As filed with the Securities and Exchange Commission on March 2, 1999.
1933 Act Registration No. 33-89090
1940 Act Registration No. 811-8966
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 8 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 10 [ X ]
(Check appropriate box or boxes.)
LEGG MASON FOCUS TRUST, INC.
(Exact name of registrant as specified in charter)
100 Light Street
Baltimore, Maryland 21202
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 539-0000
CHARLES A. BACIGALUPO
100 Light Street
Baltimore, Maryland 21202
(Name and address of agent for service)
Copies to:
ARTHUR J. BROWN, Esq.
STEPHANIE BOURQUE, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., 2nd Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[ ] On ___________ pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485 (a)(1).
[X] On May 1, 1999 pursuant to Rule 485 (a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On ___________ pursuant to Rule 485(a)(2)
<PAGE>
Legg Mason Focus Trust, Inc.
Contents of Registration Statement
This Registration Statement consists of the following papers and
documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Legg Mason Focus Trust
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Focus Trust, Inc.
Form N-1A Cross Reference Sheet
PART A. ITEM NUMBER - PROSPECTUS PROSPECTUS CAPTION
1. Front and Back Cover Pages Same
2. Risk/Return Summary: Investments, Investment Objective; Risks;
Risks and Performance Performance
3. Risk/Return Summary: Fee Table Fees and Expenses of the Fund
4. Investment Objectives, Principal Investment Objective; Risks
Investment Strategies, and Related Risks
5. Management's Discussion of Fund Not Applicable
Performance
6. Management, Organization and Capital Management
Structure
7. Shareholder Information How to Invest; How to Sell Your
Shares; Account Policies; Services
for Investors; Dividends and Taxes
8. Distribution Arrangements Management
9. Financial Highlights Information Financial Highlights
PART B. ITEM NUMBER STATEMENT OF ADDITIONAL INFORMATION
CAPTION
10. Cover Page and Table of Contents Same
11. Fund History Description of the Fund
12. Description of the Fund and Its
Investments and Risks Description of the Fund;
Fund Policies; Investment Strategies
and Risks
13. Management of the Fund Management of the Fund
14. Control Persons and Principal Management of the Fund
Holders of Securities
15. Investment Advisory and Other The Fund's Investment Adviser and
Services Manager; The Fund's Distributor
16. Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices
17. Capital Stock and Other Securities Capital Stock Information
18. Purchase, Redemption, and Pricing Additional Purchase and Redemption
of Shares Information; Valuation of Fund Shares
19. Taxation of the Fund Additional Tax Information;
Tax-Deferred Retirement Plans
20. Underwriters The Fund's Distributor
21. Calculation of Performance Data Performance Information
22. Financial Statements Financial Statements
Part C
-------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
Legg Mason Focus Trust, Inc.
PROSPECTUS MAY 1, 1999
logo
HOW TO INVEST SM
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
1
<PAGE>
T A B L E O F C O N T E N T S
A b o u t t h e f u n d:
xx Investment objective
xx Risks
xx Performance
xx Fees and expenses of the fund
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
<PAGE>
LEGG MASON FOCUS TRUST, INC.
[icon] I N V E S T M E N T O B J E C T I V E
INVESTMENT OBJECTIVE: maximum long-term capital appreciation with minimum
long-term risk to principal
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in common stocks, preferred stocks and securities
convertible or exchangeable for common stocks, such as convertible bonds and
debentures. Any income realized will be incidental to the fund's objective.
The fund's policy is to remain substantially invested in common stocks or
securities convertible into common stock.
The securities in which the fund invests will generally be listed on a national
stock exchange or traded on the over-the-counter market. Under normal
circumstances, the adviser expects to concentrate its investments in a limited
number of companies.
The selection of common stocks will be made through an investment strategy
referred to as "focus investing." Focus investing is an investment strategy
whereby companies (or businesses) are identified and selected as eligible
investments by examining all fundamental quantitative and qualitative aspects of
the company, its management and its financial position as compared to its stock
price. This is a bottom up, fundamental method of analysis as opposed to
technical analysis, which is based on the study of trading volumes and prices.
Focus investing is based on the principle that a shareholder's return from
owning a stock is ultimately determined by the fundamental economics of the
underlying business. The adviser believes that a focus investor should focus on
the long-term economic progress of the investment and disregard short-term
nuances. The fund will only invest in those companies which, in the adviser's
opinion, are undervalued at the time of purchase.
For temporary defensive purposes, the fund may temporarily invest up to 100% of
its assets in short-term U.S. Government securities, bank certificates of
deposit, prime commercial paper and other high quality short-term fixed income
securities and repurchase agreements with respect to those securities. In
addition, the fund may hold cash reserves, when necessary, for anticipated
securities purchases and redemptions or temporarily during periods when the
adviser believes prevailing market conditions call for a defensive posture. The
fund may not achieve its investment objective when so invested.
3
<PAGE>
[icon] R I S K S
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks of investing in the fund are
described below. There is no guarantee that the fund will achieve its objective.
NON-DIVERSIFICATION RISK -
The fund is non-diversified. The percentage of its assets invested in any single
issuer is not limited by the Investment Company Act of 1940. When the fund's
assets are invested in the securities of a limited number of issuers, the value
of its shares will be more susceptible to any single economic, political or
regulatory event than shares of a diversified fund.
MARKET RISK -
Stock prices generally fluctuate more than those of other securities. The fund
may experience a substantial or complete loss on an individual stock. Market
risk may affect a single issuer, industry or section of the economy or may
affect the market as a whole.
The fund invests in stocks believed to be attractively priced relative to their
intrinsic value. Such an approach involves the risk that those stocks may remain
undervalued. Value stocks as a group may be out of favor for a long period of
time, while the market concentrates on "growth" stocks. There is also a risk
that other investors will not see the potential value of the issuer, and the
security will not realize that potential.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the fund
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the fund, its adviser or distributor, or
could impact companies in which the fund invests.
While no one knows if these problems will have any impact on the fund or on
financial markets in general, the adviser and its affiliates are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
4
<PAGE>
[icon] P E R F O R M A N C E
The information below provides an indication of the risks of investing in the
fund by showing changes in its performance from year to year. Annual returns
assume reinvestment of dividends and distributions. Historical performance of
the fund does not necessarily indicate what will happen in the future.
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
40%
41.47
35%
30%
29.10
25%
20%
17.14
15%
12.29
10%
1995 (a) 1996 1997 1998
DURING THE LIFE OF THE FUND (b):
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: December 31, 1998 36.94%
-----------------------------------------------------------------------
Worst quarter: September 30, 1998 -15.91%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the Standard & Poor's 500 Stock Composite Index.
----------------------------------------------------------
1 YEAR LIFE OF FUND(b)
----------------------------------------------------------
Focus Trust 41.47% 26.72%
----------------------------------------------------------
S&P 500 Index 28.58%
----------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any. By comparing the bar chart with the average
annual total returns, you can see that average returns smooth out year-to-year
variations.
(a) April 17, 1995 (commencement of operations) to December 31, 1995.
(b) April 17, 1995 (commencement of operations) to December 31, 1998.
5
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in the fund. The fund pays operating expenses directly
out of its assets so they lower the fund's share price and dividends. Other
expenses include expenses such as transfer agency, custody, professional and
registration fees. The fund has no sales charge but is subject to a 12b-1 fee.
The fund does not charge a redemption fee.
The fees and expenses shown are for the fiscal year ended December 31, 1998, and
are calculated as a percentage of average net assets.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) (a)
------------------------------------------
------------------------------------------
Management fees 0.70%
------------------------------------------
Distribution and/or Service 1.00%
(12b-1) fees
------------------------------------------
Other Expenses 1.39%
------------------------------------------
Total Annual Fund Operating 3.09%
Expenses
------------------------------------------
(a) The manager has a voluntary agreement to waive fees so that expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) do not
exceed an annual rate of 1.90% of the fund's average daily net assets until
June 30, 2000. This voluntary waiver may be terminated at any time. With the
waiver, management fees, 12b-1 fees and total annual fund operating expenses
for the fund would have been 0.00%, 0.54% and 1.93% for the fiscal year ended
December 31, 1998.
EXAMPLE:
This example helps you compare the cost of investing in the fund with the cost
of investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------
$312 $954 $1,620 $3,402
-------------------------------------------
Under the fee waiver arrangements described above, your costs for the one,
three, five and ten year periods would have been $196, $606, $1,042 and $2,254.
6
<PAGE>
[icon] M A N A G E M E N T
MANAGEMENT AND ADVISER:
LEGG MASON FUND ADVISER, INC., 100 Light Street, Baltimore, Maryland 21202, is
the fund's adviser. The adviser is responsible for making investment decisions
and placing orders to buy or sell a particular security. It is also obligated to
provide the fund with investment management and administrative services and to
oversee the funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers. The adviser acts as manager
or adviser to investment companies with aggregate assets of $[ ] billion as of
March 31, 1999.
For the period June 30, 1998 to December 31, 1998, the adviser waived all of its
fees.
From June 28, 1997 to June 30, 1998, Focus Capital Advisory, L.P. served as the
fund's investment adviser.
PORTFOLIO MANAGEMENT:
Robert G. Hagstrom, Jr. serves as portfolio manager and has been primarily
responsible for overseeing all investments made by the fund since its inception
on April 17, 1995. From 1997 to June 30, 1998, he was the General Partner of
Focus Capital Advisory, L.P., the assets of which were purchased by the adviser.
From 1992 through 1997, he was a Principal with Lloyd, Leith & Sawin, Inc.,
where he served as Vice President from 1991 to 1992. Mr. Hagstrom is a Chartered
Financial Analyst and author of two books, titled THE WARREN BUFFET WAY:
INVESTMENT STRATEGIES OF THE WORLD'S GREATEST INVESTOR (John Wiley & Sons,
November, 1994) and THE NASCAR WAY: THE BUSINESS THAT DRIVES THE SPORT (John
Wiley & Sons, January, 1998).
DISTRIBUTOR OF THE FUND'S SHARES:
Legg Mason Wood Walker, Incorporated is the distributor of the fund's shares.
The fund has adopted a plan that allows it to pay distribution fees and
shareholder service fees for the sale of its shares and for services provided to
shareholders. Under the plan, the fund may pay the distributor an annual
distribution fee equal to 0.75% of the fund's average daily net assets and an
annual service fee equal to 0.25% of its average daily net assets.
Because these fees are paid out of the fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell shares of
the fund. The distributor pays these brokers up to 90% of the service fee that
it receives from the fund for those sales.
