent the Fund's expenses (exclusive of taxes,
interest, brokerage costs and extraordinary expenses) exceed 1.90% of
average daily net assets.
NASD rules limit the amount of annual distribution and service fees
that may be paid by mutual funds and impose a ceiling on the cumulative
distribution fees received. The Fund's Plan complies with those rules.
Legg Mason may enter into agreements with unaffiliated dealers to sell
shares of the Fund. Legg Mason pays such dealers up to 90% of the
distribution and shareholder service fees that it receives from the Fund
with respect to shares sold by the dealers. The President and Treasurer of
the Fund are employed by Legg Mason.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
Legg Mason Focus Trust, Inc. was established as a Maryland corporation
on January 27, 1995. It 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 of the Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Fund will call a special meeting
of the shareholders at the request of 10% or more of the shares entitled
to vote; shareholders wishing to call such a meeting should submit a
written request to the Fund at 100 Light Street, Baltimore, Maryland
21202, stating the purpose of the proposed meeting and the matters to be
acted upon.
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LEGG MASON FOCUS TRUST, INC.
STATEMENT OF ADDITIONAL INFORMATION
JUNE 30, 1998
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus (dated June 30, 1998), which has been
filed with the Securities and Exchange Commission ("SEC"). Copies of the
Prospectus are available without charge from the Fund's distributor, Legg Mason
Wood Walker, Incorporated ("Legg Mason"), at (410) 539-0000.
The LEGG MASON FOCUS TRUST, INC. ("Focus Trust") is a non-diversified
open-end management investment company. The Fund seeks to attain maximum
long-term capital appreciation with minimum long-term risk to principal by
investing primarily in common stocks, preferred stocks and securities
convertible into or exchangeable for common stocks. Any income realized will be
incidental to the Fund's objective. The selection of common stocks will be made
through an investment strategy referred to as "Focus Investing."
The Fund pays investment advisory and management fees to Legg Mason
Fund Adviser, Inc. ("LMFA"). The Fund also pays a 12b-1 distribution fee. See
"The Fund's Distributor."
LEGG MASON WOOD WALKER,
INCORPORATED
-----------------------------------------------
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21202
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
The investment restrictions set forth below 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.
Except as set forth under "Investment Objective and Policies" in the
Prospectus, 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;
(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
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<PAGE>
(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.
Although not considered fundamental, the Fund will not invest: (1) more
than 5% of its net assets in warrants, including within that amount no more than
2% in warrants which are not listed on the New York or American Stock Exchanges,
except warrants acquired as a result of its holdings of common stock; and, (2)
purchase or retain the securities of any issuer if, to the knowledge of the
Fund, any officer or director of the Fund or of its investment manager owns
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
and such officers and directors of the Fund or of its investment manager who own
more than 1/2 of 1%, own in the aggregate, more than 5% of the outstanding
securities of such issuer.
* * * * *
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 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.
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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.
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. LMFA determines the
liquidity of the Fund's securities, under supervision of the Board of Directors.
PORTFOLIO TURNOVER RATE
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, LMFA anticipates that the portfolio turnover levels will be
held at low levels. This is consistent with the Fund's buy and hold strategy.
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. It is currently estimated that under normal market conditions the annual
portfolio
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<PAGE>
turnover rate for the Fund will not exceed 25%. 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 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 of the securities the Fund is obligated to
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.
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<PAGE>
Investing in securities under Rule 144A could have the effect of
increasing the levels of the Fund's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. The Fund will limit its investment in securities of issues 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.
OTHER INVESTMENTS
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.
ADDITIONAL TAX INFORMATION
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to so qualify for any taxable year, the Fund must, among other
things, (i) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans and gains from the sale or
other disposition of stock, securities of foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (ii) distribute at least 90% of its dividend, interest and certain
other taxable income each year; and (iii) at the end of each fiscal quarter
maintain at least 50% of the value of its total assets in cash, U.S. Government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited, in respect of any one to each
issuer, to not more than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and have no more than 25% of
its assets invested in the securities (other than those of the U.S. Government
or other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses.
