<PAGE>
ANNUAL REPORT
DECEMBER 31, 1999
LEGG MASON
FOCUS
TRUST, INC.
LEGG
MASON
FUNDS
LOGO
The Art of Investing/SM/
Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
John F. Curley, Jr., Chairman
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 o 539 o 0000
LMF-222
2/00
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Focus Trust's report for the
year ended December 31, 1999.
Robert Hagstrom, the Fund's portfolio manager, discusses the investment
outlook and the Fund's performance on the following pages. Long-term investment
results for the Fund are shown in the "Performance Information" section of this
report.
PricewaterhouseCoopers LLP, Focus Trust's independent accountants, have
completed their annual examination, and audited financial statements for the
fiscal year ended December 31, 1999, are included in this report.
We are pleased to report that Legg Mason has made a seamless transition
into the new century. Our critical internal and external systems are operating
free of Y2K disruptions. Internal and external operations, including the Fund's
custodian and transfer agency, are running smoothly, and Fund shareholders are
receiving uninterrupted account maintenance and transaction support.
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
January 31, 2000
<PAGE>
Portfolio Manager's Comments
Focus Trust
Performance Analysis
Legg Mason Focus Trust's 1999 year-end performance statistics are
shown below with total returns of two comparable benchmarks: the Standard
& Poor's 500 Index and the Lipper Large-Cap Core Fund Index. In addition,
we have provided two-, three-, and four-year average annual returns for
the Fund, as well as the average annual return since April 30, 1995 (Focus
Trust's inception date was April 17, 1995).
<TABLE>
<CAPTION>
1999 Two- Three- Four- Since
Year Year Year Year April 30, 1995
------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Focus Trust 18.59% 29.53% 29.39% 26.21% 25.08%
S&P 500 Stock
Composite Index 21.04% 24.75% 27.56% 26.39% 27.49%
Lipper Large-Cap
Core Fund Index 19.35% 23.08% 25.10% 23.76% 24.70%
</TABLE>
Our net asset value per share rose from $22 on December 31, 1998, to
$26.09 by year-end 1999. During the year, there were no income dividend or
capital gains distributions to shareholders.
After-Tax Returns
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995/1/
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income Dividend $0.00 $0.00 $0.00 $0.00 $0.06
Capital Gain $0.00 $0.94 $0.47 $0.07 $0.00
Before-Tax Return 18.6% 41.5% 29.1% 17.1% 12.3%
After-Tax Return/2/ 18.6% 39.4% 28.2% 16.9% 12.1%
Tax Efficiency/3/ 100.0% 95.0% 97.0% 99.0% 99.0%
</TABLE>
Portfolio Manager's Comments
Our objective at Focus Trust is to grow, over the long term, the net
asset value per share of the Fund at a rate better than the rate of growth
of the S&P 500 Index, and to do so in a tax-efficient manner. Although our
investment performance relative to the S&P 500 lagged this year, our
performance over the last two and three years is ahead of the index and,
at year end, we are only 0.18% behind the index for the four-year period.
Over the long term, Focus Trust has outperformed the average return of
mutual funds included in the Lipper Large-Cap Core Fund Index.
-----------
/1/From April 17, 1995 (inception date of the Fund) to December 31, 1995;
figures are not annualized.
/2/After-tax returns are calculated by deducting 39.6% tax on income and
short-term capital gains dividends and 20% tax for long-term capital
gain distributions made between 1997 and 1999 and 28% tax on long-term
capital gain distributions made during 1995 to 1996.
/3/Tax efficiency is a measure of how much the after-tax return represents
as a percent of the before-tax return. These returns do not reflect any
unrealized capital gains held by the Fund.
2
<PAGE>
It is important to keep our investment performance in the proper
context. We are less concerned about our price performance over the short
term and more concerned that we own the right businesses with economics
capable of beating the S&P 500's economic benchmark over the long term. If
we purchase superior businesses at reasonable prices and hold these
businesses for the long term, it is our belief that we will do better than
an index fund. We can control our selection process but we cannot control,
nor even second-guess, which companies or industries the market might
favor over the short run. Sometimes we own companies the market favors and
our performance looks spectacular. At other times, our portfolio lacks the
stocks most sought after and our performance lags. With this in mind,
remember that short-term performance is highly sensitive to the initial
starting condition and can be affected by several factors beyond our
immediate control. Long-term performance, in our opinion, is a more
appropriate indication of a portfolio manager's investment ability.
I am especially pleased with our after-tax performance. Over the last
five years, Focus Trust has averaged a 98% tax-efficiency ratio. That is,
our after-tax performance over the last five years has averaged 98% of our
total return during this period. This tax-efficiency ratio is truly
outstanding. According to Morningstar, the average equity fund in their
database runs an 84% tax-efficiency ratio. That is, only 84% of the total
return of an average mutual fund falls to the bottom line for taxable
investors. For this reason, among others, many investors have switched to
index funds to generate high after-tax returns. How well does Focus
Trust's tax sensitivity compare to an index fund? Over the five years
ending November 30, 1999, the Vanguard Index 500 Fund has averaged a 96%
tax-efficiency ratio./4/
1999 Market Review
The performance of the tech-driven NASDAQ composite overshadowed all
events in 1999. For the year, the NASDAQ was up a stunning 86%, with more
than half of that gain coming in the last two months of the year. The less
tech-weighted Dow Jones Industrial Average gained 27%, and the S&P 500
Index was up 21%, even for the year with the small-cap Russell 2000 Index.