The adviser and distributor are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
7
<PAGE>
[icon] H O W T O I N V E S T
To open a regular account or a retirement account with the fund, contact a Legg
Mason financial advisor or other entity that has entered into an agreement with
the fund's distributor to sell shares of the Legg Mason family of funds. A Legg
Mason financial advisor will explain the shareholder services available from our
funds and answer any questions you may have. The minimum initial investment for
regular accounts and retirement accounts is $1,000 and the minimum for each
purchase of additional shares is $100, except as noted below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. Contact your Legg Mason
financial advisor or other entity offering the funds to discuss which one might
be appropriate for you.
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
-------------------------------------------------------------------------
IN PERSON Give your financial advisor a check for $100 or more
payable to the fund
-------------------------------------------------------------------------
MAIL Mail your check, payable to the fund, for $100 or more
to your financial advisor
-------------------------------------------------------------------------
TELEPHONE Call your financial advisor to transfer available cash
OR WIRE balances in your brokerage account or to transfer
money from your bank directly to Legg Mason. Wire transfers
may be subject to a service charge by your bank.
-------------------------------------------------------------------------
FUTURE FIRST Contact your Legg Mason financial advisor to enroll in
SYSTEMATIC Legg Mason's Future First Systematic Investment Plan.
INVESTMENT Under this plan, you may arrange for automatic monthly
investments in the fund of $50 or more. The fund's transfer
agent will transfer funds monthly from your Legg Mason
account or from your checking account to purchase shares of
the fund.
-------------------------------------------------------------------------
AUTOMATIC Arrangements may be made with some employers and
INVESTMENTS financial institutions for regular automatic monthly
investments of $50 or more in shares of the fund. You may
also reinvest dividends from certain unit investment trusts
in shares of the fund.
-------------------------------------------------------------------------
Call your financial advisor or another entity offering the fund for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
Purchase orders received by your financial advisor or the entity offering the
fund before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close of
the exchange on that day. Orders received after the close of the exchange will
be processed at the fund's net asset value as of the close of the exchange on
the next day the exchange is open. Payment must be made within three business
days to Legg Mason.
8
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. Your should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
-----------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial advisor or entity offering the
fund and request a redemption. Please have the following
information ready when you call: the name of the fund, the
number of shares (or dollar amount) to be redeemed and your
shareholder account number.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you.
Wire requests will be subject to a fee of $18. Be sure that your
financial advisor has your Bank account information on file.
The fund will follow reasonable procedures to ensure the
validity of any telephone redemption request, such as requesting
identifying information from callers or employing identification
numbers. Unless you specify that you do not wish to have
telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
-----------------------------------------------------------------------------
MAIL Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners of
the account and their signatures guaranteed without
qualification. You may obtain a signature guarantee from most
banks or securities dealers.
-----------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial advisor or another entity.
Redemptions of shares that were recently purchased by check or acquired through
reinvestment of dividends on such shares may be delayed for up to 10 days from
the purchase date in order to allow for the check to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
9
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per share is determined daily, as of the close of the New York
Stock Exchange on every day the exchange is open. To calculate the fund's share
price, the fund's assets are valued and totaled, liabilities are subtracted, and
the resulting net assets are divided by the number of shares outstanding. The
fund's securities are valued on the basis of market quotations or, lacking such
quotations, at fair value as determined under the guidance of the Board of
Directors.
Where a security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by the
adviser to be the primary market. Securities with remaining maturities of 60
days or less are valued at amortized cost. The fund will value its foreign
securities in U.S. dollars on the basis of the then-prevailing exchange rates.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
The fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This
generally applies only in cases of very large redemptions, excessive trading
or during unusual market conditions. The fund may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
10
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial advisor or other entity offering the fund for sale.
ACCOUNT STATEMENTS:
You will receive from Legg Mason a confirmation after each transaction (except
a reinvestment of dividends, capital gain distributions and purchases made
through the Future First Systematic Investment Plan or through automatic
investments). Legg Mason or the entity through which you invest will send you
account statements monthly unless there has been no activity in the account.
Legg Mason will send you statements quarterly if you participate in the Future
First Systematic Investment Plan or if you purchase shares through automatic
investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares with a net asset value of $5,000 or
more, you may elect to make systematic withdrawals from the fund. The minimum
amount for each withdrawal is $50.
EXCHANGE PRIVILEGE:
Fund shares may be exchanged for shares of any of the other Legg Mason funds,
provided these funds are eligible for sale in your state of residence. You can
request an exchange in writing or by phone. Be sure to read the current
prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. In addition, an exchange of the
fund's shares will be treated as a sale of the shares and any gain on the
transaction may be subject to tax.
The fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
11
<PAGE>
[icon] D I V I D E N D S A N D T A X E S
The fund declares and pays dividends from its net investment income and net
short-term capital gain annually. The fund distributes substantially all net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) after the end of the taxable year in which the gain is realized. A
second distribution of net capital gain may be necessary in some years to avoid
imposition of a federal excise tax.
Your dividends and distributions will be automatically reinvested in additional
shares of the fund. If you wish to receive dividends and/or distributions in
cash, you must notify the fund at least 10 days before the next dividend and/or
distribution is to be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and distributions are taxable to most investors (other than
retirement plans and other tax exempt investors) whether received in cash or
reinvested in additional shares of the fund. Dividends of net investment income
and any net short-term capital gains will be taxable as ordinary income.
Distributions of the fund's net capital gain will be taxable as long-term
capital gain, regardless of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to each investor at the end of each year detailing the
tax status of your distributions.
The fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. The fund will also withhold 31% of all dividends and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
Because each investor's tax situation is different, please consult your tax
advisor about federal, state and local tax considerations.
12
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand the fund's
financial performance since its inception. Total return represents the rate that
an investor would have earned (or lost) on an investment in the fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by the fund's independent accountants, PricewaterhouseCoopers LLP, whose
report, along with the fund's financial statements, is incorporated by reference
into the Statement of Additional Information (see back cover) and is included in
the annual report. The annual report is available upon request by calling
toll-free 1-800-822-5544.
<TABLE>
<CAPTION>
--------------------------------------------------------
Income from Investment Distributions
Operations
- ---------------------------------------------------------------------------------
For the Net Net Net Total From Net From Total Net
Years Asset Investme Realized From Investmen Net Distribution Asset
Ended Value, Income & Investme Income Realized Value,
Dec. 31, Beginning(Loss) Unrealized Operations Gain on End of
of Year Gain Investments Year
On
Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
1998 $16.32 $(.06) $6.68 $6.62 $-- $(.94) $(.94) $22.00
(b)
- --------------------------------------------------------------------------------------------
1997 13.01 (.11)(b) 3.89 3.78 -- (.47) (.47) 16.32
- --------------------------------------------------------------------------------------------
1996 11.17 (.05)(b) 1.96 1.91 -- (.07) (.07) 13.01
- --------------------------------------------------------------------------------------------
1995 (a) 10.00 .06 (b) 1.17 1.23 (.06) -- (.06) 11.17
- --------------------------------------------------------------------------------------------
</TABLE>
Ratios/Supplemental Data
-------------------------------------------------------------
Total Ratio of Net Investment Portfolio Net Assets,
Return Expenses Income (Loss) Turnover End of
% to to Average Net Rate Year
Average Assets (%) % (thousands
Net - $)
Assets (%)
-------------------------------------------------------------------------
1998 41.47% 1.93% (b) (.89)% (b) 21 $47,089
-------------------------------------------------------------------------
1997 29.10 2.00 (b) (.74) (b) 14 8,093
-------------------------------------------------------------------------
1996 17.14 2.00 (b) (.40) (b) 8 7,327
-------------------------------------------------------------------------
1995 (a) 12.29(c) 1.92 (b,d) 1.19 (b,d) -- 5,061
-------------------------------------------------------------------------
(a) April 17, 1995 (commencement of operations) to December 31, 1995.
(b) Net of fees waived pursuant to a voluntary expense limitation of 1.75% of
average daily net assets through September 1, 1995; 2.00% through June 30,
1998 and 1.90% through June 30, 2000. If no fees had been waived, the
annualized ratio of expenses to average net assets for the period April 17,
1995 to December 31, 1995 and for the years ended December 31, 1996, 1997
and 1998 would have been 7.89%, 4.96%, 4.04% and 2.71%, respectively.
(c) Not annualized
(d) Annualized
13
<PAGE>
L e g g M a s o n F o c u s T r u s t, I n c.
The following additional information about the fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) the prospectus. The SAI provides additional details about
the fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about the fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about the fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the fund, including the SAI, can be reviewed and copied at the
SEC's public reference room in Washington, DC. (phone 1-800-SEC-0330). Reports
and other information about the fund are available on the SEC's Internet site at
http://www.sec.gov. Investors may also write to: SEC, Public Reference Section,
Washington, DC 20549-6009. A fee will be charged for making copies.
LMF-091 SEC file number 811-8966
14
<PAGE>
LEGG MASON FOCUS TRUST, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus (dated May 1, 1999), which has been
filed with the Securities and Exchange Commission ("SEC"). The fund's annual
report is incorporated by reference into this Statement of Additional
Information. Copies of either the annual report or the Prospectus are available
without charge by writing to or calling the fund's distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
LEGG MASON WOOD WALKER,
INCORPORATED
- --------------------------------------------------------------------------------
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21202
(410) 539-0000 (800) 822-5544
<PAGE>
TABLE OF CONTENTS
PAGE
----
Description of the Fund
Fund Policies
Investment Strategies and Risks
Management of the Fund
The Fund's Investment Adviser and Manager
The Fund's Distributor
Portfolio Transactions and Brokerage
Additional Purchase and Redemption Information
Valuation of Fund Shares
Additional Tax Information
Tax-Deferred Retirement Plans
Performance Information
Capital Stock Information
The Fund's Custodian and Transfer and Dividend-Disbursing Agent
The Fund's Legal Counsel
The Fund's Independent Accountants
Financial Statements
Appendix A
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this Statement of Additional
Information in connection with the offerings made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. The Prospectus and the
Statement of Additional Information do not constitute offerings by the Fund or
by the distributor in any jurisdiction in which such offerings may not lawfully
be made.
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DESCRIPTION OF THE FUND
Legg Mason Focus Trust, Inc. is a non-diversified open-end, management
investment company. The fund was established as a Maryland corporation on
January 27, 1995.
FUND POLICIES
The fund's investment objective is to seek maximum long-term capital
appreciation with minimum long-term risk to principal. The investment
restrictions set forth below as well as the fund's investment objective are
fundamental policies and may not be changed without the approval of a majority
of the outstanding voting shares (as defined in the Investment Company Act of
1940 Act ("1940 Act")) of the Fund. Unless otherwise indicated, all percentage
limitations listed below apply to the Fund only at the time of the transaction.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in the Fund's total assets will not
be considered a violation.
