LEGG MASON
CASH RESERVE TRUST
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Investing in money market instruments to achieve stability of
principal and current income consistent with stability of
principal.
PROSPECTUS December 31, 1998
[LEGG MASON FUNDS LOGO APPEARS HERE]
HOW TO INVEST(SM)
As with all mutual funds, the Securities and Exchange Commission
has not passed upon the adequacy of this prospectus, nor has it
approved or disapproved these securities. It is a criminal offense
to state otherwise.
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TABLE OF CONTENTS
About the fund:
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<TABLE>
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1 Investment objective
2 Risks
3 Performance
4 Fees and expenses of the fund
5 Management
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About your investment:
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<TABLE>
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7 How to invest
9 How to sell your shares
10 Account policies
11 Services for investors
12 Dividends and taxes
13 Financial highlights
</TABLE>
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LEGG MASON CASH RESERVE TRUST
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INVESTMENT OBJECTIVE
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The fund seeks to achieve stability of principal and current income
consistent with stability of principal. There is no guarantee that
the fund will achieve its objective.
The fund is a money market fund that seeks to maintain a net asset
value of $1.00 per share. To achieve its objective, the fund adheres
to the following practices:
- it buys money market securities maturing in 397 days or less
- it maintains a dollar-weighted average portfolio maturity of
90 days or less
- it buys only high-quality money market securities determined
by the investment adviser to present minimal credit risk
High-quality money market securities in which the fund may invest
include, but are not limited to:
- securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities
- securities representing deposits at domestic and foreign
banks and savings and loan institutions. These banks and
institutions must have capital, surplus and undivided
profits of over $100,000,000 or the principal amount of the
instruments must be insured by the Federal Deposit Insurance
Corporation
- commercial paper rated A-1 by Standard & Poor's, Prime-1 by
Moody's Investors Service, Inc. or F-1 by Fitch Investors
Service, Inc. and unrated commercial paper that the adviser
determines to be of comparable quality
- corporate bonds rated AAA or AA by S&P, Aaa or Aa by
Moody's, having a remaining maturity of 397 days or less and
unrated bonds that the adviser determines to be of
comparable quality
- U.S. dollar-denominated securities of foreign issuers
- asset-backed securities - i.e., securities that represent an
interest in a pool of assets, such as credit card
receivables or car loan receivables
- repurchase agreements
- variable and floating rate securities - i.e., securities
whose interest rates change at specified intervals so they
approximately equal current market rates
Legg Mason Cash Reserve Trust 1
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RISKS
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An investment in the fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the fund seeks to maintain a net asset value of $1.00 per
share, it is possible to lose money by investing in the fund.
Additional risks of investing in this fund include:
Interest rate risk -
The possibility that the market prices of the fund's investments may
decline due to an increase in interest rates.
Credit risk -
The risk that any of the fund's holdings could have its credit rating
downgraded or could default. Credit ratings measure an issuer's
ability to make timely principal and interest payments. Generally,
the fund is required to invest at least 95% of its total assets in
the securities of issuers with the highest credit rating. Credit
ratings are the opinions of the private companies (such as Standard &
Poor's) that rate companies or their securities; they are not
guarantees.
Other risks -
Not all obligations of the U.S. Government, its agencies and
instrumentalities are backed by the full faith and credit of the
United States; some are backed only by the credit of the issuing
agency or instrumentality. Accordingly, there may be some risk of
default by the issuer.
The risks generally associated with concentrating investments in the
banking industry include interest rate risk, credit risk and
regulatory developments relating to the banking industry. The bank
securities in which the fund may invest typically are not insured by
the federal government.
Investments in Eurodollar certificates of deposit also pose certain
risks of investing overseas, such as unfavorable economic or
political developments, imposition of taxes, payment restrictions or,
in extreme cases, seizure of deposits.
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PERFORMANCE
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The information below provides an indication of the risks of
investing in the fund by showing changes in the fund's performance
from year to year. Annual returns assume reinvestment of dividends
and distributions. Historical performance of the fund does not
necessarily indicate what will happen in the future.
Year by year total return as of December 31 of each year (%)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.75 7.73 5.83 3.47 2.78 3.66 5.32 4.80 4.90 4.84
</TABLE>
During the past ten years:
<TABLE>
<S> <C> <C>
Quarter Ended Total Return
- --------------------- ------------------- --------------------
Best quarter: June 30, 1989 2.25%
Worst quarter : June 30, 1993 0.68%
</TABLE>
The fund's return for the quarter ended November 30, 1998 was 1.15%.
The fund's seven day yield on December 31, 1998 was 4.37%. For the
fund's current yield, call toll-free 1-800-822-5544.
Average Annual Total Returns as of December 31, 1998:
<TABLE>
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1 Year 4.84%
5 Years 4.70%
10 Years 5.19%
</TABLE>
These figures include changes in principal value, reinvested
dividends and capital gain distributions, if any.
Legg Mason Cash Reserve Trust 3
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FEES AND EXPENSES OF THE FUND
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The table below describes the fees and expenses you will incur
directly or indirectly as an investor in the fund. The fund pays
operating expenses directly out of its assets so they lower the
fund's share price and dividends. Other expenses include expenses
such as transfer agency, custody, professional and registration fees.
The fund has no sales charge but is subject to a 12b-1 service fee.
The fund charges no redemption fees.
The fees and expenses shown are for the fiscal year ended August 31,
1998 and are calculated as a percentage of average net assets.
<TABLE>
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Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
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Management fees 0.48%
Service (12b-1) fees 0.15%
Other expenses 0.20%
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Total Annual Fund Operating Expenses 0.83%
</TABLE>
s
This example helps you compare the cost of investing in the fund with
the cost of investing in other mutual funds. Although your actual
costs may be higher or lower, you would pay the following expenses on
a $10,000 investment in the fund, assuming (1) a 5% return each year,
(2) the fund's operating expenses remain the same as shown in the
table above, and (3) you redeem all of your shares at the end of the
time periods shown.
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<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
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$85 $ 265 $ 460 $ 1,025
</TABLE>
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MANAGEMENT
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Manager and Adviser:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland
21202, is the fund's manager. The manager is responsible for the
non-investment affairs of the fund, providing office space and
administrative staff for the fund and directing all matters related
to the operation of the fund. The manager acts as manager or
investment adviser to investment companies with aggregate assets of
$13.6 billion as of November 30, 1998.
Western Asset Management Company, 117 East Colorado Boulevard,
Pasadena, California 91105, is the fund's investment adviser. The
adviser is responsible for the actual investment management of the
fund, which includes making investment decisions and placing orders
to buy, sell or hold a particular security. The adviser acts as
investment adviser to investment companies and private accounts with
aggregate assets of $46.0 billion as of November 30, 1998.
For its services, the fund paid the manager a fee of 0.48% of its
average daily net assets for the fiscal year ended August 31, 1998.
The manager paid the adviser a fee, which is calculated daily and
payable monthly, equal to 30% of the manager's fee.
Distributor of the fund's shares:
Legg Mason Wood Walker, Incorporated distributes the fund's shares.
The fund has adopted a plan that allows it to pay shareholder service
fees for services provided to shareholders. Under the plan, the fund
may pay the distributor an annual fee equal to 0.15% of the fund's
average daily net assets. However, the Board has authorized payment
of only 0.10% annually of the fund's average daily net assets until
January 10, 1999, and 0.15% thereafter. At August 31, 1998, service
fees payable were $135,000.
Because these fees are paid out of the fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell
shares of the fund. The distributor pays these brokers up to 90% of
the service fee that it receives from the fund for those sales.
The manager, adviser and distributor are wholly owned subsidiaries of
Legg Mason, Inc., a financial services holding company.
Legg Mason Cash Reserve Trust 5
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Year 2000:
Like other mutual funds (and most organizations around the world),
the fund could be adversely affected by computer problems related to
the year 2000. These could interfere with operations of the fund, its
manager, distributor or adviser, or could impact companies in which
the fund invests.
While no one knows if these problems will have any impact on the fund
or on financial markets in general, the manager and its affiliates
are taking steps to protect fund investors. These include efforts to
determine that the problem will not directly affect the systems used
by major service providers.
Whether these steps will be effective can only be known for certain
in the year 2000.
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HOW TO INVEST
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To open a regular account or a retirement account with the fund, contact a
Legg Mason financial advisor or other entity that has entered into an
agreement with the fund's distributor to sell shares of the Legg Mason
family of funds. A Legg Mason financial advisor will explain the shareholder
services available from our funds and answer any questions you may have. The
minimum initial investment for regular accounts and retirement accounts is
$1,000 and the minimum for each purchase of additional shares is $500.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs,
Roth IRAs, simplified employee pension plans, savings incentive match plans
for employees and other qualified retirement plans. Contact your Legg Mason
financial advisor or other entity offering the fund to discuss which one
might be appropriate for you.