In 1999, if you over-weighted technology in a portfolio, chances are
you handily beat the S&P 500 Index. Conversely, if you refused to own
technology stocks in your portfolio, chances are your investment return
was poor. For those who owned some technology stocks (but not quite a
market weighting), it is likely your investment returns were one or two
standard deviations from the market return. Such was our case.
For the year, the index of consumer non-durables, health care,
financials, and utilities all posted negative price returns. Without price
leverage, many food, beverage, and household product companies could not
reach double-digit earnings growth. In addition, the pharmaceutical
companies, now under greater scrutiny for their pricing strategy,
witnessed lower stock prices, and the banking, financial services,
insurance and utility indices were negative for the year in great part
because the bond market suffered its second-worst year since 1973.
---------------
/4/The investment objective of Focus Trust is maximum long-term capital
appreciation with minimum long-term risk to principal, while the
investment objective of the Vanguard Index 500 Fund is to match the
performance of a benchmark index that measures the investment return of
large-capitalization stocks. Focus Trust seeks its investment objective
by investing in a concentrated number of issuers, while the Vanguard
Index 500 Fund seeks its investment objective by investing in a broad
number of stocks and thereby seeks to match the performance of an
index. Focus Trust is actively managed and has higher fees and a higher
portfolio turnover rate than the Vanguard Index 500 Fund. This
comparison between Focus Trust and the vanguard Index 500 Fund is being
made solely for the purpose of comparing the tax efficiency of these
two products.
3
<PAGE>
Portfolio Manager's Comments -- Continued
Whereas 1998 was the year investors were greatly concerned about the
effects of disinflation and lower interest rates, 1999 became the year
when inflation rates firmed and interest rates rose. The stocks of oil
companies, commodity chemicals, basic materials, and capital goods
companies gained in 1999 with hopes that higher inflation would allow
these companies to quickly pass on price increases--a luxury that has thus
far eluded all consumer product and service businesses. However, despite
the positive year for these above-mentioned industry groups, their stock
price returns roughly equaled the market rate of return. The only industry
group that posted outsized gains this year was technology.
Why the sudden madness for technology stocks? The quick answer is to
blame the speculators and momentum players who have chased these stocks
"to the moon," snaring countless investors along the way. One Wall Street
analyst quipped that 1999 was the year the amateurs won. This may be
partly true, but it obscures the more important and critical variable,
namely, the Internet. According to Jack Welch, Chairman and CEO of General
Electric, the Internet and connections to the Internet are the most
important business phenomena that have occurred in his lifetime. Now, if
this is true, and Jack Welch is considered a pretty smart guy, then what
is happening in the market is not a "bubble" destined to "pop" and
"disappear" forever, but a realistic, fundamental change in our business
landscape.
If, for the moment, we placed all the Internet business possibilities
aside and examined the market as it was in the early 1990s, I am willing
to speculate that technology would have still been the best-performing
industry group in the market. Before the Internet, businesses and
individuals were snapping-up computers, printers, software, servers,
intra-network connections, and cellular telephones at a rapid pace. The
Internet simply acted as a turbo charge to a global marketplace imbedded
with high technology demands. What we need to recognize is that
technology, with or without the Internet, is the one industry group this
decade that experienced consistent and sustainable double-digit unit
demand for its products and services.
Of course, other industries, from time to time, have been able to
generate double-digit returns for business owners. But in most cases,
these returns were largely a combination of unit growth and price
increases. If your company could grow units between 4% and 8%, raise
prices between 3% and 6%, increase productivity (read: invest in
technology), and repurchase stock, then the goal of 15% earnings growth
was attainable. Now, companies that attempt to raise prices aggressively
have met stiff resistance from their customers. Without price increases,
which often represented one-third of a company's earnings achievement, all
a company has to grow revenues is unit demand, increased productivity, and
share repurchases, the combination of which has made the hurdle rate of
15% earnings growth more difficult. Warren Buffett once said, "You will
find out who is swimming naked as soon as the tide goes out." Well, in
this case, the tide is price increases, and it has moved out. What is left
now is pure unit growth, and no industry has higher unit growth demand
than technology.
If you were to list all the Internet and technology companies by rank
order using price to sales, or price to operating cash, or price to
earnings (for those companies that report earnings), you would observe
companies at the top of the list that appear extremely over-valued and
others at the bottom of the list that may appear less over-valued. If you
then took the average of the list, most individuals are of the opinion
this group as a whole is richly priced and set for a major fall. Some
individuals have compared the Internet/technology group to the infamous
"Nifty-Fifty," a basket of the most expensive stocks at the market's peak
in 1972.