To the extent the Fund qualifies for treatment as a regulated
investment company, it generally will not be subject to federal income tax on
income paid to shareholders in the form of dividends or capital gains
distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of the Fund's "required distributions" over actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed amounts from
prior years. The Fund intends to make distributions sufficient to avoid
imposition of the excise tax. A distribution will be treated as paid on December
31 of the current calendar year if it is declared by the Fund during October,
November or December to shareholders of record during such month and paid during
January of the following year. Such distributions will be taxable in the year
they are declared, rather than the year in which they are received.
Shareholders generally will be subject to federal income taxes on
distributions made by the Fund whether received in cash or additional shares of
the Fund. Distributions of net investment income and net short-term capital
gains, if any, will be taxable to shareholders as ordinary income. Distributions
of net investment income may be eligible for the corporate dividends-received
deduction to the extend attributable to the Fund's qualifying dividend income.
However, the alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of net capital gains,
if any, designated by the Fund as capital gain dividends, will be taxable to
shareholders as long-term capital gains, without regard to how long a
shareholder has held shares of the Fund, and are not eligible for the dividends
received deduction. A loss on the sale of shares held for six months or less
will be
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<PAGE>
treated as a long-term capital loss to the extent of any capital gain dividend
paid to the shareholder with respect to such shares.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Generally, the
amount of the original issue discount is treated as interest income and is
included in income over the term of the debt security, even though payment of
the amount is not received until a later time, usually when the debt security
matures.
Some debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any debt security having market discount
will be treated as ordinary income to the extent it does not exceed the accrued
market discount on such debt security. Generally, market discount accrues on a
daily basis for each day the debt security is held by the Fund at a constant
rate over the time remaining to the debt security's maturity. In the case of
certain short-term debt securities with market discount, the amount of the
market discount is included in income over the remaining term of the debt
security, even though payment of the amount is not received until a later time,
usually when the debt security matures.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which the Fund held the PFIC stock. The Fund itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's holding period in prior taxable years (and an interest
factor will be added to the tax as if the tax had actually been payable in such
prior taxable years) even though the Fund distributed the corresponding income
to shareholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, the Fund may be able to elect to mark to market its PFIC
stock, resulting in the stock being treated as sold at fair market value on the
last business day of each taxable year. Any resulting gain would be reported as
ordinary income, and any resulting loss would not be recognized. If this
election were made, the special rules described above with respect to excess
distributions would still apply. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC stock.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains and losses, referred to under
the Code as "Section 988"
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<PAGE>
gains and losses, may increase or decrease the amount of the Fund's net
investment income to be distributed to its shareholders as ordinary income. For
example, fluctuations in exchange rates may increase the amount of income that
the Fund must distribute in order to qualify for treatment as a regulated
investment company and to prevent application of an excise tax on undistributed
income. Alternatively, fluctuations in exchange rates may decrease or eliminate
income available for distribution. If Section 988 losses exceed other net
investment income during a taxable year, the Fund would not be able to make
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as return of capital to shareholders for
federal income tax purposes, rather than as an ordinary dividend, reducing each
shareholder's basis in his Fund shares.
Upon the sale or exchange of shares in the Fund, a shareholder will
realize a taxable gain or loss depending upon his basis in the shares. Such gain
or loss will be treated as capital gain or loss if the shares are capital assets
in the shareholder's hands, and generally will be long-term if the shareholder's
holding period for the shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. The Fund will notify shareholders
each year of the amount of dividends and distributions, including the amount of
any distribution of capital gain dividends, and the portion of its dividends
which may be eligible for the 70% dividend-received deduction.
The above discussion and the related tax discussion in the Prospectus
are general in nature and are not intended to be complete discussions of all
applicable federal tax consequences relating to an investment in the Fund. The
Fund's legal counsel has expressed no opinion in respect thereof. Dividends and
distributions also may be subject to state and local taxes. Shareholders are
urged to consult their tax advisors regarding specific questions as to federal,
state and local taxes.
