As filed with the Securities and Exchange Commission on November 20, 2000.
1933 Act File No. 2-62218
1940 Act File No. 811-2853
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
Post-Effective Amendment No: 38 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 31
LEGG MASON CASH RESERVE TRUST
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
MARC R. DUFFY, ESQ. ARTHUR C. DELIBERT, ESQ.
Legg Mason Wood Walker, Incorporated Kirkpatrick & Lockhart LLP
100 Light Street 1800 Massachusetts Ave., N.W.
Baltimore, Maryland 21202 Second Floor
(Name and Address of Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on December 20, 2000 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 2000 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 2000 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason Cash Reserve Trust
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
LEGG MASON
CASH RESERVE TRUST
------------------
Investing in money market instruments for stability of
principal and current income consistent with stability of principal.
PROSPECTUS December 20, 2000
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As with all mutual funds, the Securities and Exchange Commission has not passed
upon the accuracy or adequacy of this prospectus, nor has it approved or
disapproved these securities. It is a criminal offense to state otherwise.
<PAGE>
TABLE OF CONTENTS
About the fund:
---------------
1 Investment objective
2 Principal risks
3 Performance
4 Fees and expenses of the fund
5 Management
About your investment:
----------------------
6 How to invest
7 How to sell your shares
8 Account policies
9 Services for investors
10 Distributions and taxes
11 Financial highlights
<PAGE>
LEGG MASON CASH RESERVE TRUST
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INVESTMENT OBJECTIVE
--------------------
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:
o it buys money market securities maturing in 397 days or less
o it maintains a dollar-weighted average portfolio maturity of 90 days or
less
o 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:
o securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
o securities representing deposits at domestic and foreign banks and savings
and loan institutions. The fund may at times invest greater than 25% of its
assets in such bank securities. 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
o commercial paper rated A-1 by Standard & Poor's ("S&P"), Prime-1 by Moody's
Investors Service, Inc. ("Moody's") or F-1 by Fitch Investors Service, Inc.
("Fitch") and unrated commercial paper that the adviser determines to be of
comparable quality
o corporate bonds rated AAA or AA by S&P or Aaa or Aa by Moody's, and unrated
bonds that the adviser determines to be of comparable quality in every case
having a remaining maturity of 397 days or less
o U.S. dollar-denominated securities of foreign issuers
o asset-backed securities - i.e., securities that represent an interest in a
pool of assets, such as credit card receivables or car loan receivables
o repurchase agreements
o variable and floating rate securities - i.e., securities whose interest
rates change at specified intervals so they approximately equal current
market rates
1
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PRINCIPAL RISKS
---------------
In general:
As with all mutual funds, 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.
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
S&P) 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.
2
<PAGE>
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PERFORMANCE
-----------
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, if any. 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 (%)
1999 4.51
1998 4.84
1997 4.90
1996 4.80
1995 5.32
1994 3.66
1993 2.78
1992 3.47
1991 5.83
1990 7.73
DURING THE PAST TEN CALENDAR YEARS:
Quarter Ended Total Return
------------- ------------
Best quarter: June 30, 1990 1.91%
Worst quarter: June 30, 1993 0.68%
The fund's year-to-date return as of September 30, 2000 was 4.23% (not
annualized). For the fund's current yield, call toll-free 1-800-822-5544.
Average Annual Total Returns
as of December 31, 1999:
1 Year 4.51%
5 Years 4.87%
10 Years 4.78%
3
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FEES AND EXPENSES OF THE FUND
-----------------------------
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 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.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
---------------------------------------------
Management fees 0.46%
Service (12b-1) fees 0.15%(a)
Other expenses 0.12%
-------------- -----
Total Annual Fund Operating Expenses 0.73%
(a) Legg Mason Wood Walker, Incorporated has agreed to waive 0.05% of the 12b-1
service fee indefinitely, reducing total expenses from 0.73% to 0.68%.
Example:
This example helps you compare the cost of investing in the fund with the cost
of investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$75 $233 $406 $906
4
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MANAGEMENT
----------
Manager and adviser:
Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the fund's manager. LMFA 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. LMFA has been
registered as an investment adviser since 1982.