4
<PAGE>
Revisiting the Nifty-Fifty, with the help of Jeremy Siegel's book
Stocks for the Long Run, an investor can make some interesting
observations. At the market peak in 1972, the Nifty-Fifty traded at 42x
earnings--two times the multiple of the S&P 500 Index. At the top of the
Nifty-Fifty was Polaroid (95x earnings), Baxter Labs (71x earnings), and
MGIC Investment Corp (68x earnings). At the bottom of the list was
International Telephone & Telegraph (15x earnings) and First National City
(20x earnings). Between the highest multiple and lowest multiple stocks in
the group was Philip Morris (24x earnings), Merck & Co. (25x earnings),
and Coca-Cola (46x earnings).
Now fast-forward 25 years. It is 1997. Based on earnings, growth of
earnings, and the interest rates during this period, what should have been
the average earnings multiple of the Nifty-Fifty? According to Siegel, 42x
earnings. Exactly the price the basket traded for 25 years earlier. Now,
what is interesting to discover is that, based on the economics generated
by the individual companies during this time period, Polaroid should have
traded for 17x earnings, not 95x; Baxter Labs should have traded for 30x
earnings, not 71x ; and MGIC Investment Corp should have traded for 5x
earnings, not 68x.
What prices should investors have paid for International Telephone &
Telegraph and First National City? You should have paid 9x, not 15x,
earnings for ITT; and you should have paid 19x, not 20x, for First
National City. These two examples were purposely included to play a trick
on you. Most people would have guessed the high P/E stocks became the low
P/E stocks while the low P/E stocks became the high P/E stocks. "Many
shall be restored that now are fallen and/ Many shall fall that now are in
honor," wrote Horace in Ars Poetica. But, as we have learned over and
over, contrarian investing is not a universal truth. Although searching
among the "fallen" may reveal some great investments, "polling" says
Buffett, "does not replace thinking."
What I found particularly interesting about Siegel's study is that
the best investments in the Nifty-Fifty were not the most expensive stocks
in the group, nor the cheapest. It was an undistinguished group in the
middle of the distribution. Philip Morris was worth not 24x earnings but
78x earnings, and Merck was accurately priced at 75x earnings, not 25x.
Coca-Cola, which was trading near the average of the Nifty-Fifty group and
more than twice the market average, was not worth 46x earnings, but 92x
earnings.
Jeremy Seigel's study is not exhaustive. But it does bring to light
an intelligent way to think about investing. Stocks priced high or low in
relation to an average industry index or average market index tell you
nothing about their valuation. It is only by completing a fundamental
analysis of the business and its industry that an investor can ascertain
the value of a stock.
Half the people on this planet have never made or received a
telephone call. A far greater number do not own cellular telephones or
computers. Today, only a small fraction of the world's population has ever
connected to the Internet. We believe the future of technology, its
peripherals, wireless communication, and the Internet is unquestionably
bright. Yes, there will be stock price volatility within this group. Yes,
there will be some companies that will fail, but there will also be many
companies that will witness enormous prosperity. Warren Buffett said the
next great economic franchises lay within the technology arena. We agree.
Our job, going forward, is to identify the global market leaders in
technology and then pay responsible prices for these outstanding
businesses.
5
<PAGE>
Portfolio Manager's Comments -- Continued
1999 Portfolio Activity
This past year, we sold two companies: Action Performance and Johnson
& Johnson. We also purchased and sold a company within the same year:
Waste Management. Lastly, we added six new businesses to our portfolio:
three technology companies (Gateway, IBM, Unisys), one consumer products
company (Avon Products), and two retailers (Amazon and Wal-Mart Stores).
We added Gateway to our portfolio at the beginning of the year.
Gateway is a leading manufacturer and seller of personal computers to
businesses and individuals. Whereas Dell Computer is the world's largest
direct manufacturer and seller of personal computers to large
corporations, Gateway has targeted primarily individuals and small
businesses. With the success of its Country Stores and newly formed
relationship with America Online, Gateway's revenues and return on capital
have greatly improved. We were quickly rewarded for these improvements.
Our average purchase price for the stock was up 125% by year end.
IBM and Unisys are two other technology companies that we added in
the fourth quarter this year. Both of these companies are among the best
worldwide providers of technical support and service. As more companies
embrace the Internet and seek to participate in the business-to-business
and business-to-consumer marketplace, they will in turn need the services
of IBM and Unisys. We purchased both companies at a substantial discount
to what we believe their businesses to be worth. Unisys is growing 18% per
year, returns 20% on invested capital, and generates more cash than it
uses. Today, the company sells for less than 20x this year's earnings. The
story is similar at IBM. We expect the company to grow at a 15% rate for
the foreseeable future. It earns 25% on invested capital and generates far
more cash than it needs to operate. This worldwide leading technology
company (in 1999, IBM was awarded the most U.S. patents, with a record
2,756 patents issued) is selling for 24x earnings. Although we have
received no near-term stock price benefit from our purchases, we are
confident these businesses, in the future, will outpace the economic
returns of the S&P 500 Index.
Avon Products is one of the world's leading manufacturers and
marketers of beauty products, fashion jewelry, and casual apparel. With
2.3 million door-to-door salespeople worldwide, the company is unmatched
in its ability to reach the consumer. We expect the company to grow its
cash earnings between 13% to 15% and achieve a remarkable 80% return on
its invested capital. Today, we can buy Avon at a 30% discount to our
calculation of intrinsic value.