The Fund may not:
(1) Act as an underwriter of securities, except that, in connection with
the disposition of a security, the Fund may be deemed to be an
"underwriter" as that term is defined in the Securities Act of 1933;
(2) Purchase or sell real estate (but this restriction shall not prevent
the Fund from investing directly or indirectly in portfolio
instruments secured by real estate or interests therein or acquiring
securities of real estate investment trusts or other issuers that
deal in real estate), interests in oil, gas and/or mineral
exploration or development programs or leases;
(3) Purchase or sell commodities or commodity contracts;
(4) Make loans, except that this restriction shall not prohibit (a) the
purchase and holding of debt instruments in accordance with the
Fund's investment objectives and policies, (b) the lending of
portfolio securities, or (c) entry into repurchase agreements with
banks or broker-dealers;
(5) Borrow money or issue senior securities, except that the Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets, except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or 5% of the value of the total assets of the Fund at the
time of its borrowing. All borrowings will be done from a bank and
asset coverage of at least 300% is required;
(6) Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of
transactions;
(7) Invest in puts, calls, straddles or combinations thereof;
(8) Participate on a joint or joint and several basis in any securities
trading account;
(9) Make investments in securities for the purpose of exercising
control;
(10) Purchase the securities of any one issuer if, immediately after such
purchase, the Fund would own more than 25% of the outstanding voting
securities of such issuer;
(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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(12) Purchase securities of issuers having less than three years'
continuous operation, if such purchase would cause the value of the
Fund's investments in all such issuers to exceed 5% of the value of
its total assets. Such three year periods shall include the
operation of any predecessor company or companies.
For temporary defensive purposes, the fund may temporarily invest up to
100% of its assets in short-term U.S. Government Securities, bank certificates
of deposit, prime commercial paper and other high quality short-term fixed
income securities and repurchase agreements with respect to those securities.
In addition, the fund may hold cash reserves, when necessary, for anticipated
securities purchases and redemptions or temporarily during periods when the
adviser believes prevailing market conditions call for a defensive posture. The
fund may not achieve its investment objective when so invested.
INVESTMENT STRATEGIES AND RISKS
-------------------------------
The investment practices described below, except for the discussion of
portfolio loan transactions, are not fundamental and may be changed by the Board
of Directors without the approval of the shareholders of the Fund. Shareholders,
however, will be notified within thirty (30) days of any changes in the
investment policies.
CONVERTIBLE SECURITIES
- ----------------------
The Fund may invest in convertible securities. Common stock occupies the
most junior position in a company's capital structure. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time and to receive interest or dividends until the holder
elects to convert. The provisions of any convertible security determine its
ranking in a company's capital structure. In the case of subordinated
convertible debentures, the holder's claims on assets and earnings are
subordinated to the claims of other creditors, and are senior to the claims of
preferred and common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claims on assets and earnings are
subordinated to the claims of all creditors but are senior to the claims of
common shareholders.
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security. If
the conversion value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition, may sell at some
premium over its conversion value. At such times the price of the convertible
security will tend to fluctuate directly with the price of the underlying equity
security.
BORROWING
- ---------
The Fund has a fundamental policy that it may not borrow money, except (1)
from banks for temporary or emergency purposes and not for leveraging or
investment and (2) to enter into reverse repurchase agreements for any purpose,
so long as the aggregate amount of borrowings and reverse repurchase agreements
does not exceed one-third of the Fund's total assets less liabilities (other
than borrowings). In the event that such asset coverage shall at any time fall
below 300%, the Fund shall, within three business days thereafter or such longer
period as the U.S. Securities and Exchange Commission ("SEC") may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. Investment
securities will not be purchased while the Fund has an outstanding borrowing
that exceeds 5% of the Fund's net assets.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
- -----------------------------------------------------------------------------
The Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" and "delayed delivery" basis. These
transactions involve a commitment by the
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Fund to purchase or sell particular securities with payment and delivery taking
place at a future date. They involve the risk that the price or yield available
in the market may be less favorable than the price or yield available when the
delivery takes place. The Fund's when-issued purchases, forward commitments and
delayed delivery transactions in total will not exceed 5% of the value of the
Fund's net assets. This 5% limitation reflects the value of the underlying
obligation together with its initial payment.
Although the Fund may purchase securities on a when-issued basis, or
purchase or sell securities on a forward commitment basis or purchase securities
on a delayed delivery basis, the Fund does not have the current intention of
doing so in the foreseeable future. The Fund will normally realize a capital
gain or loss in connection with these transactions.
When the Fund purchases securities on a when-issued, delayed delivery or
forward commitment basis, the Fund's custodian will maintain in a segregated
account: cash, U.S. Government securities or other high grade liquid debt
obligations having a value (determined daily) at least equal to the amount of
the Fund's purchase commitments. In the case of a forward commitment to sell
portfolio securities, the custodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to ensure that the Fund will maintain sufficient assets
at all times to cover its obligations under when-issued purchases, forward
commitments and delayed delivery transactions.
LOANS OF PORTFOLIO SECURITIES
- -----------------------------
The Fund may lend portfolio securities to broker-dealers and financial
institutions, although at the present time it has no intention of lending
portfolio securities in the foreseeable future. The Fund may lend portfolio
securities, provided: (1) the loan is secured continuously by collateral
marked-to-market daily and maintained in an amount at least equal to the current
market value of the securities loaned; (2) the Fund may call the loan at any
time and receive the securities loaned; (3) the Fund will receive any interest
or dividends paid on the loaned securities; and (4) the aggregate market value
of securities loaned will not at any time exceed 33% of the total assets of the
Fund. When the fund loans a security to another party, it runs the risk that the
other party will default on its obligation, and that the value of the collateral
will decline before the fund can dispose of it.
ILLIQUID SECURITIES
- -------------------
The Fund may invest up to 10% of its net assets in securities that are
illiquid. Illiquid securities are assets which may not be sold or disposed of in
the ordinary course of business within seven days at approximately the price at
which they are valued by the Fund. Due to the absence of an active trading
market, the Fund may experience difficulty in valuing or disposing of illiquid
securities. Repurchase agreements with deemed maturities in excess of seven days
and certain securities that are not registered under the Securities Act of 1933
but that may be purchased by institutional buyers under SEC Rule 144A (known as
"restricted securities") are subject to this 10% limit. The adviser determines
the liquidity of the Fund's securities, under supervision of the Board of
Directors.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio investments for the reporting period
by the monthly average value of the portfolio investments owned during the
reporting period.
The calculation excludes all securities whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Fund to receive favorable tax treatment. In any event, the annual
portfolio turnover for the Fund is not expected to exceed 25%. This relatively
low portfolio turnover rate reflects LMFA's buy and hold strategy for the
portfolio securities held by the Fund.
Generally, the Fund will purchase portfolio securities for capital
appreciation and not for short-term trading profits. Due to the nature of "focus
investing," however, the adviser anticipates that the portfolio turnover levels
will be held at low levels. The rate of portfolio turnover will not be a
limiting factor in making portfolio decisions. A high rate of portfolio turnover
may result in the realization of substantial capital gains and involves
correspondingly greater transaction costs. Portfolio turnover rates may vary
from year to year as well as within a particular year.
REPURCHASE AGREEMENTS
- ---------------------
The Fund may enter into repurchase agreements. The Fund may only enter
into repurchase agreements with financial institutions that are deemed to be
creditworthy by LMFA, pursuant to guidelines established by the Fund's Board of
Directors. During the term of any repurchase agreement, LMFA will
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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 the Fund is obligated to pay upon their
repurchase.
RESTRICTED SECURITIES AND RULE 144A SECURITIES
- ----------------------------------------------
Restricted securities cannot be sold to the public without registration
under the Securities Act of 1933 (the "1933 Act"). Unless registered for sale,
these securities can only be sold in privately negotiated transactions or
pursuant to an exemption from registration. Some restricted securities may be
illiquid securities.
The Fund may invest in securities that are exempt under SEC Rule 144A from
the registration requirements of the Securities Act of 1933. Those securities,
purchased under Rule 144A, are traded among qualified institutional investors
and may be subject to the Fund's limitation on illiquid investment.
Investing in securities under Rule 144A could have the effect of
increasing the levels of the Fund's illiquidity if qualified institutional
buyers become, for a time, uninterested in purchasing these securities. The Fund
will limit its investment in securities which the Fund is restricted from
selling to the public without registration under the Securities Act of 1933 to
no more than 10% of the Fund's total assets, excluding restricted securities
eligible for resale pursuant to Rule 144A that have been determined to be liquid
by the Fund's Board of Directors.
FOREIGN SECURITIES
- ------------------
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While the fund has no present intention to invest in foreign securities,
the fund may invest up to 25% of its total assets in foreign securities, either
directly or indirectly through the purchase of American Depositary Receipts
("ADRs") or European Depositary Receipts ("EDRs").
There are certain risks and costs involved in investing in securities of
companies and governments of foreign nations, which are in addition to the usual
risks inherent in U.S. investments. Foreign investments may include additional
risks associated with the level of currency exchange rates, less complete
financial information about the issuers, less market liquidity, more market
volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks may be
subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements. Investments in foreign securities
involve higher costs than investments in U.S. securities, including higher
transaction costs as well as the imposition of additional taxes by foreign
governments.
ADRs and EDRs
- -------------
For many foreign securities, there are U.S. dollar-denominated ADRs, which
are bought and sold in the U.S. and are issued by domestic banks. ADRs represent
the right to receive securities of foreign issuers deposited in the domestic
bank or a correspondent bank. ADRs do not eliminate all the risk inherent in
investing in the securities of foreign issuers. By investing in ADRs rather than
directly in a foreign issuer's stock, the fund may avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large, liquid market in the U.S. for most ADRs. The fund may also invest in EDRs
which are receipts evidencing an arrangement with a European bank similar to
that for ADRs and are designed for use in the European securities markets. EDRs
are not necessarily denominated in the currency of the underlying security. The
fund has no current intention to invest in unsponsored ADRs and EDRs.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. The fund may invest up to 10% of
its total assets in shares of investment companies and up to 5% of its total
assets in any one investment company so long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
Investments in other investment companies will cause the fund (and, indirectly
the shareholders) to bear proportionately the costs incurred in connection with
the investment companies' operations.
OTHER INVESTMENTS
- -----------------
Even though the fund's policy is to remain substantially invested in
common stocks or securities convertible into common stock it may invest in
non-convertible preferred stock and non-convertible debt securities.
Investments in debt securities will be rated investment grade.
Subject to prior disclosure to shareholders, the Board of Directors may,
in the future, authorize the Fund to invest in securities other than those
listed here and in the prospectus, provided that such investment would be
consistent with the Fund's investment objective and that it would not violate
any fundamental investment policies or restrictions applicable to the Fund.
MANAGEMENT OF THE FUND
The Fund's officers are responsible for the operation of the Fund under
the direction of the Board of Directors. The officers and directors of the Fund,
their date of birth and their principal occupations during the past five years
are set forth below. An asterisk (*) indicates officers and/or directors who are
"interested persons" of the Fund as defined by the 1940 Act. The business
address of each officer and director is 100 Light Street, Baltimore, Maryland
21202, unless otherwise indicated.