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Once your account is open, you may use the following methods to add to your account:
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In Person Give your financial advisor a check for $500 or more payable to the fund
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Mail Mail your check, payable to the fund, for $500 or more to your financial advisor
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Telephone Call your financial advisor to transfer available cash balances in your brokerage account
or Wire or to transfer money from your bank directly to Legg Mason. Wire transfers may be
subject to a service charge by your bank.
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Future First Contact your Legg Mason financial advisor to enroll in Legg Mason's Future First
Systematic Systematic Investment Plan. Under this plan, you may arrange for automatic monthly
Investment investments in the fund of $50 or more. The fund's transfer agent will transfer funds
monthly from your Legg Mason account or from your checking account to purchase
shares of the fund.
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Automatic Arrangements may be made with some employers and financial institutions for regular
Investments automatic monthly investments of $50 or more in shares of the fund. You may also
reinvest dividends from certain unit investment trusts in shares of the fund.
</TABLE>
Call your financial advisor or another entity offering the fund for sale
with any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Legg Mason Cash Reserve Trust 7
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Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities.
You should consult their program literature for further information.
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Purchase orders received in federal funds form, by either your Legg Mason financial advisor or the entity
offering the fund, on any day that the New York Stock Exchange is open, will be processed as follows:
If the purchase order is Shares will be purchased at the Such shares will begin to
received net asset value determined on the earn dividends on the
before 12:00 noon (E.S.T.) same day same day
at 12:00 noon or after,
but before 4:00 p.m. (E.S.T.) same day next day
after 4:00 p.m. (E.S.T.) next day next day
</TABLE>
If you do not make payment in federal funds, your order will be processed
when payment is converted into federal funds, which is usually completed in
two days, but may take up to ten days. Most bank wires are federal funds.
8
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HOW TO SELL YOUR SHARES
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Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
<TABLE>
<S> <C>
Any of the following methods may be used to sell your shares:
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Telephone Call your Legg Mason financial advisor or entity offering the fund and request a
redemption for $100 or more. Proceeds will be credited to your brokerage account or a
check will be sent to you, at your direction, at no charge to you. Wire requests will be
subject to a fee of $18. Be sure that your financial advisor has your bank account
information on file. Unless you specify that you do not wish to have telephone redemption
privileges, you may be held responsible for any fraudulent telephone order. The fund will
follow reasonable procedures to ensure the validity of any telephone redemption request,
such as requesting identifying information from callers or employing identification
numbers.
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Checkwriting The fund offers a free checkwriting service. You may write checks to anyone in amounts
of $500 or more. The fund's transfer agent will redeem sufficient shares from your
account to pay each check. You will continue to earn dividends on your shares until the
check clears at the transfer agent. Please do not use your checks to close your account.
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Mail Send a letter to the fund requesting redemption of your shares. The letter should be
signed by all of the owners of the account. Redemption requests for shares valued at
$10,000 or more or when the proceeds are to be paid to someone other than the
accountholder will require a signature guarantee. You may obtain a signature guarantee
from most banks or securities dealers.
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Securities Legg Mason has special redemption procedures for investors who wish to purchase
Purchases at stocks, bonds or other securities at Legg Mason. Once you've placed an order for
Legg Mason securities, and have not indicated any other payment method, fund shares will be
redeemed on the settlement date for the amount due. Fund shares may also be redeemed
to cover debit balances in your brokerage account.
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</TABLE>
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial advisor or another entity.
Redemptions of shares that were recently purchased by check or acquired
through reinvestment of dividends on such shares may be delayed for up to 10
days from the purchase date in order to allow for the check to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
Legg Mason Cash Reserve Trust 9
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ACCOUNT POLICIES
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To calculate the fund's share price, the fund's assets are valued and
totaled, liabilities are subtracted, and the resulting net assets are
divided by the number of shares outstanding. The fund seeks to
maintain a share price of $1.00 per share. The fund is priced twice a
day, as of 12:00 noon, Eastern time, and at the close of the New York
Stock Exchange (normally 4:00 p.m., Eastern time), on every day the
exchange is open. Like most other money market funds, the fund
normally values its investments using the amortized cost method.
Fund shares may not be held in, or transferred to, an account with
any firm that does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase
your balance. If, after 60 days, your account is still below $500,
the fund may close your account and send you the proceeds.
The fund reserves the right to:
- reject any order for shares or suspend the offering of
shares for a period of time
- change its minimum investment amounts
- delay sending out redemption proceeds for up to seven days.
This generally applies only in cases of very large
redemptions, excessive trading or during unusual market
conditions. The fund may delay redemptions beyond seven
days, or suspend redemptions, only as permitted by the SEC.
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SERVICES FOR INVESTORS
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For further information regarding any of the services below, please
contact your financial advisor or other entity offering the fund for
sale.
Account statements:
Legg Mason or the entity through which you invest will send you
account statements monthly unless there has been no activity in the
account. Legg Mason will send you statements quarterly if you
participate in the Future First Systematic Investment Plan or if you
purchase shares through automatic investments.
Systematic Withdrawal Plan:
If you are purchasing or already own shares with a net asset value of
$5,000 or more, you may elect to make systematic withdrawals from the
fund. The minimum amount for each withdrawal is $50.
Premier Account Status:
Legg Mason offers a Premier Asset Management Account, which combines
your fund account, a preferred customer VISA Gold debit card, a Legg
Mason brokerage account with margin borrowing availability and
unlimited checks with no minimum check amount. Other services include
automatic transfer of free credit balances in your brokerage account
to your fund account and automatic redemption of fund shares to
offset debit balances in your brokerage account. Legg Mason charges
an annual fee for the Premier Account, which is currently $85 for
individuals and $100 for corporations and businesses.
Exchange Privilege:
Fund shares may be exchanged for shares of any of the other Legg
Mason funds or the Bartlett funds, provided these funds are eligible
for sale in your state of residence. You can request an exchange in
writing or by phone. Be sure to read the current prospectus for any
fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject
to a sales charge when exchanging into a fund that has one. In
addition, an exchange of the fund's shares will be treated as a sale
of the shares and any gain on the transaction may be subject to tax.
The fund reserves the right to:
- terminate or limit the exchange privilege of any shareholder
who makes more than four exchanges from the fund in one
calendar year
- terminate or modify the exchange privilege after 60 days'
notice to shareholders
Legg Mason Cash Reserve Trust 11
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DIVIDENDS AND TAXES
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The fund declares dividends from its net investment income daily and
pays them monthly. Your dividends will be automatically reinvested in
additional shares of the fund. If you wish to receive dividends in
cash, you must notify the fund at least 10 days before the next
dividend is to be paid. The fund does not expect to realize any
capital gain or loss; however, if the fund realizes any capital
gains, it will pay them at least once every twelve months. You may
request that your dividends be reinvested in shares of another Legg
Mason fund.
Fund dividends and distributions of any net short-term capital gains
are taxable to most investors (other than retirement plans and other
tax-exempt investors) whether received in cash or reinvested in
additional shares of the fund. Generally, those dividends and
distributions will be taxable as ordinary income.
The sale or exchange of fund shares will not result in any gain or
loss for the shareholder to the extent the fund maintains a stable
share price of $1.00.
A tax statement is sent to each investor at the end of each year
detailing the tax status of your distributions.
The fund will withhold 31% of all dividends payable to individuals
and certain other non-corporate shareholders who do not provide the
fund with a valid taxpayer identification number or who are otherwise
subject to backup withholding.
Because each investor's tax situation is different, please consult
your tax advisor about federal, state and local tax considerations.
If the postal or other delivery service is unable to deliver your
check, your distribution option will automatically be converted to
having all dividends and other distributions reinvested in fund
shares. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
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FINANCIAL HIGHLIGHTS
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The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Total return
represents the rate that an investor would have earned (or lost) on
an investment in the fund, assuming reinvestment of all dividends and
distributions. This information has been audited by Ernst & Young
LLP, whose report, along with the fund's financial statements, is
incorporated by reference into the Statement of Additional
Information (see back cover) and is included in the annual report.
The annual report is available upon request by calling toll-free
1-800-822-5544.
<TABLE>
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1998 1997 1996 1995 1994
- ------------------------------- ------ ------ ------ ------ ------
The following information reflects financial results for a single share of the fund:
Net asset value,
beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ---------
Income from
investment operations:
Net investment income .05 .05 .05 .05 .03
Net realized gain (loss)
on investments Nil Nil Nil Nil (Nil)
-------- -------- -------- -------- ---------
Total from investment
operations .05 .05 .05 .05 .03
Distributions:
Dividends from net
investment income (.05) (.05) (.05) (.05) (.03)
-------- -------- -------- -------- ---------
Net asset value,
end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =========
Total return 4.96% 4.84% 4.92% 5.08% 3.08%
Ratios / Supplemental Data:
Ratio of expenses to average
net assets .78% .75% .70% .71% .72%
Ratio of net investment
income to average net assets 4.86% 4.73% 4.81% 5.03% 3.05%
Net assets, end of year
(in millions) $ 1,423 $ 1,343 $ 1,224 $ 1,153 $ 786
</TABLE>
Legg Mason Cash Reserve Trust 13
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Legg Mason
Cash Reserve Trust
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The following additional information about the fund is available upon
request and without charge:
Statement of Additional Information (SAI) - the SAI is filed with the
Securities and Exchange Commission (SEC) and is incorporated by
reference into (is considered part of) the prospectus. The SAI
provides additional details about the fund and its policies.