Wal-Mart is the world's largest brick-and-mortar retailer and Amazon
is the world's largest e-commerce retailer. Both companies dominate their
respective marketplace and both companies were added to Focus Trust this
year. In retailing, whether you sell products over the Internet or in
stores, scale is the critical variable that a company needs to achieve the
highest returns for its owners. Both Amazon and Wal-Mart have reached that
scale in their respective markets. But whereas Wal-Mart's position and
ability are unquestioned, Amazon's future is highly suspect in the minds
of many investors. We have spent a good deal of time with Amazon's
management team and are convinced their strategy of spending cash flow now
to dominate new category introductions is smart. Some investors look at
the company, see no earnings and assess no value. We look at the company,
identify the cash flow, monitor the working capital needs, observe capital
expenditures, and by using a real options strategy calculate what this
business may be worth in the future.
6
<PAGE>
In determining the value of a company, we conservatively estimate the
growth in cash earnings and then discount the future earnings of the
company at the appropriate rate. If there is high uncertainty regarding a
company's future value, we first offset this risk by only purchasing the
stock at a significant discount to what we believe the company is worth;
then secondly, we limit the size of our bet. If we are right, our small
investment in this business will become substantially more valuable in the
future. If we are wrong, our position weighting will not permanently harm
the portfolio. In fact, if we are wrong on Amazon, the loss we realize
will be less than the loss we took on Waste Management.
Periodically, every portfolio manager must confront an unforced
error--a mistake in analysis and a mistake in purchasing a stock that
otherwise should have been avoided. Waste Management was our unforced
error. We were drawn to Waste Management because its share price was cheap
relative to our belief that the company could achieve a 15% cash earnings
target for its owner. The goal of 15% was to be a combination of unit
growth (3% to 5%), price increases (3% to 5%), new acquisitions (3%),
efficiencies (2%), and share repurchases (2% to 3%). What became
increasingly clear, only after we made our purchase, was that the price
increases were not sticking. Instead of paying Waste Management's higher
prices, its customers were seeking other waste service providers. In
addition, there was management confusion over what exactly were the
earnings of previous acquisitions. By the time the company announced it
would be unable to deliver its economic promise, the stock price plunged.
We purchased the stock in June at an average price of $50.00 and sold it
in September at an average price of $21.04 (year-end stock price of Waste
Management was $17.19). This error in judgment cost our shareholders 3
percentage points in performance. It was a painful lesson we don't wish to
repeat, and we have taken steps in our selection process to hopefully
avoid making similar mistakes.
After acquiring shares of Action Performance from 1997 through 1999
at an average price of $34, we decided in October to sell our entire
position and received $21 for our stock (year-end stock price of Action
Performance was $11.50). We had high hopes that Action Performance would
continue to rationally allocate its capital to high-cash-returning
investments, but alas, the company spent a vast sum of money to spin off
an Internet company to shareholders that subsequently flopped. We
disagreed with management's strategy, and after failing repeatedly to
change their opinion, we decided to sell our shares in the company.
There are four major reasons why we sell shares in a company. The
first reason is an unforced error, as in the case of Waste Management.
Sometimes we will make a mistake and for a portfolio manager it is far
better to admit the mistake and move on than cling hopelessly to a
situation that is unlikely to generate better economic returns going
forward than the average economics of an index return. A second reason to
sell a stock is when we disagree with management over how to allocate the
capital of the business, as was the case at Action Performance. If a
company irrationally allocates capital to business ventures that lower our
return on invested capital, it will ultimately drive the share price of
the business lower. A third reason for selling a stock is based on
valuation. If we believe the future price return of a business is equal to
or less than what we believe is the future rate of return of the market,
we must sell the stock. This was the case with Johnson & Johnson.
We had owned Johnson & Johnson since 1995, and it was a difficult
decision to sell the stock. But based on its price earlier in the year
relative to the underlying economics of the business, we decided the
future rate of return of Johnson & Johnson, at then current prices, would
only do as well or perhaps
7
<PAGE>
Portfolio Manager's Comments -- Continued
less well than the market rate of return. We certainly did not think the
company would be able to substantially outperform the market from that
level.
We swapped our shares of Johnson & Johnson for Gateway, a portfolio
strategy that thus far appears to be profitable. But is it? How do
shareholders actually know if the decision to sell a stock is the right
decision? Phil Fisher posed the same question to me last year. Mr. Fisher,
as many of you know, is the author of Common Stocks and Uncommon Profits.
He is one of the earliest advocates of focus investing and a gentleman
whose writings greatly influenced Warren Buffett. In a series of
conversations, Mr. Fisher asked how do investors really know if they are
best served when a portfolio manager sells a stock? "What happens to a
stock after it is sold," Mr. Fisher said, "can dwarf in significance the
profit or loss at the time of sale if the sale of a really good stock is
made in the early stages of its rise." Judging the record of an investment
manager, he explained, should include not only the purchases, which are
reflected in the performance numbers, but also include the sale of stock
which, in some cases, may be a measure of loss performance.