JOHN F. CURLEY, JR.* [7/24/39], Chairman of the Board and Director;
President and/or Chairman of the Board and Director/Trustee of nine Legg Mason
funds; Retired Vice Chairman and Director of Legg Mason, Inc. and Legg Mason
Wood Walker, Inc. Formerly: Director of Legg Mason Fund Adviser, Inc. and
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Western Asset Management Company (each a registered investment adviser); Officer
and/or Director of various other affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant; Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in the manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia Electric
Company); Director/Trustee of all Legg Mason funds. Formerly: Senior Vice
President and Chief Financial Officer of Philadelphia Electric Company (now PECO
Energy Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company; and Director of
Finance, City of Philadelphia.
ARNOLD L. LEHMAN [7/18/44], Director; 200 Eastern Parkway, Brooklyn, New
York. Director of the Brooklyn Museum of Art; Director/Trustee of all Legg Mason
funds. Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], Director, 400 Seventh Street, N.W., Washington,
DC. Chief Executive Officer of the Marrow Foundation. Director/Trustee of all
Legg Mason funds. Formerly: Executive Director of the Baltimore International
Festival (January 1991-March 1993), and Senior Assistant to the President of The
Johns Hopkins University (1986-1991).
T.A. RODGERS [10/22/34], Director; 2901 Boston Street, Baltimore, Maryland.
Principal, T.A. Rodgers & Associates (management consulting); Director/Trustee
of all Legg Mason funds. Formerly: Director and Vice President of Corporate
Development, Polk Audio, Inc. (manufacturer of audio components).
The executive officers of the Fund are:
EDWARD A. TABER, III* [8/25/43], President; Senior Executive Vice President
of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice Chairman and Director
of Legg Mason Fund Adviser, Inc.; President and/or Director/Trustee of seven
other Legg Mason funds. Formerly: Executive Vice President of T. Rowe
Price-Fleming International, Inc. (1986-1992) and Director of the Taxable Fixed
Income Division at T. Rowe Price Associates, Inc. (1973-1992).
MARIE K. KARPINSKI* [1/1/49], Vice President and Treasurer; Treasurer of
Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of all Legg Mason
funds, Bartlett Capital Trust and LM Institutional Fund Advisors I and II, Inc.;
Vice President of Legg Mason Wood Walker, Inc.
KATHI D. BAIR* [12/15/64], Secretary; Secretary of the Legg Mason funds,
Bartlett Capital Trust and LM Institutional Fund Advisors II, Inc.; Assistant
Treasurer of three Legg Mason funds; employee of Legg Mason Wood Walker, Inc.
since March 1988.
W. SHANE HUGHES* [4/24/68], Assistant Secretary; employee of Legg Mason
Wood Walker, Inc. since May 1997. Formerly: Supervisor, C. W. Amos & Co.
(regional public accounting firm) (1990-1996).
The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of the Fund who are "interested persons" of the
Fund, as defined in the 1940 Act, receive no salary or fees from the Fund. Each
Director of the Fund who is not an interested person of the Fund ("Independent
Director") receives an annual retainer and a per meeting fee based on the
average net assets of the Fund at December 31 of the previous year.
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As of April 1, 1999, the directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's outstanding shares. As of
April 1, 1999, the following persons owned of record or beneficially 5% or more
of the outstanding voting shares of the Fund.
Name & Address Percentage
- -------------- ----------
Charles Schwab & Co., Inc. %
San Francisco, CA
The following table provides certain information relating to the
compensation of the Fund's directors for the fiscal year ended December 31,
1998. None of the Legg Mason funds has any retirement plan for its directors.
COMPENSATION TABLE
TOTAL COMPENSATION FROM
NAME OF PERSON AND AGGREGATE COMPENSATION FUND AND FUND COMPLEX
POSITION FROM FUND* PAID TO DIRECTORS**
- --------- ---------- -------------------
John F. Curley, Jr. - Director None None
Richard G. Gilmore - Director $680 $35,100
Arnold L. Lehman - Director $680 $30,600
Jill E. McGovern - Director $680 $35,100
T. A. Rodgers - Director $680 $35,100
* Represents fees paid to each director during the fiscal year ended December
31, 1998.
** Represents aggregate compensation paid to each director during the year
ended December 31, 1998. There are eleven open-end investment companies in
the Legg Mason Complex (with a total of twenty funds).
THE FUND'S INVESTMENT ADVISER AND MANAGER
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland Corporation, is located
at 100 Light Street, Baltimore, Maryland 21202. LMFA is a wholly owned
subsidiary of Legg Mason, Inc., which is also the parent of Legg Mason. LMFA
serves as manager and investment adviser to the Fund under an Investment
Advisory and Management Agreement with the Fund ("Investment Advisory and
Management Agreement"). The Investment Advisory and Management Agreement was
approved by the Directors, including a majority who are not "interested persons"
of the Fund or LMFA, on May 11, 1998 and by the shareholders on June 24, 1998.
From June 27, 1997 to June 30, 1998, Focus Capital Advisory, L.P. served as the
Fund's investment adviser under an investment advisory agreement with the Fund.
Prior to June 27, 1997, Lloyd, Leith & Sawin, Inc. served as the Fund's
investment adviser under an investment advisory agreement with the Fund.
The Investment Advisory and Management Agreement provides that, subject to
overall direction by the Fund's Board of Directors, LMFA manages or oversees the
investment and other affairs of the Fund. LMFA is responsible for managing the
Fund consistent with the Fund's investment objective and policies described in
its Prospectus and this Statement of Additional Information. LMFA also is
obligated to (a) furnish the Fund with office space and executive and other
personnel necessary for the operation of the Fund; (b) supervise all aspects of
the Fund's operations; (c) bear the expense of certain informational and
purchase and redemption services to the Fund's shareholders; (d) arrange, but
not pay for, the periodic updating of prospectuses, proxy material, tax returns
and reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to the Fund's officers and directors. LMFA and its affiliates
pay all compensation of directors and officers of the Fund who are officers,
directors or employees of LMFA. The Fund pays all of its expenses which are not
expressly assumed by LMFA. These expenses include,
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among others, interest expense, taxes, brokerage fees and commissions, expenses
of preparing and printing prospectuses, proxy statements and reports to
shareholders and of distributing them to existing shareholders, custodian
charges, transfer agency fees, distribution fees to Legg Mason, the Fund's
distributor, compensation of the independent directors, legal and audit
expenses, insurance expense, shareholder meetings, proxy solicitations, expenses
of registering and qualifying Fund shares for sale under federal and state law,
governmental fees and expenses incurred in connection with membership in
investment company organizations. The Fund also is liable for such nonrecurring
expenses as may arise, including litigation to which the Fund may be a party.
The Fund may also have an obligation to indemnify its directors and officers
with respect to litigation.
LMFA receives for its services to the Fund a management fee, calculated
daily and payable monthly. LMFA receives from the Fund a management fee at an
annual rate of 0.70% of the average daily net assets of the Fund. LMFA has
agreed to waive its fees to the extent necessary to limit the Fund's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) to 1.90% of
average net assets until at least June 30, 2000.
For the period June 30, 1998 through December 31, 1998, LMFA was entitled
to receive advisory fees of $107,897. However, LMFA waived all of its fees.
For the period June 28, 1997 through June 30, 1998, Focus Capital Advisory, L.P.
served as the Fund's investment adviser. For that period, the adviser was
entitled to receive advisory fees of $26,721. However, the adviser agreed to
waive its fees and reimburse expenses so that the Fund's annual operating
expenses would not exceed 2.00%. Prior to June 28, 1997, Lloyd, Leith & Sawin,
Inc. served as investment adviser to the Fund. For the fiscal year ended
December 31, 1996 and the period January 1, 1997 through June 27, 1997, Lloyd,
Leith & Sawin, Inc. was entitled to receive advisory fees of $43,364, and
$26,527, respectively. However, Lloyd, Leith & Sawin, Inc. waived its fees to
reimburse the Fund for expenses so that the Fund's expenses would not exceed
2.00%.
Under the Investment Advisory and Management Agreement, the Fund has the
non-exclusive right to use the name "Legg Mason" until that Agreement is
terminated, or until the right is withdrawn in writing by LMFA.
Under the Investment Advisory and Management Agreement, LMFA will not be
liable for any error of judgment or mistake of law or for any loss by the Fund
in connection with the performance of the Investment Advisory and Management
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations or duties under the
Agreement.
The Investment Advisory and Management Agreement terminates automatically
upon assignment and is terminable at any time without penalty by vote of the
Fund's Board of Directors, by vote of a majority of the Fund's outstanding
voting securities, or by LMFA, on not less than 60 days' notice to the other
party to the Agreement, and may be terminated immediately upon the mutual
written consent of all parties to the Agreement.
To mitigate the possibility that the Fund will be affected by personal
trading of employees, the Fund and LMFA have adopted policies that restrict
securities trading in the personal accounts of portfolio managers and others who
normally come into advance possession of information on portfolio transactions.
These policies comply, in all material respects, with the recommendations of the
Investment Company Institute.
THE FUND'S DISTRIBUTOR
Legg Mason Wood Waller, Incorporated, 100 Light Street, Baltimore,
Maryland, 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
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investors (after the prospectuses and reports have been prepared, set in type
and mailed to existing shareholders at the Fund's expense), and for
supplementary sales literature and advertising costs.
The Fund has adopted a Distribution Plan ("Plan") which, among other
things, permits the Fund to pay Legg Mason fees for its services related to
sales and distribution of shares and the provision of ongoing services to Fund
shareholders. Under the Plan, the aggregate fees may not exceed an annual rate
of 1.00% of the Fund's average daily net assets. Distribution activities for
which such payments may be made include, but are not limited to, compensation to
persons who engage in or support distribution and redemption of shares, printing
of prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses.
The Plan was approved by the shareholders on June 24, 1998. The Plan makes
clear that, of the aggregate 1.00% fees, 0.75% is paid for distribution services
and 0.25% is paid for ongoing services to shareholders. The Plan also specifies
that the Fund may not pay more in cumulative distribution fees than 6.25% of
total new gross assets attributable to Fund shares, plus interest, as specified
in the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD"). Legg Mason may pay all or a portion of the fee to its financial
advisors. The Plan was approved on May 11, 1998 by the Board of Directors of the
Fund including a majority of the directors who are not "interested persons" of
the Fund as that term is defined in the 1940 Act and who have no direct or
indirect financial interest in the operation of the Plan or the Underwriting
Agreement ("12b-1 Directors").
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
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pursuant to the Plan and the purposes for which expenditures were made. In
addition, as long as the Plan is in effect, the selection and nomination of the
Independent Directors will be committed to the discretion of such Independent
Directors.