Annual and Semiannual Reports - additional information about the
fund's investments is available in the fund's annual and semiannual
reports to shareholders. These reports provide detailed information
about the fund's portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain
more information:
- call toll-free 1-800-822-5544
- visit us on the Internet via, http://www.leggmason.com
- write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the fund, including the SAI, can be reviewed and
copied at the SEC's public reference room in Washington, DC. (phone
1-800-SEC-0330). Reports and other information about the fund are
available on the SEC's Internet site at http://www.sec.gov. Investors
may also write to: SEC, Public Reference Section, Washington, DC
20549-6009. A fee will be charged for making copies.
LMF-017 SEC file number: 811-2853
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THE LEGG MASON CASH RESERVE TRUST
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1998
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the fund's Prospectus dated December 31, 1998 which
has been filed with the Securities and Exchange Commission ("SEC"). The fund's
annual report is incorporated by reference into this Statement of Additional
Information. A copy of either the Prospectus or the annual report is available
without charge by writing to or calling the fund's distributor. See below for
the address and phone numbers.
LEGG MASON WOOD WALKER
INCORPORATED
100 Light Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
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Table Of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Strategies and Risks 3
Fund Policies 5
Management of the Fund 6
Management Agreement 8
Investment Advisory Agreement 9
The Fund's Distributor 10
Additional Tax Information 12
Additional Purchase and Redemption Information 12
Tax-Deferred Retirement Accounts and Plans 16
Valuation of Shares 17
How the Fund's Yield is Calculated 18
Massachusetts Trust Law 20
Portfolio Transactions and Brokerage 20
The Fund's Custodian and Transfer and Dividend-
Disbursing Agent 21
The Fund's Legal Counsel 21
The Fund's Independent Auditors 21
Financial Statements 21
</TABLE>
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Investment Strategies and Risks
The fund is an open-end, diversified management investment company. The
fund invests in high-quality money market instruments that mature in 397 days or
less. It may use any of the following instruments or techniques, among others:
BANK INSTRUMENTS
The fund may invest in certificates of deposit, demand and time
deposits, savings shares and bankers' acceptances, as well as Eurodollar
certificates of deposit issued by foreign branches of U.S. or foreign banks.
U. S. GOVERNMENT OBLIGATIONS
The fund may purchase securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, which include U.S. Treasury
securities that differ in their interest rates, maturities and times of
issuance. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the Treasury; others
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others only by the credit of
the agency or instrumentality. These securities may bear fixed, floating or
variable rates of interest.
VARIABLE AND FLOATING RATE SECURITIES
The fund may invest in securities whose interest rates change at
specified intervals so they approximately equal current market rates. These
securities have interest rate adjustment formulas that may help to stabilize
their market value. Many of these instruments carry a demand feature that
permits the fund to sell them during a determined time period at par plus
accrued interest. The demand feature is often backed by a credit instrument,
such as a letter of credit, or by a creditworthy insurer. The fund may rely on
the credit instrument or the creditworthiness of the insurer in purchasing a
variable or floating rate security. The ability of a party to fulfill its
obligations under a letter of credit or guarantee might be affected by possible
financial difficulties of its borrowers, adverse interest rate or economic
conditions, regulatory limitations or other factors. The fund will calculate the
remaining maturity of variable and floating rate securities in accordance with
Rule 2a-7 under the Investment Company Act of 1940.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The fund may enter into commitments to purchase short-term U.S.
Government securities on a when-issued or delayed-delivery basis. When the fund
purchases securities on a when-issued or delayed-delivery basis, it immediately
assumes the risks of ownership, including the risk of price fluctuation. These
transactions are made to secure what is considered to be an advantageous price
and yield for the fund. Settlement dates may be a month or more after entering
into these transactions, and the market values of the securities purchased may
vary from the purchase prices in the interim. No fees or other expenses, other
than normal transaction costs, are incurred. Liquid assets of the Trust
sufficient to make payment for the securities to be purchased are maintained in
a segregated account with the fund's custodian until the transaction is settled.
Such trades may have an effect on the fund that is similar to leverage. The
seller's failure to complete a transaction may result in a loss.
REPURCHASE AGREEMENTS
The fund may enter into repurchase agreements to purchase either U.S.
Government obligations or high-quality debt securities from a securities dealer
or bank. The securities dealer or bank agrees to repurchase those securities at
an agreed-upon price and date. The securities are held for the fund by a
custodian bank as collateral until resold. Additional collateral may be
necessary to maintain the required value of the repurchase agreement. There is a
risk that the other party to a repurchase agreement will
3
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default on its obligations and the fund may be delayed or prevented from
disposing of the collateral securities. This may result in a loss.
The fund will enter into repurchase agreements only with financial
institutions that the adviser determines present a minimal risk of default. This
determination is made based on guidelines set forth by the fund's board of
trustees.
REVERSE REPURCHASE AGREEMENTS
The fund may enter into reverse repurchase agreements to the extent
permitted by its investment limitations. These transactions are similar to
borrowing cash. In a reverse repurchase agreement the fund transfers possession
of a portfolio instrument to another person, such as a financial institution or
broker-dealer, in return for a percentage of the instrument's market value in
cash and agrees that on a stipulated date in the future the fund will repurchase
the portfolio instrument by remitting the original consideration plus interest
at an agreed-upon rate. The use of reverse repurchase agreements may enable the
fund to avoid selling portfolio instruments at a time when a sale may be deemed
to be disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure such an outcome.
When effecting reverse repurchase agreements, liquid assets in a dollar
amount sufficient to make payment for the obligations to be purchased are
maintained in a segregated account with the fund's custodian until the
transaction is settled.
FOREIGN SECURITIES
The fund may invest in foreign securities that are not publicly traded
in the United States. Investments in obligations of banking entities located
outside the United States involve certain risks that are different from
investments in securities of domestic banks. These risks may include adverse
foreign economic and political developments, the imposition of foreign laws or
restrictions that may adversely affect payment of principal and interest on such
obligations held by the fund, and the imposition of foreign exchange controls
and of withholding taxes on principal and interest payable on such obligations
held by the fund. In addition, there may be less public information available
about a foreign bank than is generally available about domestic banks.
Furthermore, foreign banking institutions may not be subject to the same
accounting, auditing and financial recordkeeping standards and requirements as
are domestic banks and branches. All securities purchased by the fund will be
denominated in U.S. dollars.
In an effort to minimize these risks, the adviser will purchase
foreign-issued money market instruments only from the branches of those banks
that are among the largest and most highly rated in various industrialized
nations. On an ongoing basis, the adviser will monitor the credit risk of such
foreign banks by using third party services which provide credit and sovereign
risk analysis. Also, the adviser will not purchase obligations that it believes,
at the time of purchase, will be subject to exchange controls or the interest on
which will be subject to withholding taxes. Investment will be limited to
obligations of bank branches located in countries where sovereign risk is
considered by the adviser to be minimal; however, there can be no assurance that
exchange control laws, withholding taxes or other similar laws will not become
applicable to certain of the fund's investments.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when sale would
otherwise be desirable. Although restricted securities traditionally were
considered illiquid, the adviser, acting pursuant to guidelines established by
the fund's Board of Trustees, may determine that certain restricted securities
are liquid.
The fund may invest up to 10% of its net assets in illiquid securities
(securities which cannot be
4
<PAGE>
sold within seven days at approximately the price at which the fund carries
them). Illiquid securities may be difficult to value, and the fund may have
difficulty selling such securities promptly. Repurchase agreements maturing in
more than seven days are considered illiquid.
Fund Policies
The fund has adopted certain fundamental investment limitations,
described below, which cannot be changed without approval of shareholders.
Except for the fund's investment objective and the limitations described below,
the investment policies and limitations of the fund are non-fundamental and can
be changed by the Board of Trustees without shareholder approval.
1. SELLING SHORT AND BUYING ON MARGIN The fund will not sell any money market
instruments short or purchase any money market instruments on margin but may
obtain such short-term credits as may be necessary for clearance of purchases
and sales of money market instruments.
2. BORROWING MONEY The fund will not borrow money except as a temporary measure
for extraordinary or emergency purposes and then only in amounts not in excess
of 5% of the value of its total assets. In addition, the fund may enter into
reverse repurchase agreements and otherwise borrow up to one-third of the value
of its total assets, including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments. This latter practice
is not for investment leverage but solely to facilitate management of the
portfolio by enabling the fund to meet redemption requests when the liquidation
of portfolio instruments would be inconvenient or disadvantageous.
Interest paid on borrowed funds will not be available for investment.
The fund will liquidate any such borrowings as soon as possible and may not
purchase any portfolio instruments while any borrowings are outstanding.