To rectify this omission, Mr. Fisher argued an investment manager
should include all the stocks he or she sold and what the subsequent
performance of those stocks was relative to their benchmark. If, going
forward, the sold stock under-performed the benchmark, then the sale was
intelligent. But if the sold stock out-performed the market, then
shareholders were deprived of that performance. To date, I have never seen
a mutual fund make a complete list of their sales and then calculate the
subsequent performance. Focus Trust will be the first.
The following table lists all of the stocks I have sold since the
Fund's inception. With each stock sold, I have used the average sale price
(calculated by the total dollars received, not including fees or
commissions, divided by the total number of shares) and the average date
of the sale (determined by the mid-point of a multi-day selling period).
We then calculated, on a total return basis, the performance of the stock
sold compared to the S&P 500 Index. The time period includes from the
average date sold through year-end 1999.
<TABLE>
<CAPTION>
Performance Relative
Stock Date Sold to S&P 500 Index
------- --------- --------------------
<S> <C> <C>
Daily Journal 04/26/96 -110%
Fannie Mae 08/30/96 -25%
Central Newspapers 02/28/97 -15%
Gaylord Entertainment 07/05/97 -27%
Lee Enterprises 07/18/97 -35%
Brown-Forman B 08/22/97 -38%
Wm. Wrigley, Jr. 10/31/97 -46%
Gannett 12/05/97 -16%
Walt Disney 01/30/98 -70%
Washington Post 02/27/98 -29%
Sotheby's 08/38/98 +17%
Hasbro 09/18/98 -52%
Johnson & Johnson 01/08/99 -3%
Waste Management 09/03/99 -26%
Action Performance 10/08/99 -56%
</TABLE>
8
<PAGE>
As you can see from the list of fifteen stocks, every position we
have sold, with the exception of Sotheby's, under-performed the S&P 500
Index from the date we sold it through December 31, 1999.
From these purchases and sales, we realized losses in six positions
(Daily Journal, Central Newspapers, Gaylord Entertainment, Hasbro, Waste
Management, and Action Performance) and booked gains in the other nine.
If we go back and look at the list, we can divide the rationale for
selling each stock based upon our four criteria:
1. As we already confessed, Waste Management was an unforced error;
2. Fannie Mae, Wrigley, Gannett, Disney, and Johnson & Johnson were
sold based on valuation;
3. Brown-Forman, Sotheby's, and Action Performance were sold because
of disagreements with management over how to allocate capital;
which leaves the fourth criterion. We will sell a position if it becomes
apparent the economics of the underlying business fail to either match or
exceed the baseline economics of our index. We cannot afford to buy and
hold a business that is unable to generate growth in earnings and/or
returns on capital that are at least equivalent to the returns available
from the average company in the index. If we buy and hold cheap stocks of
mediocre businesses, we will often end up with mediocre returns. By every
measuring stick, Daily Journal, Central Newspaper, Lee Enterprises,
Gaylord Entertainment, Washington Post, and Hasbro were cheap relative to
their assets and earnings. But unfortunately, the economics of these
businesses were inferior to the average economics available from the
index. Despite the good intentions of management, we had no choice but to
sell.
Investable Versus Tradable
There is a difference between investable ideas and tradable ideas.
Investable ideas are assigned to companies that generate sustainable
above-average economics. If an investor purchases an above-average
company, at or below the company's intrinsic value, the superior economics
of the business will, over time, drive the investment returns far past the
average returns of an index.
Some investors are attracted to stocks with below-average economics
if the discount to value is large enough to warrant an investment. In this
case, when the market eventually resets the price of the below-average
company closer to its intrinsic value, an investor has a chance to profit.
We call these tradable ideas. The only chance to profit is to buy the
cheap stock and sell it quickly when it reaches fair value. The reason you
must buy-and-sell as opposed to buy-and-hold is because if you
buy-and-hold a below-average economic business you will receive, over the
long term, a below-average return.
Occasionally, the market will discount heavily the prices of
below-average businesses. When this happens, some investors rush to buy
these stocks in hopes the market quickly resets the prices of these
businesses. Of course, the risk to this strategy is time. Remember,
Buffett said, "time is the friend to a wonderful business and an enemy to
the mediocre." We much prefer the investable ideas and will concentrate
our efforts to locate these kinds of businesses. Although we do not
quarrel with the strategy of buying cheap, mediocre businesses, we will
leave these tradable ideas to others.
9
<PAGE>
Portfolio Manager's Comments -- Continued
What About Berkshire Hathaway?
Many investors have asked whether Berkshire Hathaway has reached a
point where its future rate of return is now less than an index return.
1999 was a particularly difficult year for Berkshire. The stock price
declined 20%, under-performing the S&P 500 Index by 41 percentage points.
It was not the first time Berkshire failed to beat the market. In the past
twenty years, Berkshire's stock price has trailed the market five
different times: 1996, -17%; 1990, -20%; 1987, -1%; 1986, -5%; and 1984,
-9%. But clearly, this year's 41% relative performance decline caught many
by surprise.