Prior to the approval of the Plan by shareholders on June 24, 1998, the
Fund had no distribution plan. For the period June 30, 1998 to December 31,
1998, Legg Mason was entitled to receive distribution and service fees of
$95,814; however, Legg Mason waived $12,830 of these fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory and Management Agreement with the Fund, LMFA
is responsible for the execution of the Fund's portfolio transactions and must
seek the most favorable price and execution for such transactions, subject to
the possible payment, as described below, of higher brokerage commissions to
brokers who provide research and analysis. The Fund may not always pay the
lowest commission or spread available. Rather, in placing orders for the Fund
LMFA also takes into account such factors as size of the order, difficulty of
execution, efficiency of the executing broker's facilities (including the
services described below), and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, LMFA may
give consideration to research, statistical and other services furnished by
brokers or dealers to LMFA for its use, may place orders with brokers who
provide supplemental investment and market research and securities and economic
analysis and may pay to these brokers a higher brokerage commission than may be
charged by other brokers. Such services include, without limitation, advice as
to the value of securities; the advisability of investing in, purchasing, or
selling securities; advice as to the availability of securities or of purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. Such research and analysis may be useful to
LMFA in connection with services to clients other than the Fund whose brokerage
generated the service. LMFA's fee is not reduced by reason of its receiving such
brokerage and research services.
While in the future the Fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities, the Fund has no
intention of doing so prior to June 30, 2000.
For the fiscal years ended December 31, 1998, 1997 and 1996, the fund
incurred aggregate brokerage commissions of $28,298, $9,663 and $8,781,
respectively. The increase in total commissions paid in fiscal year 1998 was due
to the growth in assets from July 1998 through December 1998 when LMFA became
the fund's investment adviser.
Except as permitted by SEC rules or orders, the Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. The Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. These procedures, among other things, limit
the Fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so
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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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Clients of certain institutions that maintain omnibus accounts with the
fund's transfer agent may obtain shares through those institutions. Such
institutions may receive payments from the Fund's distributor for account
servicing, and may receive payments from their clients for other services
performed. Investors can purchase fund shares from Legg Mason without receiving
or paying for such other services.
Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
If you invest in the Fund, the Prospectus explains that you may buy shares
through the Future First Systematic Investment Plan. Under this plan you may
arrange for automatic monthly investments in Fund shares of $50 or more by
authorizing the Fund's transfer agent to transfer funds each month from your
Legg Mason account or from your checking account to be used to buy Fund shares
at the per share net asset value determined on the day the funds are sent from
your bank. You will receive a quarterly account statement. You may terminate the
Future First Systematic Investment Plan at any time without charge or penalty.
Forms to enroll in the Future First Systematic Investment Plan are available
from any Legg Mason or affiliated office.
Investors in Fund shares may also buy Fund shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of the Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn on,
the investor may be subject to extra charges in order to cover collection costs.
These charges may be deducted from the investor's shareholder account.
Systematic Withdrawal Plan
If you own Fund shares with a net asset value of $5,000 or more, you may
also elect to make systematic withdrawals from your Fund account of a minimum of
$50 on a monthly basis. The amounts paid to you each month are obtained by
redeeming sufficient shares from your account to provide the withdrawal amount
that you have specified. The Systematic Withdrawal Plan is not currently
available for shares held in an Individual Retirement Account ("IRA"),
Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan for
Employees ("SIMPLE") or other qualified retirement plan. You may
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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 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
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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.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state, local or foreign taxes that may apply to them.
GENERAL
To continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), the fund
must distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, net investment income and net short-term
capital gain) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities, or other income derived with respect to its business
of investing in securities; (2) at the close of each quarter of the fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. government securities, securities of other RICs and
other securities, with those other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the fund's total
assets and does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If the fund failed to qualify for treatment as a RIC for any taxable
year, (i) it would be taxed at corporate rates on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (ii) the shareholders would treat all those distributions,
including distributions of net capital gain (I.E., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
would be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
The fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by the fund in December of any year and payable to its shareholders of
record on a date in that month will be deemed to have been paid by the fund and
received by the shareholders on December 31 if the distributions are paid by the
fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the fund's investment company taxable
income (whether paid in cash or reinvested in fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by the fund from domestic
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax. Distributions of net capital
gain do not qualify for the dividends-received deduction.
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FOREIGN SECURITIES
Foreign Taxes. Interest and dividends received by the fund, and gains
realized thereby, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions that would reduce the total return on
its securities. Tax conventions between certain countries and the United States
may reduce or eliminate these taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign investors.
Passive Foreign Investment Companies. The fund may invest in the stock
of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation -- other than a "controlled foreign corporation" (I.E., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly or constructively, at least 10% of that voting power) as to which the
fund is a U.S. shareholder -- that, in general, meets either of the following
tests: (1) at least 75% of its gross income is passive or (2) an average of at
least 50% of its assets produce, or are held for the production of, passive
income. Under certain circumstances, the fund will be subject to federal income
tax on a portion of any "excess distribution" received on the stock of a PFIC or
of any gain on disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if the fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent it distributes that income to its shareholders.
If the fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund would be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which the fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not received by the Fund from the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
The fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over the
fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included in income by the fund
for prior taxable years. The fund's adjusted basis in each PFIC's stock subject
to the election would be adjusted to reflect the amounts of income included and
deductions taken thereunder (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs).
ORIGINAL ISSUE DISCOUNT AND PAY-IN-KIND SECURITIES
The fund may purchase zero coupon or other debt securities issued with
original issue discount ("OID"). As a holder of those securities, the fund must
include in its income the OID that accrues thereon during the taxable year, even
if it receives no corresponding payment on the securities during the year.
Similarly, the fund must include in its gross income securities it receives as
"interest" on pay-in-kind securities. Because the fund annually must distribute
substantially all of its investment company taxable income, including any OID
and other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
fund may realize capital gains or losses from those dispositions, which would
increase or decrease its investment company taxable income and/or net capital
gain.
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TAX-DEFERRED RETIREMENT PLANS
Investors may invest in fund shares through IRAs, SEPs, SIMPLEs and
other qualified retirement plans. In general, income earned through the
investment of assets of qualified retirement accounts and plans is not taxed to
the beneficiaries thereof until the income is distributed to them. Investors who
are considering establishing such a plan should consult their attorneys or other
tax advisors with respect to individual tax questions. Please contact Legg Mason
or your affiliated financial advisor for further information with respect to
these plans.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAS
Traditional IRA. Certain investors may obtain tax advantages by
establishing an IRA. Specifically, except as noted below, if neither you nor
your spouse is an active participant in a qualified employer or government
retirement plan, or if either you or your spouse is an active participant in
such a plan and your adjusted gross income does not exceed a certain level, then
each of you may deduct cash contributions made to an IRA in an amount for each
taxable year not exceeding the lesser of 100% of your earned income or $2,000.
However, a married investor who is not an active participant in such a plan and
files a joint income tax return with his or her spouse (and their combined
adjusted gross income does not exceed $150,000) is not affected by the spouse's
active participant status. In addition, if your spouse is not employed and you
file a joint return, you may establish a separate IRA for your spouse and
contribute up to a total of $4,000 to the two IRAs, provided that the
contribution to either does not exceed $2,000. If your employer's plan qualifies
as a SIMPLE, permits voluntary contributions and meets certain requirements, you
may make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Fund shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your shares are then not immediately taxable to you
or the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability, where the distribution is rolled over
into another qualified plan or certain other situations.
Roth IRA. A shareholder whose adjusted gross income (or combined
adjusted gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
Education IRA. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary
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reaches age 18; however, earnings accumulate tax-free, and withdrawals are not
subject to tax if used to pay the qualified higher education expenses of the
beneficiary (or transferred to an Education IRA of a qualified family member).
SIMPLIFIED EMPLOYEE PENSION PLAN - SEP
Legg Mason also makes available to corporate and other employers a SEP
for investment in Fund shares.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES - SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan may establish a SIMPLE either as separate IRAs or as
part of a Code section 401(k) plan. A SIMPLE, which is not subject to the
complicated nondiscrimination rules that generally apply to qualified retirement
plans, will allow certain employees to make elective contributions of up to
$6,000 per year and will require the employer to make matching contributions up
to 3% of each such employee's salary or a 2% non-elective contribution.
Withholding at the rate of 20% is required for federal income tax
purposes on distributions eligible for rollover (which excludes, for example,
certain periodic payments) from the foregoing retirement plans (except IRAs and
SEPs), unless the recipient transfers the distribution directly to an "eligible
retirement plan" (including IRAs and other qualified plans) that accepts those
distributions. Other distributions generally are subject to regular wage
withholding or to withholding at the rate of 10% (depending on the type and
amount of the distribution), unless the recipient elects not to have any
withholding apply. Investors should consult their plan administrator or tax
advisor for further information.
PERFORMANCE INFORMATION
GENERAL
From time to time, the Fund may include general comparative information,
such as statistical data regarding inflation, securities indices or the features
or performance of alternative investments, in advertisements, sales literature
and reports to shareholders. The Fund may also include calculations, such as
hypothetical compounding examples or tax-free compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of the Fund.
From time to time, the total return of the Fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
TOTAL RETURN CALCULATION
Current yield and total return quotations used by the Fund are based on
standardized methods of computing performance mandated by SEC Rules. As the
following formula indicates, the average annual total return is determined by
multiplying a hypothetical initial purchase order of $1,000 by the average
compound rate of return (including capital appreciation/depreciation and
dividends and distributions paid
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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
at the payment made beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms
of years.
T = average annual total return
The Fund computes its aggregate total return by determining the aggregate
compounded rate of return during the specified period that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
Aggregate Total Return = [ (ERV) - 1 ]
----
P
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations. Based upon the foregoing
calculations, the average annual total return for the Fund for the period April
17, 1995 (commencement of operations) through December 31, 1998 was 26.72%. For
the fiscal year ended December 31, 1998, the annual total return for the Fund
was 41.47%.
Since performance will fluctuate, performance data for the Fund should not
be used to compare an investment in the Fund's shares with bank deposits,
savings accounts and similar investment alternatives which often provide an
agreed-upon or guaranteed fixed yield for a stated period of time. Shareholders
should remember that performance is generally a function of the kind and quality
of the instruments held in a portfolio, portfolio maturity, operating expenses
and market conditions.
PERFORMANCE AND ADVERTISEMENTS
From time to time, in marketing and other fund literature, the Fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The Fund will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings. The Fund's
performance may also be compared to the average performance of its Lipper
category.
The Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which ranks funds on the basis of historical
risk and total return. Morningstar's rankings range from five stars (highest) to
one star (lowest) and represent Morningstar's assessment of the historical
-19-
<PAGE>
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.