Western Asset Management Company ("Western Asset"), 117 East Colorado Boulevard,
Pasadena, California 91105, is the fund's investment adviser. Western Asset 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. Western Asset acts as investment adviser to investment companies and
private accounts with aggregate assets of approximately $71 billion as of
September 30, 2000.
For its services, the fund paid LMFA a fee of 0.46% of its average daily net
assets for the fiscal year ended August 31, 2000. LMFA paid Western Asset a fee,
which is calculated daily and payable monthly, equal to 30% of LMFA's fee.
Distributor of the fund's shares:
Legg Mason Wood Walker, Incorporated ("Legg Mason"), 100 Light Street,
Baltimore, Maryland 21202, distributes the fund's shares. The fund has adopted a
plan under rule 12b-1 that allows it to pay distribution and/or shareholder
service fees for the sale of its shares and for services provided to
shareholders. The fees are calculated daily and paid monthly.
Under the plan, the fund may pay Legg Mason an annual fee equal to 0.15% of the
fund's average daily net assets. However, Legg Mason has agreed to waive 0.05%
of the 12b-1 service fee indefinitely.
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.
Legg Mason may enter into agreements with other brokers to sell shares of the
fund. Legg Mason pays these brokers up to 90% of the service fee that it
receives from the fund for those sales.
LMFA, Western Asset and Legg Mason are wholly owned subsidiaries of Legg Mason,
Inc., a financial services holding company.
5
<PAGE>
[icon] H O W T O I N V E S T
To open an account, contact a Legg Mason Financial Advisor, Legg Mason Funds
Investor Services ("FIS") or another entity that has entered into an agreement
with Legg Mason to sell shares of the fund. The minimum initial investment 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. The investment amount for an
education IRA is $500. Contact your financial adviser, FIS, or other entity
offering the fund to discuss which one might be appropriate for you.
Certain investment methods may be subject to lower minimum initial and
additional investments. Arrangements may also be made with some employers and
financial institutions for regular automatic monthly investments of $50 or more
in shares of the fund. Contact your financial adviser or FIS with any questions
regarding your investment options.
Once your account is open, you may use the following methods to purchase shares
of the fund:
--------------------------------------------------------------------------------
In Person Give your financial adviser a check for $500 or more
payable to the fund.
--------------------------------------------------------------------------------
Mail Mail your check, payable to the fund, for $500 or more
to your financial adviser or to Legg Mason Funds
Investor Services at P.O. Box 17023, Baltimore, MD
21297-0356.
--------------------------------------------------------------------------------
Telephone or Wire Call your financial adviser or FIS at 1-800-822-5544
to transfer available cash balances in your brokerage
account or to transfer money from your bank directly.
Wire transfers may be subject to a service charge by
your bank.
--------------------------------------------------------------------------------
Internet or FIS clients may purchase shares of the fund through
TeleFund Legg Mason's Internet site at
http://www.leggmasonfunds.com or through a telephone
account management service "TeleFund" at
1-877-6-LMFUNDS.
--------------------------------------------------------------------------------
Future First Contact a Legg Mason Financial Advisor to enroll in
Systematic Legg Mason's Future First Systematic Investment Plan.
Investment Plan Under this plan, you may arrange for automatic monthly
investments in the fund of $50 or more. The transfer
agent will transfer funds monthly from your Legg Mason
account or from your checking/savings account to
purchase shares of the fund.
--------------------------------------------------------------------------------
Automatic Arrangements may be made with some employers and
Investments financial institutions for regular automatic monthly
investments of $50 or more in shares of the fund. You
may also reinvest dividends from certain unit
investment trusts in shares of the fund.
--------------------------------------------------------------------------------
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
Purchase orders received 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:
Shares will be purchased Such shares will
If the purchase order at the net asset value begin to earn
is received next determined on dividends on the
before 12:00 noon, same day same day
Eastern time
12:00 noon or after, same day next day
but before 4:00 p.m.,
Eastern time
after 4:00 p.m., next day next day
Eastern time
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.
6
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
You may use any of the following methods to sell shares of the fund:
--------------------------------------------------------------------------------
Telephone Call your financial adviser or FIS at 1-800-822-5544 or
another authorized entity offering the fund to request a
redemption. Please have the following information ready when
you call: the name of the fund, the number of shares (or
dollar amount) to be redeemed and your shareholder account
number.