The foregoing discussion relates solely to U.S. federal income
tax law. Non-U.S. investors should consult their tax advisors concerning
the tax consequences of ownership of shares of the Fund, including the
possibility that distributions may be subject to a 30% U.S. withholding tax
(or a reduced rate of withholding provided by treaty).
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
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
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<PAGE>
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 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
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<PAGE>
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.
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:
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.
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<PAGE>
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, 1997 was 21.59%. For
the fiscal year ended December 31, 1997, the annual total return for the Fund
was 29.10%.
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.
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.
TAX-DEFERRED RETIREMENT PLANS
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of such plans until the
income is distributed to them. Investors who are
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<PAGE>
considering establishing an IRA, SEP, SIMPLE or other qualified retirement plan
should consult their attorneys or other tax advisers with respect to individual
tax questions. The option of investing in these plans with respect to the Fund
through regular payroll deductions may be arranged with a Legg Mason or
affiliated financial advisor and your employer. Additional information with
respect to these plans is available upon request from any Legg Mason or
affiliated financial advisor.
Individual Retirement Account -- IRA
Certain investors may obtain tax advantages by establishing IRAs.
Specifically, except as noted below, if neither you nor your spouse is an active
participant in a qualified employer or government retirement plan, or if either
you or your spouse is an active participant and your adjusted gross income does
not exceed a certain level, each of you may deduct cash contributions made to an
IRA in an amount for each taxable year not exceeding the lesser of 100% of your
earned income or $2,000. A married investor who is not an active participant in
such a plan and files a joint income tax return with his or her spouse (and
their combined adjusted gross income does not exceed $150,000) is not affected
by the spouse's active participant status. In addition, if your spouse is not
employed and you file a joint return, you may establish a separate IRA for your
spouse and contribute up to a total of $4,000 to the two IRAs, provided that
neither contribution exceeds $2,000. If your employer's plan permits voluntary
contributions and meets certain requirements, you may make voluntary
contributions to that plan that are treated as deductible IRA contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Fund shares through IRA
contributions, up to certain limits, because all dividends and other
distributions on your Fund shares are then not immediately taxable to you or the
IRA; they become taxable only when distributed to you. To avoid penalties, your
interest in an IRA must be distributed, or start to be distributed, to you not
later than the end of the taxable year in which you attain age 70 1/2.
Distributions made before age 59 1/2, in addition to being taxable, generally
are subject to a penalty equal to 10% of the distribution, except in the case of
death or disability or where the distribution is rolled over into another
qualified plan or certain other situations.
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 a member of his or
her family).
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Fund shares.
-12-
<PAGE>
Savings Incentive Match Plan for Employees - SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan instead 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.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding at the
rate of 10% (depending on the type and amount of the distribution), unless the
recipient elects not to have any withholding apply.
THE CORPORATION'S DIRECTORS AND OFFICERS
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
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 eight other Legg Mason funds. Formerly: Senior
Vice President and Chief Financial Officer of Philadelphia Electric Company (now
PECO Energy Company); Executive Vice President and Treasurer, Girard Bank, and
Vice President of its parent holding company, the Girard Company; and Director
of Finance, City of Philadelphia.
ARNOLD L. LEHMAN [7/18/44], Director; 200 Eastern Parkway, Brooklyn,
New York. Director of the Brooklyn Museum of Art; Director/Trustee of eight
other 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 eight other Legg Mason funds. Formerly: Executive
Director of the Baltimore International Festival (January 1991-March 1993),
and Senior Assistant to the President of The Johns Hopkins University
(1986-1991).
T.A. RODGERS [10/22/34], Director; 2901 Boston Street, Baltimore,
Maryland. Principal, T.A. Rodgers & Associates (management consulting);
Director/Trustee of eight other 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:
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<PAGE>
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 Advisor, Inc.; Vice President and Treasurer of nine other
Legg Mason funds, Bartlett Capital Trust and Western Asset Trust,
Inc.; Vice President of Legg Mason Wood Walker, Inc.