In all fairness, 1999 was a difficult year for all insurance
companies, not just for Berkshire Hathaway. However, Berkshire did have
its share of problems. First, the realized insurance losses from General
Re were unexpected. The acquisition of General Re was trumpeted in 1998
and helped lead Berkshire to a 52% gain for the year, outpacing the 29%
gain of the S&P 500 Index. But once the merger was completed, insured
losses began pouring in. Some have suggested that Buffett's conservative
and strict interpretation of accounting led to larger realized losses than
General Re, left to its own, would have otherwise acknowledged. This may
or may not be true. Either way, losses hurt stock performance.
Second, the value of Berkshire's float declined this year with the
decline in share prices of Coca-Cola, Disney, and Gillette. Over the past
twenty years, there has been a very strong correlation between Berkshire's
float and its share price. In other words, you tell me which direction the
float in Berkshire is going (up or down), and I can generally tell you
which direction the stock price is going.
Lastly, the growth in premium income has slowed this year because of
the weak pricing in the super-catastrophe insurance market and the lack of
contribution from GEICO. At present, GEICO is using all of its profits to
expand market share in the direct market for automobile insurance, a move
that we readily applaud. But until this gain in market share is completed,
GEICO will not be adding to profits.
The question that needs to be asked is whether the situation at
Berkshire is permanent or transient. Our guess is transient. We believe
the worst at General Re is behind us. We believe, from these price levels,
that Coca-Cola, Disney, and Gillette will perform better relative to the
S&P 500 Index. The only question we can't answer is when better pricing
will return to the insurance market.
Although higher insurance premium pricing will benefit Berkshire, it
is not essential for Berkshire to perform well. Many investors overlook
the fact that Berkshire is diversifying away from being a pure insurance
company. The economic profits from Flight Safety and Executive Jet, when
measured separately, greatly exceed the returns of the market. In
addition, the recent acquisition of MidAmerican Energy introduces a
strategy of purchasing utility companies in the newly deregulating and
rapidly consolidating utility industry. Berkshire's non-insurance
businesses stand a chance of raising the economic bar for the company.
For several years, Warren Buffett has warned shareholders that the
future rate of return of Berkshire will be less than the company's
historical rate. Many investors refused to believe Warren, and who could
blame them? Berkshire's share price has kept going up at a market-beating
rate of return. Now, however, there are many who question whether
Berkshire can even keep pace. My guess is Berkshire will out-perform the
S&P 500 Index going forward, and for that reason we will keep our
Berkshire position. But it is time to take Warren at his word--he
magnitude of Berkshire's future performance will likely be less than the
company's historic returns.
10
<PAGE>
Conclusion
This April marks Focus Trust's five-year anniversary. When we started
Focus Trust, I promised we would run a concentrated portfolio of 10 to 20
stocks. We have kept our word. I also promised that I would keep our
turnover ratio low and try to generate high after-tax returns. So far, so
good. I also promised to try and beat the market. Although we haven't
beaten the market every year, we have done pretty well over the time
period and certainly better than most.
J.P. Morgan said you had to be an optimist to win at the game of
investing. I believe that is true. With communism on the wane and
democratic capitalism on the rise, it is hard not to be optimistic. Even
though there have been plenty of earth-shaking economic and political
events that have come and gone over the last five years, we are still
plugging along. My guess is there will be a few more big events that will
spread doom and gloom in the next five years. I also expect we will have
continued market volatility, and there is always the chance the stock
market will go down significantly in price.
If you need or might need money in the next several years, set that
amount aside in money markets or short-term bonds. If you are investing
for five years or longer, my guess is the stock market will continue to
afford the best returns relative to bonds and cash.
Over the next five years you can expect that Focus Trust will own
between 10 and 20 stocks. We will attempt to keep portfolio turnover
ratios low and after-tax returns high. I do not know when the next market
correction will occur, but I do know what I will do when it comes. We are
always anxious to purchase great companies at lower prices. In the future,
you can expect to see us increase our weighting in technology companies,
but only at reasonable prices. You should also know we are increasingly
attracted to larger companies, versus smaller companies, that are in a
position to dominate their global marketplace. With 95% of the world's
population living outside the United States, the economic opportunities
for international companies are far more attractive than for those
companies fighting over a limited market share here in the U.S. In
addition, we have learned that the economic benefits for those companies
that reach scale become extremely valuable.
I wish to thank all of the talented analysts and portfolio managers
at Legg Mason Fund Adviser for their intellectual support, and a special
thanks to our Board of Directors and officers for their continued
guidance.
To all shareholders of Focus Trust, I appreciate your support and
confidence. At the end of our first year, we were a small mutual fund with
only $7 million in assets. Today, we are group of shareholders who
collectively own a $275 million fund with a very bright future.
If you have any questions or concerns, please do not hesitate to
contact us.
Robert G. Hagstrom, CFA
Portfolio Manager
January 28, 2000
DJIA 10738.9
11
<PAGE>
Performance Information
Legg Mason Focus Trust, Inc.
Performance Comparison of a $10,000 Investment as of December 31, 1999
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 following graph compares the Fund's total returns against that of
a closely matched broad-based securities market index. The lines
illustrate the cumulative total return of an initial $10,000 investment
for the periods indicated. The line for the Fund represents the total
return after deducting all Fund investment management and other
administrative expenses and the transaction costs of buying and selling
securities. The line representing the securities market index does not
include any transaction costs associated with buying and selling
securities in the index or other administrative expenses.