Proceeds will be credited to your brokerage account or a
check will be sent to you, at your direction, at no charge to
you. Wire requests will be subject to a fee of $12. Be sure
that your financial adviser has your bank account information
on file.
--------------------------------------------------------------------------------
Internet or FIS clients may request a redemption of fund shares through
TeleFund Legg Mason's Internet site at http://www.leggmasonfunds.com
or through TeleFund at 1-877-6-LMFUNDS.
--------------------------------------------------------------------------------
Mail Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners of
the account and their signatures guaranteed without
qualification. Redemption requests for shares valued at
$10,000 or more or when 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.
--------------------------------------------------------------------------------
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 the checks. 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.
--------------------------------------------------------------------------------
Securities Legg Mason has special redemption procedures for investors
Purchases at who wish to purchase stocks, bonds or other securities at
Legg Mason Legg Mason. Once you've placed an order for 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.
--------------------------------------------------------------------------------
The fund will follow reasonable procedures to ensure the validity of any
telephone or Internet redemption request, such as requesting identifying
information from users or employing identification numbers. Unless you specify
that you do not wish to have telephone redemption privileges, you may be held
responsible for any fraudulent telephone order.
Fund shares will be sold at the next net asset value calculated after your
redemption request is received by your financial adviser, FIS or another
authorized entity offering the fund.
Redemption orders will be processed promptly. Generally, proceeds from
redemption orders received before 11:00 a.m. Eastern time will be sent that same
day. You will normally receive the proceeds within a week.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of distributions on such shares may be
delayed for up to ten 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.
Redemptions made through authorized entities other than Legg Mason may be
subject to transaction fees or other conditions established by those entities.
You should consult their program literature for further information.
7
<PAGE>
ACCOUNT POLICIES
----------------
Calculation of net asset value:
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 regular trading on the New York Stock Exchange ("Exchange"),
normally 4:00 p.m., Eastern time, on every day the Exchange is open. The
Exchange is normally closed on all national holidays and Good Friday. Like most
other money market funds, the fund normally values its investments using the
amortized cost method.
Other:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds. The fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
The fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time,
o change its minimum investment amounts, and
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The fund may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the Securities and
Exchange Commission ("SEC").
8
<PAGE>
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SERVICES FOR INVESTORS
----------------------
For further information regarding any of the services below, please contact your
financial adviser 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. You should not purchase shares of the fund
when you are a participant in the plan.
Premier Account status:
Legg Mason offers a Premier Asset Management Account, which allows you to
combine your fund account with a preferred customer VISA Gold debit card, a Legg
Mason brokerage account with margin borrowing availability, and unlimited
checkwriting with no minimum check amount. Other services include the ability to
automatically transfer free credit balances in your brokerage account to your
fund account and the 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 $100 for individuals and $175 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. An exchange of the fund's
shares will be treated as a sale of the shares and any gain on the transaction
may be subject to tax.
The fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from the fund in one calendar year.
o terminate or modify the exchange privilege after 60 days' notice to
shareholders.
9
<PAGE>
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DISTRIBUTIONS AND TAXES
-----------------------
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, unless you elect to receive them in cash. To change your election, 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 net short-term capital gains, it will pay them at least once
every twelve months. If the postal or other delivery service is unable to
deliver your check, your dividend option will automatically be converted to
having all dividends reinvested in fund shares. No interest will accrue on
amounts represented by uncashed dividend or redemption checks. You may request
that your dividends be reinvested in shares of another Legg Mason fund.
Fund distributions of any net short-term capital gains are taxable to most
investors, whether received in cash or reinvested in additional shares of the
fund. Generally, those 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
adviser about federal, state and local tax considerations.