CAPITAL STOCK INFORMATION
The fund has authorized capital of 100 million shares of common stock, par
value $0.001 per share and may issue additional series of shares. The fund
currently offers one class of shares. Shareholders are entitled to one vote per
share and fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the fund are fully paid and nonassessable and have no
preemptive or conversion rights.
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts,
serves as custodian for the fund's assets. The custodian acts as the fund's
depository, safekeeps its portfolio securities, collects all income and other
payments with respect thereto, disburses funds at the fund's request and
maintains records in connection with its duties.
Boston Financial Data Services ("BFDS"), P.O. Box 953, Boston,
Massachusetts, 02103, serves as transfer and dividend-disbursing agent, and
administrator of various shareholder services. Legg Mason assists BFDS with
certain of its duties as transfer agent and receives compensation from BFDS for
its services. Shareholders who request an historical transcript of their account
will be charged a fee based upon the number of years researched. The Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036, serves as counsel to the Fund.
THE FUND'S INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 W. Pratt St., Baltimore, Maryland, has
been selected by the Directors to serve as independent accountants for the Fund.
FINANCIAL STATEMENTS
Focus Trust's Financial Statements, including the notes thereto, dated as
of December 31, 1998, and the report of PricewaterhouseCoopers LLP therein are
incorporated herein by reference to Focus Trust's 1998 Annual Report to
Shareholders.
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<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.
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.
-21-
<PAGE>
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.
-22-
<PAGE>
-23-
<PAGE>
Legg Mason Focus Trust, Inc.
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
(A) Articles of Incorporation 1/
(B) By-Laws 1/
(C) Specimen security -- not applicable.
(D) Investment Advisory and Management Agreement -- filed herewith
(E) Underwriting Agreement -- filed herewith
(F) Bonus, profit sharing or pension plans -- none.
(G) Custody Agreement 1/
(H) (i) Transfer Agent Services Agreement 1/
(I) Opinion and consent of counsel -- Incorporated herein by reference
to the Rule 24f-2 Notice, filed electronically on behalf of Focus
Trust, Inc. on February 27, 1997.
(J) Other opinions, appraisals, rulings and consents -- Accountants'
consent -- filed herewith.
(K) Financial statements omitted from Item 23 -- none.
(L) Agreement for providing initial capital 1/
(M) Plan pursuant to Rule 12b-1 -- filed herewith
(N)(27) Financial Data Schedule -- - filed herewith
(O) Plan Pursuant to Rule 18f-3 -- none.
- ---------------
1/ Incorporated herein by reference to the corresponding exhibit of
Post-Effective Amendment No. 2 to the registration statement of Focus Trust,
Inc., as electronically filed on April 29, 1996.
Item 24. Persons Controlled by or under Common Control with Registrant
None.
Item 25. Indemnification
<PAGE>
This item is incorporated by reference to the corresponding exhibit of
Post-Effective Amendment No. 5 to the registration statement of Focus Trust,
Inc., SEC File No. 33-89090, as electronically filed on April 29, 1998.
Item 26. Business and Connections of Investment Adviser
Legg Mason Fund Adviser, Inc. ("LMFA"), is a registered investment adviser
incorporated on January 20, 1982. LMFA is engaged primarily in the investment
advisory business. It serves as manager and/or investment adviser to seventeen
open-end investment companies or portfolios. Information as to the officers and
directors of LMFA is included in its Form ADV filed June 24, 1998 with the
Securities and Exchange Commission (Registration Number 801-16958) and is
incorporated herein by reference.
Item 27. Principal Underwriters
- ----------------------
(a) Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Cash Reserve Trust
Legg Mason Income Trust, Inc.
Legg Mason Global Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Investors Trust, Inc.
Legg Mason Light Street Trust, Inc
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
(b) The following table sets forth information concerning each director and
officer of the Registrant's principal underwriter, Legg Mason Wood Walker,
Incorporated ("LMWW").
<PAGE>
Name and Principal Position and Offices With Positions and Offices With
Business Address* Underwriter - LMWW Registrant
------------------ ------------------------- --------------------------
Raymond A. Mason Chairman of the Board None
John F. Curley, Jr. Retired Vice Chairman of Chairman of the
the Board Board and Director
James W. Brinkley President and Director None
Edmund J. Cashman, Jr. Senior Executive Vice None
President and Director
Richard J. Himelfarb Senior Executive Vice None
President and Director
Edward A. Taber, III. Senior Executive Vice President
President and Director
Robert A. Frank Executive Vice President None
and Director
Robert G. Sabelhaus Executive Vice President None
and Director
Charles A. Bacigalupo Senior Vice President, None
Secretary and Director
F. Barry Bilson Senior Vice President None
and Director
Thomas M. Daly, Jr. Senior Vice President None
and Director
Jerome M. Dattel Senior Vice President None
and Director
Robert G. Donovan Senior Vice President None
and Director
Thomas E. Hill Senior Vice President None
One Mill Place and Director
Easton, MD 21601
Arnold S. Hoffman Senior Vice President None
1735 Market Street and Director
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice President None
24th Floor and Director
Two Oliver Plaza
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice President None
1747 Pennsylvania Ave., and Director
N.W.
Washington, D.C. 20006
Laura L. Lange Senior Vice President None
and Director
Marvin H. McIntyre Senior Vice President None
1747 Pennsylvania Ave., and Director
N.W.
Washington, D.C. 20006
Mark I. Preston Senior Vice President None
and Director
Joseph Sullivan Senior Vice President None
and Director
<PAGE>
Name and Principal Position and Offices With Positions and Offices With
Business Address* Underwriter - LMWW Registrant
------------------ ------------------------- --------------------------
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice President None
Deepak Chowdhury Senior Vice President None
255 Alhambra Circle
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice President None
Dennis A. Green Senior Vice President None
William F. Haneman, Jr. Senior Vice President None
One Battery Park Plaza
New York, NY 10005
Theodore S. Kaplan Senior Vice President None
and General Counsel
Seth J. Lehr Senior Vice President None
1735 Market Street
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice President None
and Asst. Secretary
Robert L. Meltzer Senior Vice President None
One Battery Park Plaza
New York, NY 10004
Jonathan M. Pearl Senior Vice President None
1777 Reisterstown Road
Pikesville, MD 21208
John A. Pliakas Senior Vice President None
125 High Street
Boston, MA 02110
Gail Reichard Senior Vice President None
Timothy C. Scheve Senior Vice President None
and Treasurer
Elisabeth N. Spector Senior Vice President None
Robert J. Walker, Jr. Senior Vice President None
200 Gibraltar Road
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
<PAGE>
Name and Principal Position and Offices With Positions and Offices With
Business Address* Underwriter - LMWW Registrant
------------------ ------------------------- --------------------------
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras Street
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President and
Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, D.C. 20006
Hance V. Myers, III Vice President None
1100 Poydras Street
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Reidy, Jr. Vice President None
Jeffrey W. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby Street
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market Street
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shepherd Vice President None
1111 Bagby Street
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
<PAGE>
Name and Principal Position and Offices With Positions and Offices With
Business Address* Underwriter - LMWW Registrant
------------------ ------------------------- --------------------------
Robert S. Trio Vice President None
1747 Pennsylvania Ave.,
N.W.
Washington, D.C. 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
---------------------
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an affiliated
person of the Registrant or an affiliated person of such an affiliated
person.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Item 29. Management Services
None.
Item 30. Undertakings
None
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore and State of Maryland, on the 1st day of
March, 1999.
Legg Mason Focus Trust, Inc.
By: /s/ Marie K. Karpinski
----------------------------
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- -----
/s/ John F. Curley, Jr.* Director March 1, 1999
------------------------
John F. Curley, Jr.
/s/ Richard G. Gilmore* Director March 1, 1999
-----------------------
Richard G. Gilmore
/s/ Arnold L. Lehman** Director March 1, 1999
----------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Director March 1, 1999
----------------------
Jill E. McGovern
/s/ T.A. Rodgers* Director March 1, 1999
----------------------
T.A. Rodgers
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
June 25, 1998, filed herewith.
**Signatures affixed by Marie K. Karpinski pursuant to a power of attorney
dated June 24, 1998, filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director of the following investment company:
LEGG MASON FOCUS TRUST, INC.
plus any other investment companies for with Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager or for which the undersigned individual serves
as Director ("Funds"), hereby severally constitute and appoint each of Marie K.
Karpinski, Arthur J. Brown and Arthur C. Delibert my true and lawful
attorney-in-fact, with full power of substitution, and with full power to sign
for me and in my name in the appropriate capacity, all Pre-effective Amendments
to any Registration Statements of the Funds, any and all Registration Statements
on Form N-1A, any supplements or other instruments in connection therewith as
said attorney-in-fact deems necessary or appropriate, to comply with the
provisions of the Securities Act of 1933 and the Investment Company Act of 1940,
and all related requirements of the Securities and Exchange Commission. I hereby
ratify and confirm all that said attorney-in-fact or his or her substitute may
do or cause to be done by virtue hereof.
WITNESS my hand as of the date set forth below.
SIGNATURE DATE
/s/ John F. Curley, Jr. June 25, 1998
- -------------------------------
John F. Curley, Jr.
/s/ Richard G. Gilmore June 25, 1998
- -------------------------------
Richard G. Gilmore
- --------------------------------- June ____ , 1998
Arnold L. Lehman
/s/ Jill E. McGovern June 25, 1998
- --------------------------------
Jill E. McGovern
/s/ T. A. Rodgers June 25, 1998
- -------------------------------
T.A. Rodgers
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director of the following investment company:
LEGG MASON FOCUS TRUST, INC.
plus any other investment companies for with Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager or for which the undersigned individual serves
as Director ("Funds"), hereby severally constitute and appoint each of Marie K.
Karpinski, Arthur J. Brown and Arthur C. Delibert my true and lawful
attorney-in-fact, with full power of substitution, and with full power to sign
for me and in my name in the appropriate capacity, all Pre-effective Amendments
to any Registration Statements of the Funds, any and all Registration Statements
on Form N-1A, any supplements or other instruments in connection therewith as
said attorney-in-fact deems necessary or appropriate, to comply with the
provisions of the Securities Act of 1933 and the Investment Company Act of 1940,
and all related requirements of the Securities and Exchange Commission. I hereby
ratify and confirm all that said attorney-in-fact or his or her substitute may
do or cause to be done by virtue hereof.
WITNESS my hand as of the date set forth below.
SIGNATURE DATE
June ____, 1998
- -------------------------------
John F. Curley, Jr.
June ____, 1998
- -------------------------------
Richard G. Gilmore
/s/ Arnold L. Lehman
- --------------------------------- June 24 , 1998
Arnold L. Lehman
June ____, 1998
- --------------------------------
Jill E. McGovern
June ____, 1998
- -------------------------------
T.A. Rodgers
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
LEGG MASON FOCUS TRUST, INC.
