<PAGE>
Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
John F. Curley, Jr., Chairman
Nelson A. Diaz
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
G. Peter O'Brien
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or
accompanied by a prospectus.
Legg Mason Wood Walker, Incorporated
-------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 . 539 . 0000
LMF-222
8/00
Semi-Annual Report
June 30, 2000
Legg Mason
Focus
Trust, Inc.
[LEGG
MASON
FUNDS
Logo]
The Art of Investing(SM)
<PAGE>
To Our Shareholders,
We are pleased to provide you with the semi-annual report for Legg Mason Focus
Trust, Inc. for the six months ended June 30, 2000.
On the following pages, Robert Hagstrom, the Fund's portfolio manager,
discusses the investment outlook and the Fund's performance.
We hope you will consider using the Fund for investments of additional funds
as they become available. Some shareholders regularly add to their investment in
the Legg Mason Funds by authorizing automatic, monthly transfers from their bank
checking or Legg Mason accounts. Your Financial Advisor will be happy to help
you make these arrangements if you would like to purchase additional shares in
this convenient manner.
Sincerely,
/s/ Edward A. Taber, III
------------------------
Edward A. Taber, III
President
August 4, 2000
<PAGE>
Portfolio Manager's Comments
Focus Trust
Performance Analysis
Legg Mason Focus Trust's total returns for the first quarter, second
quarter, and year to date are shown below with total returns of the Fund's
two comparable benchmark indices: the Standard & Poor's 500 Index, an index
of widely held common stocks, and Lipper Analytical Services, Inc.'s
("Lipper's") index of Large-Cap Core funds.
<TABLE>
<CAPTION>
First Second Year
Quarter Quarter to Date
--------------------------------------------------------------------
<S> <C> <C> <C>
Focus Trust -4.48% -3.89% -8.20%
S&P 500 Stock Composite Index +2.29% -2.66% -0.42%
Lipper Large-Cap Core Fund Index +4.27% -2.28% +1.89%
</TABLE>
The Fund's average annual total returns for one, two, three, four, and five
years are shown below, as well as total return information for the same periods
for the S&P 500 Index and the Lipper Large-Cap Core Fund Index.
<TABLE>
<CAPTION>
Average Annual Total Returns,
Periods Ending June 30, 2000
----------------------------------------------------
1 Year 2 Years 3 Years 4 Years 5 Years
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Focus Trust -1.36% +11.96% +20.59% +21.55% +20.87%
S&P 500 Stock Composite Index +7.24% +14.74% +19.66% +23.26% +23.80%
Lipper Large-Cap Core Fund Index +10.44% +14.35% +19.20% +21.70% +21.94%
</TABLE>
As you can see from the above results, Focus Trust, true to form, has
continued to provide shareholders with a "bumpy" ride over the short run and a
"smoother" ride over the long run. This, as we have explained on numerous
occasions, is a common occurrence among concentrated low-turnover mutual funds.
Concentrated funds (funds that own less than twenty stocks) tend to carry
volatility ratings (measured by the beta coefficient) that are substantially
higher than broadly invested funds (funds that own more than one hundred
stocks).
Some investors equate volatility with risk. This suggests that the more bouncy
the stock price of a security or the net asset value of a mutual fund is in
relation to an index, the greater the likelihood either is to lose money for
investors. Volatility as a risk measurement tool was embraced by the financial
services industry soon after the 1973-1974 bear market. Not surprisingly, after
so many investors suffered through the worst stock market decline since the
Great Depression, consistency of positive returns became a paramount goal.
However, what may surprise many is the fact that standard deviation as a
measurement tool had existed and was generally ignored for over twenty years.
The concept of standard deviation was first introduced by Harry Markowitz in a
1952 paper titled "Portfolio Selection." In this landmark paper, Markowitz
connected the idea of risk and return by arguing that investors could not expect
to earn high returns without being willing to accept the risks involved. Risk
defined as losing money was tied by Markowitz to the bounciness of a stock
price. The more bouncy a stock is, the greater the chance of losing money.
Conversely, if a stock price bounced very little, then it was assumed there was
very little chance of losing money.