10
<PAGE>
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FINANCIAL HIGHLIGHTS
--------------------
The financial highlights table is intended to help you understand the fund's
financial performance for the past five 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>
<CAPTION>
Year ended August 31, 2000 1999 1998 1997 1996
The following information reflects financial results for a single share of the fund:
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------------
Income from
investment operations:
Net investment income 0.05 0.04 0.05 0.05 0.05
Dividends from net
investment income (0.05) (0.04) (0.05) (0.05) (0.05)
------------------------------------------------------------------
Net asset value,
end of year $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------------
------------------------------------------------------------------
Total return 5.36% 4.46% 4.96% 4.84% 4.92%
Ratio / Supplemental Data:
Ratio of expenses to
average net assets 0.68% 0.75% 0.78% 0.75% 0.70%
Ratio of net investment
income to average net assets 5.25% 4.37% 4.86% 4.73% 4.81%
Net assets, end of year
(in millions) $1,950 $1,777 $1,423 $1,343 $1,224
</TABLE>
11
<PAGE>
Legg Mason Cash Reserve Trust
-----------------------------
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 SEC and is
incorporated by reference into (is considered part of) the prospectus. The SAI
provides further information and additional details about the fund and its
policies.
Annual and Semi-Annual Reports - Additional information about the fund's
investments is available in the fund's annual and semi-annual reports to
shareholders. In the fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
fund's performance during its last fiscal year.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmasonfunds.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the fund, including the SAI, can be reviewed and copied at the
SEC's Public Reference Room in Washington, D.C. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR database
on the SEC's Internet site at http://www.sec.gov. Investors may also obtain this
information, after paying a duplicating fee, by electronic request at the
following e-mail address: [email protected] or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
LMF-017 SEC file number: 811-2853
<PAGE>
LEGG MASON CASH RESERVE TRUST
STATEMENT OF ADDITIONAL INFORMATION
December 20, 2000
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the fund's Prospectus dated December 20, 2000, 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, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
Legg Mason Wood Walker,
Incorporated
--------------------------------------------------------------------------------
100 Light Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
TABLE OF CONTENTS
DESCRIPTION OF THE FUND 1
FUND POLICIES 1
INVESTMENT STRATEGIES AND RISKS 2
MANAGEMENT OF THE FUND 4
THE FUND'S INVESTMENT ADVISER/MANAGER 7
THE FUND'S DISTRIBUTOR 9
ADDITIONAL TAX INFORMATION 11
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 11
TAX-DEFERRED QUALIFIED PLANS 15
VALUATION OF FUND SHARES 16
PERFORMANCE INFORMATION 18
MASSACHUSETTS TRUST LAW 19
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
Appendix A A-1
No person has been authorized to give any information or to make any
representations not contained in the prospectus or this statement of additional
information in connection with the offerings made by the prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the fund or its distributor. The prospectus and this
statement of additional information do not constitute offerings by the fund or
by the distributor in any jurisdiction in which such offerings may not lawfully
be made.
<PAGE>
DESCRIPTION OF THE FUND
Legg Mason Cash Reserve Trust ("Cash Reserve Trust" or "the fund") is a
diversified open-end management investment company that was established as a
Massachusetts business trust on July 24, 1978.
FUND POLICIES
Cash Reserve Trust's investment objective is to seek stability of
principal and current income consistent with the stability of principal.
The following information supplements the information concerning the
fund's investment objective, policies and limitations found in the Prospectus.
The fund has adopted certain fundamental investment limitations, described
below, that cannot be changed except by a vote of the shareholders.
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
1
<PAGE>
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 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 be considered to be outside the limitation. Cash Reserve Trust
will monitor the level of borrowing and illiquid securities in its portfolio and
will make necessary adjustments to maintain required asset coverage and adequate
liquidity.
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, described 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.
Unless otherwise stated, the investment policies and limitations of the
fund are non-fundamental and can be changed by the Board of Trustees without
shareholder approval.
INVESTMENT STRATEGIES AND RISKS
The fund 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
2
<PAGE>
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. Rule 2a-7 under the
Investment Company Act of 1940 allows the fund to treat many variable and
floating rate securities as having a maturity equal to the time remaining until
the next interest rate reset, or until the fund can exercise a demand feature,
rather than the time remaining before the principal value of the security must
unconditionally be repaid.
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 fund
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 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.
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
3
<PAGE>
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
The fund may invest up to 10% of its net assets in illiquid securities
(securities which cannot be 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.
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.
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
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 by the 1940 Act. The business address of each trustee and
officer is 100 Light Street, Baltimore, Maryland 21202, unless otherwise
indicated.