This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT ("Agreement") is made
this 30th day of June, 1998, by and between Legg Mason Focus Trust, Inc., a
Maryland corporation (the "Fund"), and Legg Mason Fund Adviser, Inc., a Maryland
corporation (the "Adviser").
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act") and
has registered its shares of common stock for sale to the public under the
Securities Act of 1933 and various state securities laws; and
WHEREAS, the Fund wishes to retain the Adviser to provide investment
advisory, management, and administrative services to the Fund; and
WHEREAS, the Adviser is willing to furnish such services on the terms and
conditions hereinafter set forth:
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Fund hereby appoints Legg Mason Fund Adviser, Inc. as Adviser of
the Fund for the period and on the terms set forth in this Agreement. The
Adviser accepts such appointment and agrees to render the services herein set
forth, for the compensation herein provided.
2. The Fund shall at all times keep the Adviser fully informed with regard
to the securities owned by it, its funds available, or to become available, for
investment, and generally as to the condition of its affairs. It shall furnish
the Adviser with such other documents and information with regard to its affairs
as the Adviser may from time to time reasonably request.
3. (a) Subject to the supervision of the Fund's Board of Directors, the
Adviser shall regularly provide the Fund with investment research, advice,
management and supervision and shall furnish a continuous investment program for
the Fund's portfolio of securities consistent with the Fund's investment goals
and policies. The Adviser shall determine from time to time what securities will
be purchased, retained or sold by the Fund, and shall implement those decisions,
all subject to the provisions of the Fund's Articles of Incorporation and
Bylaws, the 1940 Act, the applicable rules and regulations of the Securities and
Exchange Commission, and other applicable federal and state law, as well as the
investment goals and policies of the Fund. The Adviser will place orders
pursuant to its investment determinations for the Fund either directly with the
issuer or with any broker or dealer. In placing orders with brokers and dealers
the Adviser will attempt to obtain the best net price and the most favorable
execution of its orders; however, the Adviser may, in its discretion, purchase
and sell portfolio securities through
<PAGE>
brokers who provide the Fund with research, analysis, advice and similar
services, and the Adviser may pay to these brokers, in return for research and
analysis, a higher commission or spread than may be charged by other brokers.
The Adviser is authorized to combine orders on behalf of the Fund with orders on
behalf of other clients of the Adviser, consistent with guidelines adopted by
the Board of Directors of the Fund. The Adviser shall also provide advice and
recommendations with respect to other aspects of the business and affairs of the
Fund, and shall perform such other functions of management and supervision as
may be directed by the Board of Directors of the Fund.
(b) The Fund hereby authorizes any entity or person associated with
the Adviser which is a member of a national securities exchange to effect any
transaction on the exchange for the account of the Fund which is permitted by
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Fund hereby consents to the retention by such person
associated with the Adviser of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
4. The Adviser may enter into a contract ("Advisory Agreement") with an
investment adviser in which the Adviser delegates to such investment adviser any
or all its duties specified in Paragraph 3 hereunder, provided that such
Advisory Agreement imposes on the investment adviser bound thereby all duties
and conditions to which the Adviser is subject hereunder, and further provided
that such Advisory Agreement meets all requirements of the 1940 Act and rules
thereunder.
5. (a) The Adviser, at its expense, shall supply the Board of Directors
and officers of the Fund with all statistical information and reports reasonably
required by them and reasonably available to the Adviser and shall furnish the
Fund with office facilities, including space, furniture and equipment and all
personnel reasonably necessary for the operation of the Fund. The Adviser shall
oversee the maintenance of all books and records with respect to the Fund's
securities transactions and the keeping of the Fund's books of account in
accordance with all applicable federal and state laws and regulations. In
compliance with Rule 31a-3 under the 1940 Act, the Adviser hereby agrees that
any records which it maintains for the Fund are the property of the Fund, and
further agrees to surrender promptly to the Fund any of such records upon the
Fund's request. The Adviser further agrees to arrange for the preservation of
the records required to be maintained by Rule 31a-1 under the 1940 Act for the
periods prescribed by Rule 31a-2 under the 1940 Act. The Adviser shall authorize
and permit any of its directors, officers and employees, who may be elected as
directors or officers of the Fund, to serve in the capacities in which they are
elected.
(b) Other than as herein specifically indicated, the Adviser shall
not be responsible for the Fund's expenses. Specifically, the Adviser will not
be responsible, except to the extent of the reasonable compensation of employees
of the Fund whose services may be used by the Adviser hereunder, for any of the
following expenses of the Fund, which expenses shall be borne by the Fund:
advisory fees; distribution fees; interest, taxes, governmental fees, fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations; the cost (including brokerage commissions
or charges, if any) of
-2-
<PAGE>
securities purchased or sold by the Fund and any losses in connection therewith;
fees of custodians, transfer agents, registrars or other agents; legal expenses;
expenses relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying shares of the Fund for sale under applicable
federal and state law; expenses of preparing, setting in print, printing and
distributing prospectuses, reports, notices and dividends to Fund shareholders;
costs of stationery; costs of stockholders' and other meetings of the Fund;
directors' fees; audit fees; travel expenses of officers, directors and
employees of the Fund, if any; and the Fund's pro rata portion of premiums on
any fidelity bond and other insurance covering the Fund and its officers and
directors.
6. No director, officer or employee of the Fund shall receive from the
Fund any salary or other compensation as such director, officer or employee
while he or she is at the same time a director, officer, or employee of the
Adviser or any affiliated company of the Adviser. This paragraph shall not apply
to directors, executive committee members, consultants and other persons who are
not regular members of the Adviser's or any affiliated company's staff.
7. As compensation for the services performed and the facilities furnished
and expenses assumed by the Adviser, including the services of any consultants
or sub-advisers retained by the Adviser, the Fund shall pay the Adviser, as
promptly as possible after the last day of each month, a fee, computed daily at
an annual rate of 0.70% of the Fund's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
succeeding the effective date of this Agreement. If this Agreement is terminated
as of any date not the last day of a month, such fee shall be paid as promptly
as possible after such date of termination, shall be based on the average daily
net assets of the Fund in that period from the beginning of such month to such
date of termination, and shall be based on that proportion of such average daily
net assets as the number of business days in such period bears to the number of
business days in such month. The average daily net assets of the Fund shall in
all cases be based only on business days and be computed as of the time of the
regular close of business of the New York Stock Exchange, or such other time as
may be determined by the Board of Directors of the Fund. Each such payment shall
be accompanied by a report prepared either by the Fund or by a reputable firm of
independent accountants, which shall show the amount properly payable to the
Adviser under this Agreement and the detailed computation thereof.
8. The Adviser assumes no responsibility under this Agreement other than
to render the services called for hereunder, in good faith, and shall not be
responsible for any action of the Board of Directors of the Fund in following or
declining to follow any advice or recommendations of the Adviser; provided, that
nothing in this Agreement shall protect the Adviser against any liability to the
Fund or its shareholders to which it would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
hereunder.
-3-
<PAGE>
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Adviser who may also be a director,
officer, or employee of the Fund, to engage in any other business or to devote
his time and attention in part to the management or other aspects of any other
business, whether of a similar nature or a dissimilar nature, or to limit or
restrict the right of the Adviser to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
10. As used in this Agreement, the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
11. This Agreement will become effective on the date first written above,
provided that it shall have been approved by the Fund's Board of Directors and
by the shareholders of the Fund in accordance with the requirements of the 1940
Act and, unless sooner terminated as provided herein, will continue in effect
for two years from the above written date. Thereafter, if not terminated, this
Agreement shall continue in effect for successive annual periods ending on the
same date of each year, provided that such continuance is specifically approved
at least annually (i) by the Fund's Board of Directors or (ii) by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act), provided that in either event the continuance is also approved by a
majority of the Fund's Board of Directors who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval.
12. This Agreement is terminable without penalty by the Fund's Board of
Directors, by vote of a majority of the outstanding voting securities of the
Fund (as defined in the 1940 Act), or by the Adviser, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written consent
of the Adviser and the Fund. This Agreement shall terminate automatically in the
event of its assignment by the Adviser and shall not be assignable by the Fund
without the consent of the Adviser.
13. In the event this Agreement is terminated by either party or upon
written notice from the Adviser at any time, the Fund hereby agrees that it will
eliminate from its corporate name any reference to the name of "Legg Mason." The
Fund shall have the non-exclusive use of the name "Legg Mason" in whole or in
part only so long as this Agreement is effective or until such notice is given.
-4-
<PAGE>
14. This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON FOCUS TRUST, INC.
By: /s/ Kathi D. Bair By: /s/ Marie K. Karpinski
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Kathi D. Bair By: /s/ William H. Miller
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 30th day of June, 1998, by and
between Legg Mason Focus Trust, Inc., a Maryland corporation ("Corporation"),
and Legg Mason Wood Walker, Incorporated, a Maryland corporation
("Distributor").
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act"), and has registered its shares of
common stock for sale to the public under the Securities Act of 1933 ("1933
Act") and various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of the shares of common
stock of the Corporation ("Shares") and to furnish certain other services to the
Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under, the
1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Corporation. The
Distributor, as exclusive agent for the Corporation, upon the commencement of
operations of the Corporation and subject to applicable federal and state law
and the Articles of Incorporation and By-Laws of the Corporation, shall: (i)
promote the Corporation; (ii) solicit orders for the purchase of the Shares
subject to such terms and conditions as the Corporation may specify; and (iii)
accept orders for the purchase of the Shares on behalf of the Corporation
(collectively, "Distribution Services"). The Distributor shall comply with all
applicable federal and state laws and offer the Shares of the Corporation on an
agency or "best efforts" basis under which the Corporation shall issue only such
Shares as are actually sold. The Distributor shall have the right to use any
list of shareholders of the Corporation or any other list of investors which it
obtains in connection with its provision of services under this Agreement;
provided, however, that the Distributor shall not sell or knowingly provide such
list or lists to any unaffiliated person without the consent of the
Corporation's Board of Directors.
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing shareholders
with information on their investments, and any other services now or hereafter
deemed to be appropriate subjects for the payments of "service fees" under
Conduct Rule 2830(d) of the National Association of Securities Dealers, Inc.
(collectively, "Shareholder Services").
<PAGE>
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services and may enter into agreements with qualified dealers
and other qualified entities to perform recordkeeping and subaccounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Corporation and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Corporation. No
such dealer or other entity is authorized to act as agent for the Corporation in
connection with the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Corporation shall be the
net asset value per share (as determined by the Corporation) of the outstanding
Shares of the Corporation plus any applicable sales charge as described in the
Registration Statement of the Corporation. The Corporation shall furnish the
Distributor with a statement of each computation of public offering price and of
the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect the gross proceeds derived from the sale of the Shares,
remit the net asset value thereof to the Corporation upon receipt of the
proceeds and retain the sales charge, if any. The Distributor shall receive from
the Corporation a distribution fee and a service fee at the rates and under the
terms and conditions of the Plan of Distribution ("Plan") adopted by the
Corporation, as such Plan is in effect from time to time, and subject to any
further limitations on such fees as the Corporation's Board of Directors may
impose. The Distributor may reallow any or all of the sales charge, distribution
fee and service fee that it has received under this Agreement to such dealers or
sub-accountants as it may from time to time determine; provided, however, that
the Distributor may not reallow to any dealer for Shareholder Services an amount
in excess of .25% of the average annual net asset value of the Shares with
respect to which said dealer provides Shareholder Services.