About the same time Markowitz was writing his paper, Warren Buffett was taking
Ben Graham's class, "Security Analysis," at Columbia University. Graham, like
Markowitz, also thought about risk. After all, Graham lost his early fortune in
the 1929 stock market crash. But unlike Markowitz, Graham
2
<PAGE>
did not equate risk with bounciness. Rather he equated risk with economics. If
Graham could purchase a company for less than its book value, he figured he was
taking very little risk despite how much the price of the company bounced. In
fact, the more the stock price declined relative to the company's book value,
the less risk Graham figured he was taking. This commonsense approach
immediately connected with Warren Buffett. When stock prices declined in the
1970s, Warren believed, just as Graham had taught him, that he was taking less
risk with each purchase he made at lower prices. But this mindset was at
diametric odds with the more popularized notion of standard deviation as a
measurement of risk.
Over the last twenty-five years, there have been two separate definitions of
risk. One is price-based, the other is economic-based. Modern portfolio theory
promotes a price-based model of risk. Warren Buffett, and a cadre of other like-
minded investors, embrace an economic model of risk. Who is right and who is
wrong? The answer largely depends upon your time horizon. Those who judge their
success or failure over short periods are more likely to embrace a price-based
model of risk, whereas those who are measuring their performance over multiple
years care more about economic risk. If you are going to be a buy-and-hold
investor (which is the mandate for Focus Trust), what becomes paramount is the
economic risk we take since our future rate of return will be determined by the
economics of the businesses we own.
At the recent Morningstar Conference, Leah Zell, who manages the Acorn
International Fund, suggested the stock market, over the short run, appears to
react first to sentiment, then earnings, then lastly fundamentals. However, over
the long term, Zell argued market prices are determined largely by fundamentals,
then earnings, then lastly sentiment. If you are a long-term investor, what is
most important to your thinking is the fundamentals of your business. What a
long-term investor wants to know is whether the company they own has a
sustainable long-term competitive advantage that will allow the company to earn
high cash returns on invested capital at a rate greater than the market rate of
return. If it does, and you have bought the company at a reasonable price, you
can assume the future price of the company will, over the long term, track
growth in economics and hence outpace the market. However, if you are a short-
term investor, what becomes most important is identifying sentiment indicators
that will help you predict what stocks to buy or sell in the short run.
As you well know, our style at Focus Trust commands that we pay particular
attention to our companies' long-term fundamentals. By this measurement, our
portfolio exceeds the long-term baseline economic growth of the market. As such,
we should expect that as long as our companies perform economically well, our
long-term price performance should be equally as good. But what do we do when
one of our stock's long-term economic advantages is temporarily derailed by
short-run sentiment indicators? First, we have to suffer through difficult
periods of price underperformance. Second, we must look to purchase more shares
of above-average companies at below-average prices. The first event causes
short-term emotional discomfort. The second event ensures we will be well
rewarded over the long term for any short-term deficits.
Year-to-Date Market Review
The Federal Reserve began tightening in June 1999. Since then, the Fed has
raised rates six times, increasing the Federal Funds rate 175 basis points./1/
This action, not unexpectedly, has begun to slow economic growth. Twelve months
after the Fed began a concerted effort to slow the U.S. economy, its effects are
now being measured. Housing and auto sales are flattening. Employment growth is
slowing and wage growth is not accelerating. With slowing economic growth, we
can also expect lower inflation. Although oil prices are up sharply over the
last year, it is highly unlikely oil prices will
--------------
/1/ 100 basis points = 1%.
3
<PAGE>
Portfolio Manager's Comments -- Continued
continue to march higher. Political and economic pressure has reached a fever
point that in turn has caused oil-producing countries to increase production.
Most expect inflation to be lower, not higher, over the next twelve months.
With a slowing economy also comes slower-gaining equity markets. Each of the
major indices (Dow Jones Industrial Average, S&P 500, NASDAQ Composite) are all
trading down from earlier highs and at present appear to be locked into lateral
movements. Any short-term rise in prices is soon offset by profit taking. This
tug-of-war between bulls and bears is not surprising. It reflects the division
between those who believe the economy can achieve a soft landing versus those
who are forecasting a hard landing and its dire consequence.
It is interesting to note there is a growing chorus of investment minds who
are predicting much lower stock price gains in the years ahead than what we have
experienced over the last decade. Money managers are preaching diminished
expectations, trying to prepare their clients for the days when stock indices
won't go up 20%-30%-40% year in and year out. Historically, stock prices track
closely to the growth in earnings. Admittedly, the decade of the 1990s has been
an exceptionally great period for corporate earnings. A bustling U.S. economy
coupled with a prosperous world economy has created a windfall for many
companies.