However, during the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to assure completion of the reverse repurchase
agreements, the fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements.
3. INVESTING IN COMMODITIES, MINERALS, OR REAL ESTATE The fund will not invest
in commodities, commodity contracts, oil, gas, or other mineral programs, or
real estate, except that it may purchase money market instruments issued by
companies that invest in or sponsor such interests.
4. UNDERWRITING The fund will not engage in underwriting of securities issued by
others.
5. LENDING CASH OR SECURITIES The fund will not lend any of its assets, except
that it may purchase or hold money market instruments, including repurchase
agreements and variable amount demand master notes, permitted by its investment
objective and policies.
6. ACQUIRING SECURITIES The fund will not acquire the voting securities of any
issuer. It will not invest in securities issued by any other investment company,
except as part of a merger, consolidation, or other acquisition. It will not
invest in securities of a company for the purpose of exercising control or
management.
7. DIVERSIFICATION OF INVESTMENTS The fund will not purchase securities issued
by any one issuer having a value of more than 5% of the value of its total
assets except cash or cash items, repurchase agreements, and U.S. government
obligations. The fund considers the type of bank obligations it purchases as
cash items (however, as a non-fundamental policy, the fund will apply the 5%
limitation to bank obligations other than demand deposits).
8. CONCENTRATION OF INVESTMENTS The fund will not purchase money market
instruments if, as a result of such purchase, more than 25% of the value of its
total assets would be invested in any one industry. However, investing in
domestic bank instruments (such as time and demand deposits and certificates of
deposit), U.S. government obligations or instruments secured by these money
market
5
<PAGE>
instruments, such as repurchase agreements, shall not be considered investments
in any one industry. Domestic banks include U.S. branches of foreign banks that
are subject to the same regulation as domestic banks, and foreign branches of
domestic banks whose parent would be unconditionally liable in the event that
the foreign branch failed to pay on its instruments.
9. INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND The
fund will not purchase or retain the securities of any issuer if the officers
and trustees of the fund or its investment adviser owning individually more than
1/2 of 1% of the issuer's securities togetheR own more than 5% of the issuer's
securities.
10. DEALING IN PUTS AND CALLS The fund will not invest in puts, calls,
straddles, spreads, or any combination of these.
11. ISSUING SENIOR SECURITIES The fund will not issue senior securities, except
as permitted by the investment objective and policies and investment limitations
of the fund.
Except with respect to the one-third limitation on borrowing money, if a
percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net assets will
not result in a violation of such restriction.
The fund did not borrow money or invest in reverse repurchase agreements
in excess of 5% of the value of its total assets during the last fiscal year
and, at present, has no intent to do so.
The investment objective and fundamental investment limitations of the
fund, described in the preceding paragraphs and in the Prospectus, may be
changed only with the vote of a majority of the Trust's outstanding voting
securities. Under the Investment Company Act of 1940, as amended ("1940 Act"), a
"vote of a majority of the outstanding voting securities" of the fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the fund or (2) 67% or more of the shares present at a shareholders' meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy.
Management of the Fund
The fund's officers are responsible for the operation of the fund under
the direction of the Board of Trustees. The officers and trustees of the fund,
their dates of birth and their principal occupations during the past five years
are set forth below. An asterisk(*) indicates officers and/or trustees who are
"interested persons" of the fund, as defined in the 1940 Act. The address of
each officer and trustee is 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
JOHN F. CURLEY, JR.*, [7/24/39] Chairman of the Board, President and
Trustee; Retired Vice Chairman and Director of Legg Mason Wood Walker, Inc. and
Legg Mason, Inc.; Director of Legg Mason Fund Adviser, Inc. and Western Asset
Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.; President and/or
Chairman of the Board and Director/Trustee of nine Legg Mason funds.
ARNOLD L. LEHMAN, [7/18/44] Trustee; The Brooklyn Museum of Art, 200
Eastern Parkway, Brooklyn, NY. Director, The Brooklyn Museum of Art;
Director/Trustee of nine Legg Mason funds. Formerly: Director, Baltimore Museum
of Art.
JILL E. McGOVERN, [8/29/44] Trustee; 1500 Wilson Blvd., Arlington,
Virginia. Chief Executive Officer of the Marrow Foundation. Director/Trustee of
nine Legg Mason funds. Formerly: Executive Director of the Baltimore
International Festival (1991- 1993).
RICHARD G. GILMORE, [6/9/27] Trustee; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries
6
<PAGE>
are engaged in the manufacture and sale of decorative paper products, business
forms, and specialty metal packaging); Director of PECO Energy Company (formerly
Philadelphia Electric Company); Director/Trustee of nine Legg Mason funds.
T.A. RODGERS, [10/22/34] Trustee; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting).
Director/Trustee of nine Legg Mason funds. Formerly: Director and Vice President
of Corporate Development, Polk Audio, Inc. (manufacturer of audio components)
(1991-1992).
EDWARD A. TABER*, [8/25/43] Trustee; Senior Executive Vice President of
Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Chairman and Director of Legg
Mason Fund Adviser, Inc. and Director of Western Asset Management Company (a
registered investment adviser); President and/or Director/Trustee of eight Legg
Mason funds.
EDMUND J. CASHMAN, Jr. *, [8/31/36] Trustee; Senior Executive Vice
President and Director of Legg Mason, Inc.; Officer and/or Director of various
other affiliates of Legg Mason, Inc.; President or Vice Chairman of the Board
and Director/Trustee of four Legg Mason funds.
The executive officers of the fund, other than those who also serve as
trustees, are:
MARIE K. KARPINSKI*, [1/1/49] Vice President and Treasurer; Treasurer of
Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of nine Legg Mason
funds and Vice President of Legg Mason Fund Adviser, Inc.,; Vice President of
Legg Mason Wood Walker, Inc.
KATHI D. BAIR*, [12/15/64] Secretary; Secretary of nine Legg Mason
funds; Assistant Treasurer of three Legg Mason funds.
BRIAN M. EAKES*, [12/9/69 ] Assistant Secretary and Assistant Treasurer;
employee of Legg Mason, Inc. since July 1995. Formerly: Senior Associate - Audit
of Coopers & Lybrand L.L.P. (Aug. 1992 - June 1995).
Officers and trustees of the fund who are interested persons of the fund
receive no salary or fees from the fund. Each trustee who is not an interested
person of the fund ("Independent Trustees") receives an annual retainer and a
per meeting fee based on the average net assets of the fund at December 31 of
the previous year.
The Nominating Committee of the Board of Trustees is responsible for the
selection and nomination of disinterested trustees. The Committee is composed of
Messrs. Gilmore, Rodgers and Lehman and Dr. McGovern, each of whom is a
disinterested trustee as that term is defined in the 1940 Act.
At December 1, 1998, the trustees and officers of the fund beneficially
owned, in the aggregate, less than 1% of the fund's outstanding shares.
As of December 1, 1998, no persons or entities were known by the fund to
own of record 5% or more of the fund's outstanding shares.
TRUSTEE LIABILITY
The fund's Declaration of Trust provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
The following table provides certain information relating to the
compensation of the fund's trustees
7
<PAGE>
for the fiscal year ended August 31, 1998. The fund has no retirement plan for
its trustees.
<TABLE>
<CAPTION>
- --------------------------------- ------------------------------- -----------------------------
<S> <C> <C>
NAME OF PERSON AND POSITION AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM
FUND* FUND AND FUND COMPLEX PAID
TO TRUSTEES**
- --------------------------------- ------------------------------- -----------------------------
John F. Curley, Jr. -
Chairman of the Board and None None
Trustee
- --------------------------------- ------------------------------- -----------------------------
Charles F. Haugh - TrusteeA $3,600 $26,100
- --------------------------------- ------------------------------- -----------------------------
Arnold L. Lehman - Trustee $3,600 $30,600
- --------------------------------- ------------------------------- -----------------------------
Jill E. McGovern - Trustee $3,600 $35,100
- --------------------------------- ------------------------------- -----------------------------
Richard G. Gilmore - Trustee $3,600 $35,100
- --------------------------------- ------------------------------- -----------------------------
T.A. Rodgers - Trustee $3,600 $35,100
- --------------------------------- ------------------------------- -----------------------------
Edward A. Taber - Trustee None None
- --------------------------------- ------------------------------- -----------------------------
Edmund J. Cashman, Jr. - Trustee None None
- --------------------------------- ------------------------------- -----------------------------
</TABLE>
* Represents fees paid to each trustee during the fiscal year ended August
31, 1998.
** Represents aggregate compensation paid to each trustee during the
calendar year ended December 31, 1998.
(A)Mr. Haugh retired as a trustee in September 1998.
Management Agreement
Legg Mason Fund Adviser, Inc. ("Manager"), 100 Light Street, Baltimore,
Maryland 21202, serves as the manager for the fund under a Management Agreement
dated July 18, 1988. The Management Agreement provides that, subject to the
overall direction by the Board of Trustees, the Manager will manage the
investment and other affairs of the fund. Under the Management Agreement, the
Manager is responsible for managing the fund's securities and for making
purchases and sales of securities consistent with the investment objectives and
policies described in the fund's Prospectus and this Statement of Additional
Information. The Manager is a wholly owned subsidiary of Legg Mason, Inc. which
is also the parent of Legg Mason Wood Walker, Incorporated.