KATHI D. BAIR* [12/15/64], Secretary; Secretary of the Legg Mason
funds and Bartlett Capital Trust; 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 receive no salary or fees from the Fund. Each Director of the Fund who is
not an interested person of the Fund ("Independent Directors") receives an
annual retainer and a per meeting fee based on the average net assets of the
Fund at December 31 of the previous year.
As of April 1, 1998, 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, 1998, the following persons owned of record or
beneficially more than 5% of the outstanding voting shares of the Fund.
<TABLE>
<CAPTION>
Name & Address Percentage
- -------------- ----------
<S><C>
Charles Schwab & Co., Inc. 9.15%
San Francisco, CA
</TABLE>
The following table provides certain information relating to the
compensation of the Fund's directors for the fiscal year ended December 31,
1997. 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>
John F. Curley, Jr. - Director None None
Richard G. Gilmore - Director None $29,400
Arnold L. Lehman - Director None $29,400
Jill E. McGovern - Director None $29,400
T. A. Rodgers - Director None $29,400
</TABLE>
* Represents fees paid to each director during the fiscal year ended
December 31, 1997. None of the Fund's current directors served as a
director of the Fund during the fiscal year ended December 31, 1997.
-14-
<PAGE>
** Represents aggregate compensation paid to each director during the 12
months ended December 31, 1997. There are nine open-end investment
companies in the Legg Mason Complex (with a total of seventeen funds).
THE FUND'S INVESTMENT ADVISER AND MANAGER
LMFA, a Maryland Corporation, is located at 100 Light Street,
Baltimore, Maryland 21202. LMFA is a wholly owned subsidiary of Legg Mason,
Inc., which is also the parent of Legg Mason. 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 for the Fund's expenses (exclusive of taxes, interest,
brokerage and extraordinary expenses) in excess of 1.90% of average net assets
until at least June 30, 2000.
For the period June 28, 1997 through December 31, 1997, 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
& Sawin, Inc. served as investment adviser to the Fund. For the period April 17,
1995 (commencement of operations) through December 31, 1995, 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 $15,371,
$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%.
-15-
<PAGE>
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 Advisory 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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 LFMA's buy and hold strategy for the
portfolio securities held by the Fund.
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.
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.
-16-
<PAGE>
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 period April 17, 1995 (commencement of operations) through
December 31, 1995 and the fiscal years ended December 31, 1996 and 1997, the
Fund incurred aggregate brokerage commissions of $6,042, $8,781 and $9,663,
respectively.
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.
THE FUND'S DISTRIBUTOR
Legg Mason 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
-17-
<PAGE>
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").
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.
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
The Bank of New York, 48 Wall Street, New York, NY 10286 serves as
custodian of the Fund's assets. First Data Investor Services Group, Inc. serves
as transfer and dividend-disbursing agent, and administrator of various
shareholder services. Boston Financial Data Services ("BFDS"), P.O. Box 953,
Boston, Massachusetts, 02103, serves as sub-transfer and dividend-disbursing
agent, and administrator
-18-
<PAGE>
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
Coopers & Lybrand, L.L.P. 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, 1997, which have been audited by Coopers & Lybrand, L.L.P.
are incorporated by reference from Focus Trust's 1997 Annual Report to
Shareholders.
-19-
<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.
-20-
<PAGE>
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D-Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
-21-
<PAGE>
TABLE OF CONTENTS
PAGE
----
Additional Information About Investment Limitations and Policies 2
Additional Tax Information 6
Additional Purchase and Redemption Information 8
Valuation of Fund Shares 10
Performance Information 10
Tax-Deferred Retirement Plans 11
The Corporation's Directors and Officers 13
The Fund's Investment Adviser and Manager 15
Portfolio Transactions and Brokerage 16
The Fund's Distributor 17
The Fund's Custodian and Transfer and Dividend-Disbursing Agent 18
The Fund's Legal Counsel 19
The Fund's Independent Accountants 19
Financial Statements 19
Appendix A 20
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.
LEGG MASON WOOD WALKER,
INCORPORATED
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410) 539-0000 (800) 822-5544