This year, S&P 500 earnings are expected to be approximately $57, up from $32
in 1994. Over the last six years, earnings are up 80%, over 13% per year, while
stock prices have gained over 200%. How did this happen? Generally speaking,
market multiples have expanded for two principal reasons. First has been the
significant drop in interest rates. Lower discount rates translate into higher
valuations. Second has been the steady increase in productivity that has
translated into higher returns on capital. This combination of lower interest
rates and higher returns on capital mixed in with a solid dose of economic
growth has pushed stock prices to record valuations. What we must now prepare
for is the likelihood that interest rates will not drop significantly lower,
that productivity gains will be less year-over-year and the strong possibility
the Fed's hike in interest rates will slow growth in corporate earnings. S&P 500
earnings are expected to rise to $62 in 2001, a 9% annual gain that pales when
compared to the earnings gain over the past several years.
We are joining the chorus of other portfolio managers and investment advisers
who warn their clients not to build in high expectations for future stock price
gains. This is not to say we expect a bear market. We do not. However, we think
it would be naive to expect that stock prices will continue to rise at the rate
we have experienced over the last six years. Even so, we do expect stocks to
outperform bonds and bonds to outperform cash.
As far as Focus Trust is concerned, we currently own a portfolio of
outstanding companies. Each company generates above-average returns on capital,
and as a group our portfolio generates cash earnings that are expected to grow
at a rate faster than the 9% estimate for the S&P 500. Although we have
experienced a modest decline in our net asset value, I am confident the
economics of what we own will propel our investments higher.
As always, I appreciate your support and confidence. If you have any questions
about Focus Trust, please do not hesitate to contact us.
Robert G. Hagstrom, CFA
Portfolio Manager
July 11, 2000
DJIA 10727.19
4
<PAGE>
Performance Information
Legg Mason Focus Trust, Inc.
Total Returns for One, Three and Five Years and Life of Fund as of June 30, 2000
The returns shown are based on historical results and are not intended to
indicate future performance. Total return measures investment performance in
terms of appreciation or depreciation in a Fund's net asset value per share,
plus dividends and any capital gain distributions. It assumes that dividends
and distributions were reinvested at the time they were paid. The investment
return and principal value of an investment in this Fund will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Average annual returns tend to smooth out variations in
a Fund's return, so that they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The Fund's total returns as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Average Annual Total Return:
<S> <C>
One Year -1.36%
Three Years +20.59
Five Years +20.87
Life of Fund (Inception April 17, 1995) +20.27
Cumulative Total Return:
One Year -1.36%
Three Years +75.38
Five Years +157.94
Life of Fund (Inception April 17, 1995) +161.55
</TABLE>
-----------------------------
Selected Portfolio Performance(dagger)
Strong performers for the six months ended June 30, 2000*
-------------------------------------------------------------
1. Avon Products, Inc. +34.8%
2. Harley-Davidson, Inc. +20.2%
3. Citigroup Inc. +8.4%
4. International Business Machines
Corporation +1.4%
(dagger) Individual stock performance is measured by the change in the
stock's price; reinvestment of dividends is not included.
* Securities held for the entire period.
Weak performers for the six months ended June 30, 2000*
-------------------------------------------------------------
1. Unisys Corporation -54.4%
2. Amazon.com, Inc. -52.3%
3. America Online, Inc. -30.1%
4. Gateway, Inc. -21.2%
Portfolio Changes
Securities added since December 31, 1999
-------------------------------------------------------------
American International Group, Inc.
Eastman Kodak Company
The Home Depot, Inc.
WorldCom, Inc.
Securities sold since December 31, 1999
-------------------------------------------------------------
Freddie Mac
Koninklijke (Royal) Philips Electronics N.V.
Lloyds TSB Group, plc
United Asset Management Corporation
5
<PAGE>
Statement of Net Assets
Legg Mason Focus Trust, Inc.