5. As used in this Agreement, the term "Registration Statement" shall mean
the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information filed by the Corporation as part of the Registration
Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or sub-accountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Corporation, and the Corporation shall not be responsible in
any way for any other information, statements or representations given or
-2-
<PAGE>
made by the Distributor, any dealer or sub-accountant, or their representatives
or agents. Except as specifically provided in this Agreement, the Corporation
shall bear none of the expenses of the Distributor in connection with its offer
and sale of the Shares.
7. The Corporation agrees at its own expense to register the Shares with
the Securities and Exchange Commission, state and other regulatory bodies, and
to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the Registration Statement. The Corporation shall bear all
expenses related to preparing and typesetting such Prospectuses, Statements of
Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to the Corporation's
communications with persons who are shareholders of the Corporation.
8. The Corporation agrees to indemnify, defend and hold the Distributor,
its several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers or directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
required to be stated or necessary to make the Registration Statement not
misleading, provided that in no event shall anything contained in this Agreement
be construed so as to protect the Distributor against any liability to the
Corporation or its shareholders to which the Distributor would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement, and further provided that the
Corporation shall not indemnify the Distributor for conduct set forth in
paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the Corporation,
its several officers and directors, and any person who controls the Corporation
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Corporation, its
officers or directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, on account of any wrongful act of the
Distributor or any of its employees or arising out of or based upon any alleged
untrue statement of a material fact contained in information furnished in
writing by the Distributor to the Corporation for use in the Registration
Statement or arising out of or based upon any alleged omission to state a
material fact in connection with such information required to be stated in the
Registration Statement or necessary to make such information not misleading. As
used in this paragraph, the term "employee" shall not include a corporate entity
under control to provide services to the Corporation, or any employee of such a
corporate entity, unless such person is otherwise an employee of the
Corporation.
-3-
<PAGE>
10. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of the Corporation by written notice to the Distributor
at its principal office.
11. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by telex or in writing, the
Corporation and State Street Bank and Trust Company, the Corporation's transfer
agent, of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the identity of
the shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by the
Distributor for the repurchase of such Shares in cash or in the form of a credit
against moneys due the Corporation from the Distributor as proceeds from the
sale of Shares. The Corporation reserves the right to suspend such repurchase
right upon written notice to the Distributor. The Distributor further agrees to
act as agent for the Corporation to receive and transmit promptly to the
Corporation's transfer agent shareholder and dealer requests for redemption of
Shares.
13. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's Board of
Directors on a quarterly basis showing such information concerning expenditures
related to this Agreement as from time to time shall be reasonably requested by
the Board of Directors.
16. As used in this Agreement, the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective on the date first written above
and, unless sooner terminated as provided herein, will continue in effect for
one year from the above written date. Thereafter, if not terminated, this
Agreement shall continue in effect for successive annual periods ending on the
same date of each year, provided that such continuance is specifically approved
at least annually (i) by the Corporation's Board of Directors or (ii) by a vote
of a majority of the outstanding voting securities of the Corporation (as
defined in the 1940 Act),
-4-
<PAGE>
provided that in either event the continuance is also approved by a majority of
the Corporation's Directors who are not interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval.
18. This Agreement is terminable in its entirety without penalty by the
Corporation's Board of Directors, by vote of a majority of the outstanding
voting securities of the Corporation (as defined in the 1940 Act), or by the
Distributor, on not less than 60 days' notice to the other party and will be
terminated upon the mutual written consent of the Distributor and the
Corporation. This Agreement will also automatically and immediately terminate in
the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharged or
terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON FOCUS TRUST, INC.
By: /s/ Kathi D. Bair By: /s/ Marie K. Karpinski
Attest: LEGG MASON WOOD WALKER,
INCORPORATED
By: /s/ Kathi D. Bair By: /s/ Edmund J. Cashman, Jr.
DISTRIBUTION PLAN OF
LEGG MASON FOCUS TRUST, INC.
WHEREAS, Legg Mason Focus Trust, Inc. (the "Corporation") is an open-end
management investment company registered under the Investment Company Act of
1940, as amended ("1940 Act"), and has offered, and intends to continue
offering, for public sale distinct series of shares of common stock ("Series"),
each corresponding to a distinct portfolio;
WHEREAS, the Corporation has registered the offering of its shares of
common stock under a Registration Statement filed with the Securities and
Exchange Commission and that Registration Statement is in effect as of the date
hereof;
WHEREAS, the Corporation's Board of Directors has established one Series
of shares of common stock of the Corporation: Legg Mason Focus Trust;
WHEREAS, the Corporation desires to adopt a Distribution Plan pursuant to
Rule 12b-1 under the 1940 Act and the Board of Directors has determined that
there is a reasonable likelihood that adoption of the Distribution Plan will
benefit the Corporation and its shareholders;
WHEREAS, the Corporation intends to employ Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the 1940 Act on the following terms
and conditions:
1. A. Legg Mason Focus Trust shall pay to Legg Mason, as compensation for
Legg Mason's services as principal underwriter of the Series' shares, a
distribution fee at the rate of 0.75% on an annualized basis of the average
daily net assets of the Corporation's shares, such fee to be calculated and
accrued daily and paid monthly or at such other intervals as the Board shall
determine.
B. The Corporation shall pay to Legg Mason, as compensation for
ongoing services provided to the Corporation's shareholders, a service fee at
the rate of 0.25% on an annualized basis of the average daily net assets of the
Corporation's shares, such fee to be calculated and accrued daily and paid
monthly or at such other intervals as the Board shall determine.
C. The Corporation may pay a distribution or service fee to Legg
Mason at a lesser rate than the fees specified in paragraphs 1.A. and 1.B.,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 4 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Conduct Rule 2830(d) of the National Association of
Securities Dealers, Inc. ("NASD") remain in effect and apply to distributors or
dealers in the Corporation's shares, the amounts paid hereunder shall not exceed
those limitations, including permissible interest.
<PAGE>
2. As principal underwriter of the Corporation's shares, Legg Mason may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the shares of the Series and/or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason, other
broker-dealers and other entities that engage in or support the distribution of
shares or who service shareholder accounts or provide sub-accounting and
recordkeeping services; expenses of Legg Mason and such other broker-dealers and
other entities, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall not take effect with respect to any additional Series
until it has been approved by a vote of at least a majority of the outstanding
voting securities, as defined in the 1940 Act, of that Series.
4. This Plan shall take effect on June 30, 1998 and shall continue in
effect for successive periods of one year from its execution for so long as such
continuance is specifically approved at least annually together with any related
agreements, by votes of a majority of both (a) the Board of Directors of the
Corporation and (b) those Directors who are not "interested persons" of the
Corporation, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements; and only if the
Directors who approve the Plan taking effect have reached the conclusion
required by Rule 12b-1(e) under the 1940 Act.
5. Any person authorized to direct the disposition of monies paid or
payable by any Series pursuant to this Plan or any related agreement shall
provide to the Corporation's Board of Directors and the Board shall review, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made. Legg Mason shall submit only information
regarding amounts expended for "distribution activities," as defined in this
paragraph 5, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this paragraph 5, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Legg Mason's performance of its obligations under
the underwriting agreement, dated June 30, 1998 by and between the Corporation
and Legg Mason, that are not deemed "service activities." As used herein,
"distribution activities" also includes sub-accounting or recordkeeping services
provided by an entity if the entity is compensated, directly or indirectly, by
the Fund or Legg Mason for such services. Such entity may also be paid a service
fee if it provides appropriate services. Nothing in the foregoing is intended to
or shall cause there to be any implication that compensation for such services
must be made only pursuant to a plan of distribution under Rule 12b-1. "Service
activities" shall mean activities covered by the definition of "service fee"
contained in Conduct Rule 2830(b) of the NASD, including the provision by Legg
-2-
<PAGE>
Mason of personal, continuing services to investors in the Corporation's shares.
Overhead and other expenses of Legg Mason related to its "distribution
activities" or "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such distribution or service activities, respectively.
6. This Plan may be terminated with respect to any Series at any time by
vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the
outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1.A. hereof or the amount of service
fees provided for in paragraph 1.B. hereof unless such amendment is approved by
a vote of at least a majority of the outstanding securities, as defined in the
1940 Act, of the Corporation, and no material amendment to the Plan shall be
made unless such amendment is approved in the manner provided for continuing
approval in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of directors
who are not interested persons of the Corporation, as defined in the 1940 Act,
shall be committed to the discretion of directors who are themselves not
interested persons.
9. The Corporation shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 5 hereof for a period of not less than six years from the date of such
report, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan as
of the day and year set forth below:
LEGG MASON FOCUS TRUST, INC.
Date: June 30, 1998 By: /s/ Marie K. Karpinski
Attest: Agreed and assented to by
By: /s/ Kathi D. Bair LEGG MASON WOOD WALKER, INC.
By: /s/ Edmund J. Cashman, Jr.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 8 (File No. 33-89090) under the Securities Act of 1933 and Post-Effective
Amendment No. 10 (File No. 811-8966) under the Investment Company Act of 1940 to
the Registration Statement on Form N-1A of Legg Mason Focus Trust, Inc. of our
report dated February 5, 1999 on our audit of the financial statements and
financial highlights as of December 31, 1998 and for the respective periods then
ended, which report is included in the Annual Report to Shareholders.
We also consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "The Fund's Independent Accountants" and
"Financial Statements" in the Statement of Additional Information.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
March 1, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000936886
<NAME> LEGG MASON FOCUS TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 36241
<INVESTMENTS-AT-VALUE> 47428
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<TOTAL-LIABILITIES> 1849
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<REALIZED-GAINS-CURRENT> 1270
<APPREC-INCREASE-CURRENT> 8298
<NET-CHANGE-FROM-OPS> 9431
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1557
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<NUMBER-OF-SHARES-SOLD> 32537
<NUMBER-OF-SHARES-REDEEMED> (2915)
<SHARES-REINVESTED> 1500
<NET-CHANGE-IN-ASSETS> 38996
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 223
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 418
<AVERAGE-NET-ASSETS> 15414
<PER-SHARE-NAV-BEGIN> 16.32
<PER-SHARE-NII> (.06)
<PER-SHARE-GAIN-APPREC> 6.68
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.942)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.00
<EXPENSE-RATIO> 1.93
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</TABLE>