4
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Name, Address, Age Position(s) Held with Principal Occupation(s)
Fund During Past 5 Years
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JOHN F. CURLEY, JR.* Chairman of the Board, President and/or Chairman of the Board and Director/Trustee of
[7/24/39] President and Trustee all Legg Mason retail funds; Retired Vice Chairman and
Director of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.;
Formerly: Director of Legg Mason Fund Adviser, Inc. and
Western Asset Management Company (each a registered investment
adviser); Officer and/or Director of various other affiliates
of Legg Mason, Inc.
--------------------------------------------------------------------------------------------------------------------------------
EDMUND J. CASHMAN, Jr. * Trustee Senior Executive Vice President and Director of Legg Mason,
[8/31/36] Inc., and Legg Mason Wood Walker, Inc.; Officer and/or
Director of various other affiliates of Legg Mason, Inc.; Vice
Chairman of the Board and Director of Legg Mason Income Trust,
Inc., President and Director of Legg Mason Tax Exempt Trust,
Inc., and President and Trustee of Legg Mason Tax-Free Income
Funds
--------------------------------------------------------------------------------------------------------------------------------
EDWARD A. TABER III* Trustee President and/or Director/Trustee of all Legg Mason retail
[8/25/43] funds except Legg Mason Tax Exempt Trust, Senior Executive
Vice President of Legg Mason, Inc. and Legg Mason Wood Walker,
Incorporated; Chairman and Director of Legg Mason Fund
Adviser, Inc.; Director of Legg Mason Funds Management, Inc.
and Western Asset Management Company (each a registered
investment adviser). Formerly: Executive Vice President of
T.Rowe Price-Fleming International, Inc. (1986-1992) and
Director of the Taxable Income Division at T.Rowe Price
Associates, Inc. (1973-1992)
--------------------------------------------------------------------------------------------------------------------------------
RICHARD G. GILMORE Trustee Independent Consultant. Director of CSS Industries, Inc.
[6/9/27] (diversified holding company whose subsidiaries are engaged in
10310 Tam O' Shanter Place the manufacture and sale of decorative paper products,
Bradenton, Florida 34202 business forms, and specialty metal packaging);
Director/Trustee of all Legg Mason retail funds. Formerly:
Senior Vice President, Chief Financial Officer and Director of
Philadelphia Electric Company (now Exelon Corporation);
Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company;
and Director of Finance, City of Philadelphia
--------------------------------------------------------------------------------------------------------------------------------
ARNOLD L. LEHMAN Trustee Director of the Brooklyn Museum of Art; Director/Trustee of
[7/18/44] all Legg Mason retail funds. Formerly: Director of the
The Brooklyn Museum of Art Baltimore Museum of Art
200 Eastern Parkway
Brooklyn, New York 11238
--------------------------------------------------------------------------------------------------------------------------------
5
<PAGE>
--------------------------------------------------------------------------------------------------------------------------------
JILL E. McGOVERN Trustee Chief Executive Officer of The Marrow Foundation since 1993.
[8/29/44] Director/Trustee of all Legg Mason retail funds. Formerly:
400 Seventh Street NW Executive Director of the Baltimore International Festival
Washington, DC 20008 (January 1991 - March 1993); and Senior Assistant to the
President of The Johns Hopkins University (1986-1990)
--------------------------------------------------------------------------------------------------------------------------------
T.A. RODGERS Trustee Principal, T.A. Rodgers & Associates (management consulting);
[10/22/34] Director/Trustee of all Legg Mason retail funds. Formerly:
2901 Boston Street Director and Vice President of Corporate Development, Polk
Baltimore, Maryland 21202 Audio, Inc. (manufacturer of audio components)
--------------------------------------------------------------------------------------------------------------------------------
G. PETER O'BRIEN Trustee Trustee of Colgate University, Director of Pinnacle Holdings,
[10/13/45] Inc., Director of Renaissance Capital Greenwich Funds; Vice
118 Riverside Road President of Hill House, Inc.; Director/Trustee of all Legg
Riverside, CT 06878 Mason retail funds except Legg Mason Income Trust, Inc., and
Legg Mason Tax Exempt Trust, Inc. Formerly: Managing
Director, Equity Capital Markets Group of Merrill Lynch & Co.