June 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Shares/Par Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock and Equity Interests -- 90.4%
Communications Services -- 5.6%
Telephone -- 5.6%
WorldCom, Inc. 285 $ 13,061/A/
--------
Consumer Cyclicals -- 25.2%
Leisure Time (Products) -- 9.8%
Harley-Davidson, Inc. 274 10,549
International Speedway Corporation 292 12,081
--------
22,630
--------
Retail (Building Supplies) -- 2.3%
The Home Depot, Inc. 108 5,393
--------
Retail (General Merchandise) -- 6.8%
Wal-Mart Stores, Inc. 273 15,732
--------
Retail (Home Shopping) -- 3.2%
Amazon.com, Inc. 206 7,480/A/
--------
Services (Advertising/Marketing) -- 3.1%
WPP Group plc 100 7,263
--------
Consumer Staples -- 11.4%
Personal Care -- 6.0%
Avon Products, Inc. 315 14,018
--------
Restaurants -- 5.4%
McDonald's Corporation 379 12,493
--------
Financials -- 24.3%
Financial (Diversified) -- 12.4%
American Express Company 270 14,074
Citigroup Inc. 245 14,761
--------
28,835
--------
Insurance (Multi-Line) -- 6.1%
American International Group, Inc. 120 14,041
--------
Insurance (Property/Casualty) -- 5.8%
Berkshire Hathaway Inc. - Class A .25 13,450/A/
--------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology -- 23.9%
Communications Equipment -- 1.4%
Nokia Oyj 63 $ 3,121
--------
Computers (Hardware) -- 12.1%
Gateway, Inc. 343 19,448/A/
International Business Machines Corporation 80 8,732
--------
28,180
--------
Computers (Software/Services) -- 7.1%
America Online, Inc. 200 10,550/A/
Unisys Corporation 415 6,039/A/
--------
16,589
--------
Photography/Imaging -- 3.3%
Eastman Kodak Company 130 7,735
--------
Total Common Stock and Equity Interests (Identified Cost -- $196,628) 210,021
---------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 9.0%
Bank of America
6.82%, dated 6/30/00, to be repurchased at $10,432 on 7/3/00
(Collateral: $11,619 Freddie Mac mortgage-backed securities,
6.00%, due 9/1/28, value $10,691) $10,426 10,426
Goldman, Sachs & Company
6.82%, dated 6/30/00, to be repurchased at $10,432 on 7/3/00
(Collateral: $10,561 Fannie Mae mortgage-backed securities,
8.50%, due 10/1/28, value $10,822) 10,427 10,427
--------
Total Repurchase Agreements (Identified Cost -- $20,853) 20,853
---------------------------------------------------------------------------------------------------------------------
Total Investments -- 99.4% (Identified Cost -- $217,481) 230,874
Other Assets Less Liabilities -- 0.6% 1,435
--------
Net assets -- 100.0% $232,309
========
</TABLE>
7
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Focus Trust, Inc.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Net assets consisting of:
Accumulated paid-in capital applicable to
9,700 shares outstanding $218,803
Accumulated net investment income/(loss) (867)
Accumulated net realized gain/(loss) on investments and
foreign currency transactions 980
Unrealized appreciation/(depreciation) of investments and
foreign currency transactions 13,393
--------
Net assets -- 100.0% $232,309
========
Net asset value per share:
Primary Class $23.95
======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing.
N.M. -- Not meaningful.
See notes to financial statements.
8
<PAGE>
Statement of Operations
Legg Mason Focus Trust, Inc.
For the Six Months Ended June 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Dividends/A/ $ 728
Interest 668
--------
Total income $ 1,396
Expenses:
Investment advisory fee 859
Distribution and service fees 1,228
Transfer agent and shareholder servicing expense 67
Audit and legal fees 23
Custodian fee 36
Directors' fees 4
Organization expense 2
Registration fees 29
Reports to shareholders 7
Other expenses 7
--------
Total expenses 2,262
--------
Net Investment Income/(Loss) (866)
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on investments sold 11,239
Change in unrealized appreciation/(depreciation) of investments (32,936)
--------
Net Realized and Unrealized Gain/(Loss) on Investments (21,697)
---------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $(22,563)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Net of foreign taxes withheld of $44.
See notes to financial statements.
9
<PAGE>
Statement of Changes in Net Assets
Legg Mason Focus Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
6/30/00 12/31/99
-----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Change in Net Assets:
Net investment income/(loss) $ (866) $ (1,617)
Net realized gain/(loss) on investments sold 11,239 (10,259)
Change in unrealized appreciation/(depreciation) of investments (32,936) 35,142
-----------------------------------------------------------------------------------------------------
Change in net assets resulting from operations (22,563) 23,266
Change in net assets from Fund share transactions (20,752) 205,269
-----------------------------------------------------------------------------------------------------
Change in net assets (43,315) 228,535
Net Assets:
Beginning of period 275,624 47,089
-----------------------------------------------------------------------------------------------------
End of period $232,309 $275,624
-----------------------------------------------------------------------------------------------------
Undistributed net investment income/(loss), end of period $ (867) $ (1)
-----------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
10
<PAGE>
Financial Highlights
Legg Mason Focus Trust, Inc.