<TABLE>
<CAPTION>
--------------------------------------------------
Cumulative Average Annual
Total Return Total Return
--------------------------------------------------
<S> <C> <C>
One Year +18.59% +18.59%
Life of Fund+ +184.92 +24.90
--------------------------------------------------
</TABLE>
+ Inception Date-- April 17, 1995
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Standard
& Poor's
500 Stock
Focus Composite
Trust Index/1/
<S> <C> <C>
4/17/95 $10,000.00 $10,000.00
$10,140.00 $10,641.00
$10,810.00 $11,487.00
12/31/95 $11,229.00 $12,178.00
$12,385.00 $12,832.00
$11,983.00 $13,408.00
$12,485.00 $13,823.00
12/31/96 $13,154.00 $14,975.00
$13,275.00 $15,376.00
$14,913.00 $18,062.00
$15,651.00 $19,413.00
12/31/97 $16,982.00 $19,971.00
$19,833.00 $22,757.00
$20,864.00 $23,508.00
$17,544.00 $21,170.00
12/31/98 $24,025.00 $25,678.00
$26,756.00 $26,958.00
$26,515.00 $28,861.00
$23,971.00 $27,055.00
12/31/99 $28,492.00 $31,081.00
</TABLE>
/1/ An unmanaged index of widely held common stocks. Index returns are for the
periods beginning April 30, 1995.
12
<PAGE>
Focus Trust
Selected Portfolio Performance+
Strong performers for the year ended December 31, 1999*
-------------------------------------------------------
1. WPP Group plc +169.2%
2. America Online, Inc. +88.6%
3. Citigroup Inc. +67.7%
4. American Express Company +62.6%
5. Harley-Davidson, Inc. +35.2%
6. International Speedway Corporation +24.4%
7. McDonald's Corporation +5.2%
+ Individual stock performance is measured by the change in the stock's
price; reinvestment of dividends is not included.
* Securities held for the entire year.
Weak performers for the year ended December 31, 1999*
-----------------------------------------------------
1. United Asset Management Corporation -28.6%
2. Freddie Mac -27.0%
3. Berkshire Hathaway, Inc. - Class A -19.9%
4. Lloyds TSB Group plc -11.9%
Portfolio Changes
Securities added since December 31, 1998
----------------------------------------
Amazon.com, Inc.
Avon Products, Inc.
Gateway Inc.
International Business Machines Corporation
Unisys Corporation
Wal-Mart Stores, Inc.
Waste Management Inc.
Securities sold since December 31, 1998
---------------------------------------
Action Performance Companies, Inc.
Johnson &Johnson
Waste Management Inc.
13
<PAGE>
Statement of Net Assets
Legg Mason Focus Trust, Inc.
December 31, 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
Shares/Par Value
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests--93.6%
Advertising--6.5%
WPP Group plc 215 $ 17,872
--------
Banking-- 14.2%
Citigroup Inc. 489 27,143
Lloyds TSB Group plc 964 12,062
--------
39,205
--------
Computer Services and Systems-- 13.6%
Gateway Inc. 342 24,645/A/
International Business Machines Corporation 89 9,558
Unisys Corporation 100 3,194/A/
--------
37,397
--------
Consumer Staples-- 5.2%
Wal-Mart Stores, Inc. 210 14,482
--------
Consumer Products-- 3.5%
Avon Products, Inc. 293 9,669
--------
Financial Services-- 18.1%
American Express Company 162 26,999
Freddie Mac 332 15,606
United Asset Management Corporation 388 7,195
--------
49,800
--------
Insurance-- 9.9%
Berkshire Hathaway, Inc.- Class A 1 27,209/A/
--------
Media-- 10.0%
America Online, Inc. 364 27,489/A/
--------
Motorcycles/Bicycles-- 2.5%
Harley-Davidson, Inc. 108 6,919
--------
Racetracks-- 4.1%
International Speedway Corporation 223 11,208
--------
Restaurants-- 4.0%
McDonald's Corporation 274 11,038
--------
Retail-Internet-- 2.0%
Amazon.com, Inc. 74 5,633/A/
--------
Total Common Stocks and Equity Interests (Identified Cost-- $211,592) 257,921
-----------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreements-- 6.1%
Bank of America
3.10%, dated 12/31/99, to be repurchased at $8,488 on 1/3/00
(Collateral:$9,458 Freddie Mac mortgage-backed securities,
6%, due 9/1/28, value $8,704) $8,486 $ 8,486
Morgan Stanley Dean Witter
2.25%, dated 12/31/99, to be repurchased at $8,488 on 1/3/00
(Collateral:$6,335 U.S.Treasury Bills, 11.75%, due 11/15/14,
value $8,659) 8,486 8,486
--------
Total Repurchase Agreements (Identified Cost--$16,972) 16,972
-----------------------------------------------------------------------------------------------------------------
Total Investments--99.7% (Identified Cost--$228,564) 274,893
Other Assets Less Liabilities--0.3% 731
--------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to
10,562 shares outstanding $239,555
Accumulated net investment income/(loss) (1)
Accumulated net realized gain/(loss) on investments
and foreign currency transactions (10,259)
Unrealized appreciation/(depreciation) of investments
and foreign currency transactions 46,329
--------
NET ASSETS--100.0% $275,624
========
NET ASSET VALUE PER SHARE $26.09
======
-----------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Non-income producing.