The Manager has delegated the portfolio management functions for the
fund to the adviser, Western Asset Management Company. The Manager is obligated
to furnish the fund with office space and certain administrative services, as
well as executive and other personnel necessary for the operation of the fund.
The Manager and its affiliates also are responsible for the compensation of
trustees and officers of the fund who are employees of the Manager and/or its
affiliates.
The Manager receives for its services a management fee, calculated daily
and payable monthly, based upon the average daily net assets of the fund as
follows: 0.50% on the first $500 million; 0.475% on the next $500 million; 0.45%
on the next $500 million; 0.425% on the next $500 million and 0.4% thereafter.
During the fiscal years ended August 31, 1998, 1997 and 1996, the fund paid
$6,284,105, $6,110,012 and $5,896,533, respectively, to the Manager. During the
fiscal year ended August 31, 1996, Legg Mason contributed $400,000 to offset a
portion of the fund's net realized losses.
8
<PAGE>
Under the Management Agreement, the Manager will not be liable for any
error of judgment or mistake of law or for any loss suffered by the fund in
connection with the performance of the Management Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or losses resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties or from reckless
disregard of its obligations or duties under the Agreement.
The Management Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the fund's Board of Trustees,
by vote of a majority of the outstanding voting securities or by the Manager, on
not less than 60 days' notice to the other party, and may be terminated
immediately upon the mutual written consent of the Manager and the fund.
The fund pays all of its expenses which are not expressly assumed by the
Manager. These expenses include, among others, interest expense, taxes,
brokerage fees and commissions, expenses of preparing prospectuses, statements
of additional information, proxy statements and reports and of printing them for
and distributing them to existing shareholders, custodian charges, transfer
agency fees, compensation of the independent trustees, legal and audit expenses,
insurance expenses, expenses of registering and qualifying shares of the fund
for sale under federal and state law, governmental fees and expenses incurred in
connection with membership in investment company organizations.
The fund also is obligated to pay the expenses for maintenance of its
financial books and records, including computation of the fund's net asset value
per share, and dividends. The fund also is liable for such nonrecurring expenses
as may arise, including litigation to which the fund may be a party. The fund
may also have an obligation to indemnify the trustees and officers of the fund
with respect to litigation.
Under the Management Agreement, the fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated, or until the right
is withdrawn in writing by the Manager.
Investment Advisory Agreement
The adviser, Western Asset Management Company, 117 East Colorado
Boulevard, Pasadena, CA 91105, an affiliate of Legg Mason, serves as investment
adviser to the Fund under an Investment Advisory Agreement dated July 18, 1988,
between the Adviser and the Manager ("Advisory Agreement"). The Advisory
Agreement was most recently approved by the Board of Trustees, including a
majority of the trustees who are not "interested persons" of the fund, the
Adviser or the Manager, on November 13, 1998. Under the Advisory Agreement, the
Adviser is responsible, subject to the supervision of the Manager and the
general oversight of the fund's Board of Trustees, for the actual management of
the fund's assets, including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security. For the Adviser's services to
the fund, the Manager (not the fund) pays the Adviser a fee, computed daily and
payable monthly, at an annual rate of 30% of the fee received by the Manager
from the fund. During the years ended August 31, 1998, 1997 and 1996, the
Manager paid the Adviser $1,885,232, $1,833,004 and $1,768,960, respectively,
pursuant to the Advisory Agreement.
Under the Advisory Agreement, the Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Manager or
by the fund in connection with the performance of the Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under the Agreement.
The Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the fund's Board of Trustees,
by vote of a majority of the fund's outstanding voting securities, by the
Manager or by the Adviser, on not less than 60 days' notice to the fund and/or
the other party(ies). The Advisory Agreement will be terminated immediately upon
any termination of the Management Agreement or upon the mutual written consent
of the Adviser, the Manager and the fund.
9
<PAGE>
The Fund's Distributor
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland 21202, acts as distributor of the fund's shares pursuant to an
Underwriting Agreement. The Underwriting Agreement obligates Legg Mason to
promote the sale of fund shares and to pay certain expenses in connection with
its distribution efforts, including expenses for the printing and distribution
of prospectuses and periodic reports used in connection with the offering to
prospective investors (after the prospectuses and reports have been prepared,
set in type and mailed to existing shareholders at the fund's expense), and for
supplementary sales literature and advertising costs.
The fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits the fund to pay Legg Mason fees for
its services related to sales and distribution of shares and the provision of
ongoing services to shareholders. Under the Plan, the aggregate fees may not
exceed an annual rate of 0.15% of the fund's average daily net assets. However,
the Board has authorized payment of only 0.10% annually from the fund until
January 10, 1999. Distribution activities for which such payments may be made
include, but are not limited to, compensation to persons who engage in or
support distribution of shares, printing of prospectuses and reports for persons
other than existing shareholders, advertising, preparation and distribution of
sales literature, overhead, travel and telephone expenses. The Plan was approved
by the shareholders of the fund on March 8, 1996.
Effective January 10, 1997, the fund began compensating Legg Mason for
distribution costs and services at an annual rate equal to 0.10% of its average
daily net assets. During the years ended August 31, 1998 and 1997, the fund paid
Legg Mason $1,299,123 and $833,064, respectively, pursuant to the Underwriting
Agreement. The Plan specifies that the fund may not pay more in cumulative
distribution fees than 6.25% of total new gross assets, plus interest, as
specified in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Shareholder servicing fees paid under the
Plan are not subject to that limit. Legg Mason may pay all or a portion of the
fee to its financial advisors or to dealers with which Legg Mason has a dealer
agreement with respect to the fund. The continuation of the Plan was approved on
November 13, 1998 by the Board of Trustees, including a majority of the trustees
who are not "interested persons" of the fund as that term is defined in the 1940
Act and who have no direct or indirect financial interest in the operation of
the Plan or the Underwriting Agreement ("12b-1 Trustees").
In approving the continuation of the Plan, in accordance with the
requirements of Rule 12b-1, the trustees determined that there was a reasonable
likelihood that the Plan would benefit the fund and its shareholders. The
trustees considered, among other things, the extent to which the potential
benefits of the Plan to the fund's shareholders outweighed the costs of the
Plan; the likelihood that the Plan would succeed in producing such potential
benefits; the merits of certain possible alternatives to the Plan; and the
extent to which the retention of assets and additional sales of shares of the
fund would be likely to maintain or increase the amount of compensation paid by
the fund to its Manager.
In considering the costs of the Plan, the trustees particularly
considered the fact that any payments made by the fund to Legg Mason under the
Plan would increase the fund's level of expenses in the amount of such payments.
Further, the trustees recognized that the Manager would earn greater management
fees if the fund's assets were increased, because such fees are calculated as a
percentage of the fund's assets and thus would increase if net assets increase.
The trustees further recognized that there can be no assurance that any of the
potential benefits described below would be achieved when the Plan is
implemented.
The trustees noted that the payment of commissions and service fees to
Legg Mason and its investment executives could motivate them to improve their
sales efforts with respect to the fund and to maintain and enhance the level of
services they provide to the fund's shareholders. These efforts, in turn, could
lead to increased sales and reduced redemptions, eventually enabling the fund to
achieve
10
<PAGE>
economies of scale and lower per share operating expenses. Any reduction in such
expenses would serve to offset, in whole or in part, the additional expenses
incurred by the fund in connection with the Plan. Furthermore, the investment
management of the fund could be enhanced, as net inflows of cash from new sales
might enable its portfolio manager to take advantage of attractive investment
opportunities, and reduced redemptions could eliminate the potential need to
liquidate attractive securities positions in order to raise the funds necessary
to meet the redemption requests.
The Plan will continue in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Trustees, including a
majority of the 12b-1 Trustees, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated by a vote of a
majority of the 12b-1 Trustees or by a vote of a majority of the outstanding
voting shares. Any change in the Plan that would materially increase the
distribution cost to the fund requires shareholder approval; otherwise the Plan
may be amended by the trustees, including a majority of the 12b-1 Trustees, as
previously described.
In accordance with Rule 12b-1, the Plan provides that Legg Mason will
submit to the fund's Board of Trustees, and the trustees will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the candidates to serve as
Independent Trustees will be committed to the discretion of the Independent
Trustees.
During the year ended August 31, 1998, Legg Mason incurred the following
distribution and shareholder servicing expenses with respect to the fund:
Compensation to sales personnel $894,000
Advertsing $63,000
Printing and mailing of prospectuses to prospective
shareholders $202,000
Other (Funds Marketing, Branch System Processing,
Executive and Sales Management, Funds Accounting
and Training) $3,496,000
Total expenses $4,655,000
The foregoing are estimated and do not include all expenses fairly allocable to
Legg Mason's or its affiliates' efforts to distribute the fund. Legg Mason
receives payment under the plan regardless of the actual expenses it incurs.