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions
-------------------------------------- --------------------------------------
From
Net Asset Net Net Total From Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income/ Gain/(Loss) on Investment Investment Gain on Total End of
of Period (Loss) Investments Operations Income Investments Distributions Period
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 2000* $26.09 $(.09)/A/ $(2.05) $(2.14) $ -- $ -- $ -- $23.95
Years Ended Dec. 31,
1999 22.00 (.15)/A/ 4.24 4.09 -- -- -- 26.09
1998 16.32 (.06)/A/ 6.68 6.62 -- (.94) (.94) 22.00
1997 13.01 (.11)/A/ 3.89 3.78 -- (.47) (.47) 16.32
1996 11.17 (.05)/A/ 1.96 1.91 -- (.07) (.07) 13.01
1995/B/ 10.00 .06/A/ 1.17 1.23 (.06) -- (.06) 11.17
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net
Investment Net Assets,
Expenses Income/(Loss) Portfolio End of
Total to Average to Average Turnover Period
Return Net Assets Net Assets Rate (in thousands)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 2000* (8.20)%/C/ 1.84%/A,D/ 1.20%/A,D/ 47% $232,309
Years Ended Dec. 31,
1999 18.59% 1.90%/A/ (.91)%/A/ 14% 275,624
1998 41.47% 1.93%/A/ (.89)%/A/ 21% 47,089
1997 29.10% 2.00%/A/ (.74)%/A/ 14% 8,093
1996 17.14% 2.00%/A/ (.40)%/A/ 8% 7,327
1995/B/ 12.29%/C/ 1.92%/A,D/ 1.19%/A,D/ -- 5,061
-------------------------------------------------------------------------------------------------------
</TABLE>
/A/ 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 April 30, 2001. If no fees had been waived,
the annualized ratio of expenses to average net assets for the years
ended December 31, 1999, 1998, 1997 and 1996, and for the period April
17, 1995 to December 31, 1995, would have been 1.93%, 2.71%, 4.04%, 4.96%
and 7.89%, respectively.
/B/ For the period April 17, 1995 (commencement of operations) to December
31, 1995.
/C/ Not annualized.
/D/ Annualized.
* Unaudited.
See notes to financial statements.
11
<PAGE>
Notes to Financial Statements
Legg Mason Focus Trust, Inc.
(Amounts in Thousands) (Unaudited)
-----------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Focus Trust, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end, non-diversified
investment company.
Security Valuation
Securities owned by the Fund for which market quotations are readily
available are valued at current market value. In the absence of readily
available market quotations, securities are valued at fair value as
determined by the Fund's Board of Directors. Where a security is traded on
more than one market, which may include foreign markets, the securities are
generally valued on the market considered by the Fund's adviser to be the
primary market. Securities with remaining maturities of 60 days or less are
valued at amortized cost. The Fund will value its foreign securities in U.S.
dollars on the basis of the then-prevailing exchange rates.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized for financial reporting and federal income tax purposes.
Dividend income and distributions to shareholders are recorded on the ex-
dividend date. Dividends from net investment income, if available, will be
paid annually. Net capital gain distributions are declared and paid after the
end of the tax year in which the gain is realized. Distributions are
determined in accordance with federal income tax regulations, which may
differ from those determined in accordance with generally accepted accounting
principles; accordingly, periodic reclassifications are made within the
Fund's capital accounts to reflect income and gains available for
distribution under federal income tax regulations.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis
for both financial reporting and federal income tax purposes. At June 30,
2000, receivables for securities sold and payables for securities purchased
were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
--------------------------------------------
$180 $1,418
Deferred Organizational Expenses
Deferred organizational expenses of $65 are being amortized on a straight
line basis over 5 years commencing on the date the Fund's operations began.
Legg Mason Fund Adviser, Inc. ("LMFA"), the Fund's investment adviser, has
agreed that in the event it redeems any of its shares during such period, it
will reimburse the Fund for any unamortized organization costs in the same
proportion as the number of shares to be redeemed bears to the number of
shares that LMFA purchased from Focus Capital Advisory, L.P. on June 30,
1998, and which remain outstanding at the time of redemption.
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and
distribute substantially all of its taxable income to its shareholders.