See notes to financial statements
15
<PAGE>
Statement of Operations
Legg Mason Focus Trust, Inc.
December 31, 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Dividends/A/ $ 1,125
Interest 629
---------
Total income $ 1,754
Expenses:
Investment advisory fee 1,242
Distribution and service fees 1,774
Transfer agent and shareholder servicing expense 138
Audit and legal fees 44
Custodian fee 87
Directors' fees 6
Organization expense 13
Registration fees 83
Reports to shareholders 14
Other expenses 14
---------
3,415
Less fees waived (44)
---------
Total expenses, net of waivers 3,371
-------
NET INVESTMENT INCOME/(LOSS) (1,617)
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on investments (10,259)
Change in unrealized appreciation/(depreciation) of investments 35,142
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS 24,883
-----------------------------------------------------------------------------------------------------------------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $23,266
-----------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Net of foreign taxes withheld of $16.
See notes to financial statements.
16
<PAGE>
Statement of Changes in Net Assets
Legg Mason Focus Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Net Assets:
Net investment income/(loss) $ (1,617) $ (137)
Net realized gain/(loss) on investments (10,259) 1,270
Change in unrealized appreciation/(depreciation) of investments 35,142 8,298
----------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 23,266 9,431
Distributions to shareholders from net realized gain on investments -- (1,557)
Change in net assets from Fund share transactions 205,269 31,122
----------------------------------------------------------------------------------------------------------------------
Change in net assets 228,535 38,996
Net Assets:
Beginning of year 47,089 8,093
----------------------------------------------------------------------------------------------------------------------
End of year $275,624 $47,089
----------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(loss), end of year $ (1) $ --
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
17
<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 Realized Total From Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Year (Loss) Investments Operations Income Investments Distributions Year
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------
Net
Investment Net Assets,
Expenses Income (Loss) Portfolio End of
Total to Average to Average Turnover Year
Return Net Assets Net Assets Rate (in thousands)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 June 30, 2000. 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.
See notes to financial statements
18
<PAGE>
Notes to Financial Statements
Legg Mason Focus Trust, Inc.
(Amounts in Thousands)
-------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Focus Trust, Inc. ("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. 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
December 31, 1999, receivables for securities sold and payables for
securities purchased for the Fund were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
---------------------------------------
$ -- $ --
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. ("Focus Capital") on June 30, 1998, and 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.
At December 31, 1999, the Fund had capital loss carryforwards for
federal income tax purposes of $9,931 expiring in 2007.
19
<PAGE>
Notes to Financial Statements -- Continued
--------------------------------------------------------------------------
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 year ended December 31, 1999, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds from Sales
--------------------------------------------
$212,273 $23,438
At December 31, 1999, cost, aggregate gross unrealized appreciation
and gross unrealized depreciation based on the cost of securities for
federal income tax purposes for the Fund were as follows:
Net
Appreciation/
Cost Appreciation Depreciation (Depreciation)
-------------------------------------------------------------------
$228,564 $61,715 $(15,386) $46,329
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. 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 June 30, 2000, as shown in the chart below:
<TABLE>
<CAPTION>
Year Ended At
December 31, 1999 December 31, 1999
----------------- -----------------
Expense Expense Limitation Management Management
Limitation Expiration Date Fees Waived Fees Payable
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.90% June 30, 2000 $44 $188
</TABLE>
20
<PAGE>
--------------------------------------------------------------------------
During the period January 1, 1998 to June 30, 1998, management fee
expense was $34, all of which was waived by Focus Capital; during the
period July 1, 1998 to December 31, 1998, management fee expense was $74,
all of which was waived by LMFA.
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 December 31, 1999
----------------------
Distribution Service Distribution and
Fee Fee Service Fee Payable
-----------------------------------------------------
0.75% 0.25% $232
No brokerage commissions were paid by the Fund to Legg Mason or its
affiliates during the year ended December 31, 1999. Legg Mason also has an
agreement with the Fund's transfer agent to assist it with some of its
duties. For this assistance, the transfer agent paid Legg Mason $39 for
the year ended December 31, 1999.
LMFA and Legg Mason are corporate affiliates and wholly owned
subsidiaries of Legg Mason, Inc.
5. Fund Share Transactions:
At December 31, 1999, 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>
Year Ended Dec. 31, 1999 10,297 $251,272 -- $ -- (1,875) $(46,003) 8,422 $205,269
Year Ended Dec. 31, 1998 1,725 32,537 79 1,500 (159) (2,915) 1,645 31,122
</TABLE>
21
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of Legg Mason Focus Trust, Inc.:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Legg Mason Focus Trust, Inc. (hereafter referred to as the "Fund") at
December 31, 1999, and the results of its operations, the changes in its net
assets and the financial highlights for each of the fiscal periods presented, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999, by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 10, 2000
22
<PAGE>
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