Additional Tax Information
The fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended.
To do so, the fund must distribute annually to its shareholders at least 90% of
its investment company taxable income (generally, net investment income plus any
net short-term capital gain) and must meet several additional requirements.
Among these requirements are the following: (1) at least 90% of the fund's gross
income each taxable year must be derived from dividends, interest and gains from
the sale or other disposition of securities, or other income derived with
respect to its business of investing in securities; (2) at the close of each
quarter of the fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
and other securities, with those other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the fund's total
assets; and (3) at the close of each quarter of the fund's taxable year, not
more than 25% of the value of its total assets may be
11
<PAGE>
invested in securities (other than U.S. government securities) of any one
issuer.
By qualifying for treatment as a RIC, the fund (but not its
shareholders) will be relieved of federal income tax on the part of its
investment company taxable income that it distributes to its shareholders. If
the fund failed to qualify as a RIC for any taxable year, it would be taxed on
the full amount of its taxable income for that year without being able to deduct
the distributions it makes to its shareholders and the shareholders would treat
all those distributions as dividends (that is, ordinary income) to the extent of
the fund's earnings and profits.
The fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and any capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
Additional Purchase And Redemption Information
Shares are sold at their net asset value without a sales charge on days
the New York Stock Exchange ("Exchange") is open for business. The procedure for
purchasing shares of the Fund is explained in the Prospectus under "How to
Invest".
CONVERSION TO FEDERAL FUNDS
It is the fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. This conversion must be
made before shares are purchased. Legg Mason or Boston Financial Data Services
("BFDS") acts as the shareholders' agent in depositing checks and converting
them to federal funds, normally within two to nine business days of receipt of
checks.
A cash deposit made after the daily cashiering deadline of the Legg
Mason office in which the deposit is made will be credited to your Legg Mason
brokerage account ("Brokerage Account") on the next business day following the
day of deposit, and the resulting free credit balance will be invested on the
second business day following the day of receipt.
REDEMPTION BY WIRE
The fund redeems shares at the next computed net asset value after Legg
Mason receives the redemption request. Redemption procedures are explained in
the Prospectus under "How to Sell Your Shares". When payment for shares is in
the form of federal funds, the 10-day potential delay described in the
Prospectus does not apply.
REDEMPTION IN KIND
The fund reserves the right, under certain conditions, to honor any
request for a redemption, or combination of requests from the same shareholder
in any 90-day period, totaling $250,000 or 1% of the net assets of the fund,
whichever is less, by making payment in whole or in part in securities valued in
the same way as they would be valued for purposes of computing the fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
the market price of those securities will be subject to fluctuation until they
are sold. The fund does not redeem in kind under normal circumstances, but would
do so where the Adviser determines that it would be in the best interests of the
shareholders as a whole.
FUTURE FIRST SYSTEMATIC INVESTMENT PLAN AND TRANSFER OF FUNDS FROM FINANCIAL
INSTITUTIONS
When you purchase shares through the Future First Systematic Investment
Plan, BFDS, the fund's transfer agent, will transfer funds from your Legg Mason
account or from your checking account to be used to buy shares of the fund. Legg
Mason, the fund's distributor, will send an account statement
12
<PAGE>
quarterly. The transfer also will be reflected on your Legg Mason account
statement or your regular checking account statement. You may terminate the
Future First Systematic Investment Plan at any time without charge or penalty.
You may also buy additional shares of the fund through a plan permitting
transfers of funds from a financial institution. Certain financial institutions
may allow you, on a pre-authorized basis, to have $50 or more automatically
transferred monthly for investment in shares of the fund to:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
Attn: Legg Mason Funds
If the investor's check is not honored by the institution on which it
is drawn, the investor may be subject to extra charges in order to cover
collection costs. These charges may be deducted from the investor's account.
SYSTEMATIC WITHDRAWAL PLAN
You may also elect to make systematic withdrawals from your fund account
of a minimum of $50 on a monthly basis if you own shares with a net asset value
of $5,000 or more. The amounts paid to you each month are obtained by redeeming
sufficient shares from your account to provide the withdrawal amount that you
have specified. The Systematic Withdrawal Plan is not currently available for
shares held in an Individual Retirement Account ("IRA"), Simplified Employee
Pension Plan ("SEP"), Savings Incentive Match Plan for Employees ("SIMPLE") or
other qualified retirement plan.
You may change the monthly amount to be paid to you without charge not
more than once a year by notifying Legg Mason or the affiliate with which you
have an account. Redemptions will be made at the net asset value determined as
of the close of the Exchange on the first day of each month. If the Exchange is
not open for business on that day, the shares will be redeemed at the net asset
value determined as of the close of the Exchange on the preceding business day.
The check for the withdrawal payment will usually be mailed to you on the next
business day following redemption. If you elect to participate in the Systematic
Withdrawal Plan, dividends and distributions on all shares in your fund account
must be automatically reinvested in fund shares. You may terminate the
Systematic Withdrawal Plan at any time without charge or penalty. The fund, its
transfer agent, Legg Mason and its affiliates also reserve the right to modify
or terminate the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend. If the periodic withdrawals exceed reinvested dividends and
distributions, the amount of your original investment will be correspondingly
reduced.
LEGG MASON PREMIER ASSET MANAGEMENT ACCOUNT/VISA ACCOUNT
Shareholders of the fund who have cash or negotiable securities
(including fund shares) valued at $20,000 or more in accounts with Legg Mason
may subscribe to Legg Mason's Premier Asset Management Account ("Premier"). This
program provides a direct link between a shareholder's fund account and his or
her Brokerage Account. Premier provides shareholders with a convenient method to
invest in the fund through their Brokerage Accounts, which includes automatic
daily investment of free credit balances of $100 or more and automatic weekly
investment of free credit balances of less than $100.
Premier is a comprehensive financial service which combines a
shareholder's fund account, a preferred customer VISA Gold debit card, a Legg
Mason Brokerage Account and unlimited checkwriting with no minimum check amount.
Premier is offered as an exclusive preferred customer service for shareholders
of certain Legg Mason funds.
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The VISA Gold debit card may be used to purchase merchandise or services
from merchants honoring VISA or to obtain cash advances (which a bank may limit
to $5,000 or less, per account per day) from any bank honoring VISA.
Checks, VISA charges and cash advances are posted to the shareholder's
margin account and create automatic same day redemptions if shares are available
in the fund. If fund shares have been exhausted, the debits will remain in the
margin account, reducing the cash available. The shareholder will receive one
consolidated monthly statement which details all fund transactions, securities
activity, check writing activity and VISA Gold purchases and cash advances.
BancOne Columbus ("BancOne"), 757 Carolyn Avenue, Columbus, Ohio 43271,
is the fund's agent for processing payment of VISA Gold debit card charges and
clearance of checks written on the Premier Account. Shareholders are subject to
BancOne's rules and regulations governing VISA accounts, including the right of
BancOne not to honor VISA drafts in amounts exceeding the authorization limit of
the shareholder's account at the time the VISA draft is presented for payment.
The authorization limit is determined daily by taking the shareholder's fund
account balance and subtracting (1) all shares purchased within 15 days by other
than federal funds wired; (2) all shares for which certificates have been
issued; and (3) any previously authorized VISA transaction.
PREFERRED CUSTOMER CARD SERVICES Unlike some other investment programs
which offer the VISA card privilege, Premier also includes travel/accident
insurance at no added cost when shareholders purchase travel tickets with their
Premier VISA Gold debit card. Coverage is provided through VISA and extends up
to $250,000.
If a VISA Gold debit card is lost or stolen, the shareholder should
report the loss immediately by contacting Legg Mason directly between the hours
of 8:30 a.m. and 5:00 p.m., or BancOne (collect) after hours at 1-614-248-4242.
Those shareholders who subscribe to the Premier VISA account privilege may be
liable for the unauthorized use of their VISA Gold debit card in amounts up to
$50.
Legg Mason is responsible for all Premier VISA Gold debit card inquiries
as well as billing and account resolutions. Simply call Legg Mason Premier
Client Services directly between 8:30 a.m. and 5:00 p.m., Eastern time, at
1-800-253-0454 or 1-410-528-2066 with your account inquiries.
AUTOMATIC PURCHASES OF FUND SHARES For shareholders participating in the
Premier program who sell shares held in their Brokerage Account, any free credit
balances of $100 or more in a single account resulting from any such sale will
automatically be invested in shares of the fund on the same business day the
proceeds of sale are credited to the Brokerage Account. Free credit balances of
less than $100 will be invested in fund shares weekly.
Free credit balances arising from sales of Brokerage Account shares for
cash (i.e., same-day settlement), redemption of debt securities, dividend and
interest payments and cash deposits will be invested automatically in fund
shares on the next business day following the day the transaction is credited to
the Brokerage Account.