12
<PAGE>
-----------------------------------------------------------------------------
Use of Estimates
Preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
2. Investment Transactions:
For the six months ended June 30, 2000, investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds From Sales
------------------------------------------
$108,070 $134,309
At June 30, 2000, cost, aggregate gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes were as follows:
Net
Appreciation/
Cost Appreciation Depreciation (Depreciation)
-----------------------------------------------------------
$217,481 $27,786 $(14,393) $13,393
3. Repurchase Agreements:
All repurchase agreements are fully collateralized by obligations issued
by the U.S. Government or its agencies, and such collateral is in the
possession of the Fund's custodian. The value of such collateral includes
accrued interest. Risks arise from the possible delay in recovery or
potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Fund's investment adviser reviews
the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
4. Transactions With Affiliates:
On June 30, 1998, LMFA purchased the assets of Focus Capital Advisory,
L.P. ("Focus Capital"). For the period June 28, 1997 to June 30, 1998, Focus
Capital served as the Fund's investment adviser. Prior to June 28, 1997,
Lloyd, Leith & Sawin, Inc. served as investment adviser to the Fund.
Effective June 30, 1998, the Fund entered into an investment advisory and
management agreement with LMFA. Pursuant to its agreement, LMFA provides the
Fund with investment advisory, management and administrative services for
which the Fund pays a fee, computed daily and payable monthly, at an annual
rate of 0.70% of its average daily net assets.
LMFA has agreed to waive its fees in any month to the extent the Fund's
expenses (exclusive of taxes, interest, brokerage and extraordinary expenses)
exceed during that month an annual rate of 1.90% of average daily net assets
until April 30, 2001, as shown in the chart below:
Six Months Ended
June 30, 2000 At June 30, 2000
---------------- ----------------
Expense Expense Limitation Management Management
Limitation Expiration Date Fees Waived Fees Payable
---------------------------------------------------------------------------
1.90% April 30, 2001 $0 $138
13
<PAGE>
Notes to Financial Statements -- Continued
-----------------------------------------------------------------------------
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the New
York Stock Exchange, serves as the Fund's distributor. Legg Mason receives an
annual distribution fee and an annual service fee, computed daily and payable
monthly as follows:
At June 30, 2000
------------------------
Distribution Service Distribution and Service
Fee Fee Fees Payable
-----------------------------------------------------
0.75% 0.25% $197
No brokerage commissions were paid by the Fund to Legg Mason or its
affiliates during the six months ended June 30, 2000. Legg Mason also has an
agreement with the Fund's transfer agent to assist it with some of its
duties. For this assistance, the transfer agent paid Legg Mason $31 for the
six months ended June 30, 2000.
LMFA and Legg Mason are corporate affiliates and wholly owned subsidiaries
of Legg Mason, Inc.
5. Fund Share Transactions:
At June 30, 2000, there were 100,000 shares authorized at $.001 par value
for the Fund. Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ------------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 2000 2,341 $ 56,933 -- $ -- $(3,203) $(77,685) (862) $(20,752)
Year Ended December 31, 1999 10,297 251,272 -- -- (1,875) (46,003) 8,422 205,269
</TABLE>
14
<PAGE>
Legg Mason offers a wide range of mutual funds to meet investors' varying
financial needs and investment goals. The funds are listed below:
Equity Funds: Specialty Funds:
Value Trust, Inc. Market Neutral Trust
Special Investment Trust, Inc. Balanced Trust
Total Return Trust, Inc. Financial Services Fund
American Leading Companies Opportunity Trust
Trust
Classic Valuation Fund
Focus Trust, Inc.
U.S. Small-Capitalization
Value Trust
Global Funds: Taxable Bond Funds:
Global Income Trust U.S. Government Intermediate-Term
Europe Fund Portfolio
International Equity Trust Investment Grade Income Portfolio
Emerging Markets Trust High Yield Portfolio
Tax-Free Bond Funds: Money Market Funds:
Tax-Free Intermediate-Term U.S. Government Money Market
Income Trust Portfolio
Maryland Tax-Free Income Trust Cash Reserve Trust
Pennsylvania Tax-Free Income Trust Tax Exempt Trust, Inc.
For information on the specific risks, charges, and expenses associated with any
Legg Mason fund, please consult a Legg Mason Financial Advisor for a prospectus.
Read it carefully before investing or sending money.
[LEGG
MASON
FUNDS
Logo]
The Art of Investing(SM)