Fund shares will receive the next dividend declared following purchase
(normally 12:00 noon, Eastern time, on the following business day). A purchase
order will not become effective until cash in the form of federal funds is
received by the fund.
HOW TO OPEN A PREMIER ACCOUNT To subscribe to Premier services, clients
must contact Legg Mason to execute both a Premier Agreement with Legg Mason and
a VISA Account Application and Agreement with BancOne. Legg Mason charges a fee
for the Premier service, which is currently $85 per year for individuals and
$100 per year for businesses and corporations. Legg Mason reserves the right to
alter or waive the conditions upon which a Premier account may be opened. Both
Legg Mason and BancOne reserve the right to terminate or modify any
shareholder's Premier services at their discretion.
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You may request Premier Account status by filling out the Premier Asset
Management Account Agreement and Check Application which can be obtained from
your financial advisor. You will receive your VISA Gold debit card (if
applicable) from BancOne. The Premier VISA Gold debit card may be used at over 8
million locations, including 23,000 ATMs, in 24 countries around the world.
Premier checks will be sent to you directly. There is no limit on the number of
checks you may write against your Premier account.
Shareholders should be aware that the various features of the Premier
program are intended to provide easy access to assets in their accounts and that
the Premier account is not a bank account. Additional information about the
Premier program is available by calling your financial advisor or Legg Mason's
Premier Client Services.
OTHER INFORMATION REGARDING REDEMPTION
The fund reserves the right to modify or terminate the check, wire,
telephone or VISA Gold card redemption services described in the Prospectus and
this Statement of Additional Information at any time.
You may request the fund's checkwriting service by sending a written
request to Legg Mason. State Street Bank and Trust Company ("State Street"), the
fund's custodian, will supply you with checks which can be drawn on an account
of the fund maintained with State Street. When honoring a check presented for
payment, the fund will cause State Street to redeem exactly enough full and
fractional shares from your account to cover the amount of the check. Canceled
checks will be returned to you.
Check redemption is subject to State Street's rules and regulations
governing checking accounts. Checks should not be used to close a fund account
because when the check is written you will not know the exact total value of the
account, including accrued dividends, on the day the check clears. Persons who
obtained certificates for their shares may not use the checkwriting service.
The date of payment for a redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended except (1) for any
periods during which the Exchange is closed, (2) when trading in markets the
fund normally utilizes is restricted, or an emergency, as defined by rules and
regulations of the SEC, exists, making disposal of the fund's investments or
determination of its net asset value not reasonably practicable, or (3) for such
other periods as the SEC by regulation or order may permit for protection of the
fund's shareholders. In the case of any such suspension, you may either withdraw
your request for redemption or receive payment based upon the net asset value
next determined after the suspension is lifted.
Although the fund may elect to redeem any shareholder account with a
current value of less than $500, the fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
Tax-Deferred Retirement Accounts And Plans
In general, income earned through the investment of assets of
qualified retirement accounts and plans is not taxed to the beneficiaries
thereof until the income is distributed to them. Investors who are considering
establishing such an account or plan should consult their attorneys or tax
advisers with respect to individual tax questions. The option of investing in
these accounts or plans through regular payroll deductions may be arranged with
a Legg Mason or affiliated financial advisor and your employer. Additional
information with respect to these accounts or plans is available upon request
from any Legg Mason or affiliated financial advisor.
INDIVIDUAL RETIREMENT ACCOUNT - IRA
Certain investors who have not reached age 70 1/2 may obtain tax
advantages by establishiNG IRAs. Specifically, if neither you nor your spouse is
an active participant in a qualified employer or
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government retirement plan, or if either you or your spouse is an active
participant in such a plan and your adjusted gross income does not exceed a
certain level, you may deduct cash contributions made to an IRA in an amount for
each taxable year not exceeding the lesser of 100% of your and your spouse's
earned income or $2,000 ($4,000 for a married couple filing a joint return);
notwithstanding the foregoing, however, a married investor who is not an active
participant in such a plan and files jointly with his or her spouse (and their
combined adjusted gross income does not exceed $150,000) is not affected by the
spouse's active participant status. In addition, if your spouse is not employed
and you file a joint return, you may establish a separate IRA for your spouse
and contribute up to a total of $4,000 to the two IRAs, provided that neither
contribution exceeds $2,000. If your employer's plan qualifies as a SEP, permits
voluntary contributions and meets certain other requirements, you may make
voluntary contributions to that plan that are treated as deductible IRA
contributions. Furthermore, individuals whose earnings (together with their
spouse's earnings) do not exceed a certain level may establish an "education
IRA" and/or a "Roth IRA", although contributions to these new types of IRAs
(established by the Taxpayer Relief Act of 1997) are nondeductible, withdrawals
from them will not be taxable under certain circumstances.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in shares of the fund through
IRA contributions up to certain limits, because all dividends on your fund
shares are then not immediately taxable to you or the IRA; they become taxable
only when distributed to you. To avoid penalties, your interest in an IRA must
be distributed, or start to be distributed, to you not later than the end of the
taxable year in which you attain age 70 1/2. Distributions made before age 59
1/2, in additioN TO being taxable, generally are subject to a penalty equal to
10% of the distribution, except in the case of death or disability, when the
distribution is rolled over into another qualified plan or certain other
situations.
SIMPLIFIED EMPLOYEE PENSION PLAN - SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in shares of the fund.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES - SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan instead may establish a SIMPLE either as separate IRAs
or as part of a Code section 401(k) plan. A SIMPLE, which is not subject to the
complicated nondiscrimination rules that generally apply to qualified retirement
plans, allows certain employees to make elective contributions of up to $6,000
per year and requires the employer to make matching contributions up to 3% of
each such employee's salary.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding or
withholding at the rate of 10% (depending on the type and amount of the
distribution), unless the recipient elects not to have any withholding apply.
Investors should consult their plan administrator or tax adviser for further
information.
Valuation Of Shares
The fund attempts to stabilize the value of a share at $1.00. Net asset
value will not be calculated on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Martin Luther King's
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
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USE OF THE AMORTIZED COST METHOD The trustees have decided that the best
method for determining the value of portfolio instruments is amortized cost.
Under this method, portfolio instruments are valued at the acquisition cost as
adjusted for amortization of premium or accretion of discount rather than at
current market value. The Board of Trustees periodically assesses the accuracy
and appropriateness of this method of valuation.
The fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with Rule 2a-7 under the 1940 Act. Under
that Rule, the trustees must establish procedures reasonably designed to
stabilize the net asset value per share, as computed for purposes of
distribution and redemption, at $1.00 per share, taking into account current
market conditions and the fund's investment objective.
Under the Rule, the fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the Rule, a
demand feature entitles the fund to receive the principal amount of the
instrument from the issuer or a third party (1) on no more than 30 days' notice
or (2) at specified intervals, not exceeding one year, on no more than 30 days'
notice. A standby commitment entitles the fund to achieve same day settlement
and to receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
Although demand features and standby commitments are techniques that are
defined as "puts" under the Rule, the fund does not consider them to be "puts"
as that term is used in the fund's investment limitations. Demand features and
standby commitments are features which enhance an instrument's liquidity, and
the investment limitation which proscribes puts is designed to prohibit the
purchase and sale of put and call options and is not designed to prohibit the
fund from using techniques which enhance the liquidity of portfolio instruments.
MONITORING PROCEDURES The fund's procedures include monitoring the
relationship between the amortized cost value per share and net asset value per
share based upon available indications of market value. If there is a difference
of more than 0.5% between the two, the trustees will take any steps they
consider appropriate (such as shortening the dollar-weighted average portfolio
maturity) to minimize any material dilution or other potentially unfair results
arising from differences between the two methods of determining net asset value.
INVESTMENT RESTRICTIONS Rule 2a-7 requires the fund, if it wishes to
value its assets at amortized cost, to limit its investments to instruments
that, (i) in the opinion of the Adviser, present minimal credit risk and (ii)(a)
are rated in the two highest rating categories by at least two nationally
recognized statistical rating organizations ("NRSROs")(or one, if only one NRSRO
has rated the security) or, (b) if unrated, are determined to be of comparable
quality by the Adviser, all pursuant to procedures determined by the Board of
Trustees ("Eligible Securities"). Securities that were long-term when issued,
but that have 397 days or less remaining to maturity, and that lack an
appropriate short-term rating, may be eligible if they are comparable in
priority and security to a rated short-term security, unless the former security
has a long-term rating below AA/Aa.
The fund may invest no more than 5% of its total assets in securities
that are Eligible Securities but have not been rated in the highest short-term
ratings category by at least two NRSROs (or by one NRSRO, if only one NRSRO has
assigned the obligation a short-term rating) or, if the obligations are unrated,
determined by the Adviser to be of comparable quality ("Second Tier
Securities"). In addition, the fund will not invest more than 1% of its total
assets or $1 million (whichever is greater) in the Second Tier Securities of a
single issuer.
The Rule requires the fund to maintain a dollar-weighted average
portfolio maturity appropriate to the objective of maintaining a stable net
asset value of $1.00 per share and in any event not more than 90 days. In
addition, under the Rule, no instrument with a remaining maturity (as defined by
the Rule) of more than 397 days can be purchased by the fund; except that the
fund may hold securities with
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maturities greater than 397 days as collateral for repurchase agreements and
other collateralized transactions of short duration. Certain variable rate
securities in which the fund invests may have a remaining maturity of more than
397 days. However, pursuant to regulations of the SEC, the fund is permitted to
treat these securities as having a maturity of no more than 397 days, based on
the times at which the interest rates of these securities are reset and/or the
fund is permitted to redeem them on demand.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the fund will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible.
It is the fund's usual practice to hold portfolio securities to maturity
and realize par, unless the Adviser determines that sale or other disposition is
appropriate in light of the fund's investment objective. Under the amortized
cost method of valuation, neither the amount of daily income nor the net asset
value is affected by any unrealized appreciation or depreciation of the
portfolio.
In periods of declining interest rates, the indicated daily yield on
shares of the fund, computed by dividing the annualized daily income on the
fund's investment portfolio by the net asset value computed as above, may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares
of the fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
How The Fund's Yield Is Calculated
The current annualized yield for the fund is based on a seven-day period
and is computed by determining the net change in the value of a hypothetical
account in the fund. The net change in the value of the account includes the
value of dividends and of additional shares purchased with dividends, but does
not include gains and losses or unrealized appreciation and depreciation. In
addition, the fund may use a compound effective annualized yield quotation which
is calculated as prescribed by SEC regulations, by adding one to the base period
return (calculated as described above), raising the sum to a power equal to 365
divided by 7, and subtracting one.
The fund's yield may fluctuate daily depending upon such factors as the
average maturity of its securities, changes in investments, changes in interest
rates and variations in operating expenses. Therefore, current yield does not
provide a basis for determining future yields. The fact that the fund's current
yield will fluctuate and that shareholders' principal is not guaranteed or
insured should be considered in comparing the fund's yield with yields on
fixed-income investments, such as insured savings certificates. In comparing the
yield of the fund to other investment vehicles, consideration should be given to
the investment policies of each, including the types of investments owned,
lengths of maturities of the portfolio, the method used to compute the yield and
whether there are any special charges that may reduce the yield.
OTHER INFORMATION
The fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to predict or indicate future results. The return on an investment in
the fund will fluctuate. In Performance Advertisements, the fund may compare its
taxable yield with data published by Lipper Analytical Services, Inc. for money
market funds ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
IBC/Donoghue's Money Market Fund Report ("Donoghue"), Morningstar Mutual Funds
("Morningstar") or Wiesenberger Investment Companies Service ("Wiesenberger") or
with the performance of recognized stock and other indexes, including (but not
limited to) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"),
the Dow Jones Industrial
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Average ("Dow Jones") and the Consumer Price Index as published by the U.S.
Department of Commerce.
The types of securities in which the fund invests are different from
those included in the Standard & Poor's and Dow Jones indices which track the
performance of the equity markets. The S&P 500 and Dow Jones are accepted as
broad-based measures of the equity markets. Calculation of those indices assumes
reinvestment of dividends and ignores brokerage and other costs of investing.
The fund also may refer in such materials to mutual fund performance rankings
and other data, such as comparative asset, expense and fee levels, published by
Lipper, CDA, Donoghue, Morningstar or Wiesenberger. Performance Advertisements
also may refer to discussions of the Trust and comparative mutual fund data and
ratings reported in independent periodicals, including (but not limited to) THE
WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, THE NEW YORK TIMES and FORTUNE.
The fund may also compare its performance with the performance of bank
certificates of deposit ("CDs") as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index. In
comparing the fund's performance to CD performance, investors should keep in
mind that bank CDs are insured in whole or part by an agency of the U.S.
Government and offer fixed principal and fixed or variable rates of interest,
and that bank CD yields may vary depending on the financial institution offering
the CD and prevailing interest rates. Fund shares are not insured or guaranteed
by the U.S. Government or any agency thereof and returns thereon will fluctuate.
While the fund seeks to maintain a stable net asset value of $1.00 per share,
there can be no assurance that it will be able to do so.
In advertising, the fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. The fund may use other recognized
sources as they become available.
The fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
The fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
The fund may also include in advertising biographical information on key
investment and managerial personnel.
The fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors meet their specific
investment goals and have grown to provide a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $74.8 billion as of September
30, 1998.
In advertising, the fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
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Massachusetts Trust Law
The fund is a Massachusetts business trust formed on July 24, 1978.
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for obligations of the fund. To protect its shareholders, the
fund's Declaration of Trust, filed with the Commonwealth of Massachusetts,
expressly disclaims the liability of its shareholders for acts or obligations of
the fund. The Declaration requires notice of this disclaimer to be given in each
agreement, obligation or instrument the fund or its trustees enter into or sign.
The Declaration of Trust authorizes the fund to issue an unlimited
number of shares. Each share of the fund gives the shareholder one vote in
trustee elections and other matters submitted to shareholders for vote. Fund
shares are fully-paid and non-assessable, and have no preemptive or conversion
rights.
In the unlikely event a shareholder, based on the mere fact of being a
shareholder, is held personally liable for the fund's obligations, the fund is
required to use its property to protect or compensate the shareholder. On
request, the fund will defend any claim made, and pay any judgment, against such
a shareholder for any act or obligation of the fund. Therefore, financial loss
resulting from liability as a shareholder will occur only if the fund itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Portfolio Transactions And Brokerage
Under the Advisory Agreement, the Adviser is responsible for the
execution of portfolio transactions. Debt securities are generally traded on a
"net" basis without a stated commission, through dealers acting for their own
account and not as brokers. Prices paid to a dealer in debt securities will
generally include a "spread", which is the difference between the prices at
which the dealer is willing to purchase and sell the specific security at the
time, and includes the dealer's normal profit. Some portfolio transactions may
be executed through brokers acting as agents. In selecting brokers or dealers,
the Adviser must seek the most favorable price (including the applicable dealer
spread) and execution for such transactions, subject to the possible payment as
described below of higher brokerage commissions for agency transactions to
brokers who provide research and analysis. The fund may not always pay the
lowest commission or spread available. Rather, in placing orders on behalf of
the fund, the Adviser also takes into account such factors as size of the order,
difficulty of execution, efficiency of the executing broker's facilities
(including the services described below) and any risk assumed by the executing
broker. The fund paid no brokerage commissions, nor did it allocate any
transactions to dealers for research, analysis, advice or similar services
during any of its last three fiscal years.
Consistent with the policy of most favorable price and execution, the
Adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the Adviser for its use, may place orders
with brokers who provide supplemental investment and market research and
securities and economic analysis, and, for agency transactions, may pay to these
broker-dealers a higher brokerage commission than may be charged by other
brokers. Such research and analysis may be useful to the Adviser in connection
with services to clients other than the fund. The Adviser's fee is not reduced
by reason of its receiving such brokerage and research services.
The fund may not buy securities from, or sell securities to, Legg Mason
or its affiliated persons as principal. However, the fund's Board of Trustees
has adopted procedures in conformity with Rule 10f-3 under the 1940 Act whereby
the fund may purchase securities that are offered in underwritings in which Legg
Mason or any of its affiliated persons is a participant.
Investment decisions for the fund are made independently from those of
other funds and accounts advised by the Adviser. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this
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procedure may adversely affect the price or quantity of the security available
to a particular account. In other cases, however, an account's ability to
participate in large-volume transactions may produce better executions and
prices.
The fund may not always hold portfolio securities to maturity, but may
sell a security to buy another which has a higher yield because of short-term
market movements. This may result in high portfolio turnover. The fund does not
anticipate incurring significant brokerage expense in connection with such
transactions, since ordinarily they will be made directly with the issuer or a
dealer on a net price basis.
The Fund's Custodian And Transfer And Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105
serves as custodian of the fund's assets. Under a custody agreement with the
fund, the custodian holds the fund's securities and keeps all necessary accounts
and records. Boston Financial Data Services, P.O. Box 953, Boston, MA 02103
serves as transfer and dividend-disbursing agent and administrator of various
shareholder services. The transfer agent maintains shareholder account records
and handles the payment of dividends.
The Fund's Legal Counsel
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to the fund.
The Fund's Independent Auditors
Ernst & Young LLP, 2 Commerce Square, 2001 Market Street, Philadelphia,
PA, has been selected by the Board of Trustees to serve as the fund's
independent auditors. The auditors perform an annual audit of the fund and
assist in the preparation of tax returns.
Financial Statements
The fund's Statement of Net Assets as of August 31, 1998; the Statement
of Operations for the year ended August 31, 1998; the Statement of Changes in
Net Assets for the years ended August 31, 1998 and 1997; the Financial
Highlights for the years ended August 31, 1994 through 1998; the Notes to
Financial Statements and the Report of Ernst & Young LLP, Independent Auditors,
are hereby incorporated by reference in this Statement of Additional Information
from the fund's annual report for the year ended August 31, 1998.
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