(1971-1999)
--------------------------------------------------------------------------------------------------------------------------------
NELSON A. DIAZ Trustee Partner, Blank Rome Comisky & McCauley LLP (law firm) since
[5/23/47] 1997. Director/Trustee of all Legg Mason retail funds except
One Logan Square Legg Mason Income Trust, Inc. and Legg Mason Tax Exempt Trust,
Philadelphia, PA 19103 Inc., Trustee of Temple University and of Philadelphia Museum
of Art. Board member of U.S. Hispanic Leadership Institute,
Democratic National Committee, and National Association for
Hispanic Elderly. Formerly: General Counsel, United States
Department of Housing and Urban Development (1993-1997)
--------------------------------------------------------------------------------------------------------------------------------
MARIE K. KARPINSKI* Vice President and Vice President and Treasurer of Legg Mason Fund Adviser, Inc.,
[1/1/49] Treasurer and Vice President and Treasurer of all Legg Mason funds
--------------------------------------------------------------------------------------------------------------------------------
MARC R. DUFFY* Vice President and Employee of Legg Mason since September 1999 and Vice President
[1/29/58] Secretary and Secretary of all Legg Mason funds. Formerly: Senior
Associate, Kirkpatrick & Lockhart LLP (1996-1999), Senior
Counsel, Securities and Exchange Commission, Division of
Investment Management (1989-1995)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, Lehman, O'Brien, Diaz, and Dr. McGovern.
On November 13, 2000, the trustees and officers of the fund
beneficially owned, in the aggregate, less than 1% of the fund's outstanding
shares.
6
<PAGE>
On November 13, 2000, no persons or entities were known by the fund to
own of record 5% or more of the fund's outstanding shares.
COMPENSATION TABLE
The following table provides certain information relating to the
compensation of the fund's trustees. The fund has no retirement plan for its
trustees.
Aggregate Total Compensation From
Name of Person and Position Compensation Fund and Fund Complex
From Fund* Paid to Trustees**
--------------------------------------------------------------------------------
John F. Curley, Jr., NONE NONE
Chairman of the Board and Trustee
--------------------------------------------------------------------------------
Arnold L. Lehman, Trustee $3600 $44,100
--------------------------------------------------------------------------------
Jill E. McGovern, Trustee $3600 $44,100
--------------------------------------------------------------------------------
Richard G. Gilmore, Trustee $3600 $44,100
--------------------------------------------------------------------------------
T.A. Rodgers, Trustee $3600 $44,100
--------------------------------------------------------------------------------
Edward A. Taber, III, Trustee NONE NONE
--------------------------------------------------------------------------------
Edmund J. Cashman, Jr., Trustee NONE NONE
--------------------------------------------------------------------------------
G. Peter O'Brien, Trustee $3600 $33,300
--------------------------------------------------------------------------------
Nelson A. Diaz, Trustee $2700 $25,200
--------------------------------------------------------------------------------
* Represents fees paid to each trustee during the fiscal year ended
August 31, 2000.
** Represents estimated aggregate compensation paid to each trustee during
the calendar year ended December 31, 2000. There are twelve open-end
investment companies in the Legg Mason complex (with a total of
twenty-three funds).
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 FUND'S INVESTMENT ADVISER/MANAGER
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation, 100
Light Street, Baltimore, Maryland 21202, is a wholly owned subsidiary of Legg
Mason, Inc., which is also the parent of Legg Mason Wood Walker, Incorporated
("Legg Mason"). LMFA serves as manager to the fund under a management agreement
between Cash Reserve Trust and LMFA ("Management Agreement").
7
<PAGE>
The Management Agreement provides that, subject to the overall
direction by the Board of Trustees, LMFA will manage the investment and other
affairs of the fund. Under the Management Agreement, LMFA 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.
LMFA 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.
LMFA 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 0.40% thereafter. During
the fiscal years ended August 31, 2000, 1999, and 1998, the fund paid
$8,531,204, $7,566,408, and $6,284,105, respectively, to LMFA.
Under the Management Agreement, LMFA 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 LMFA,
on not less than 60 days' notice to the other party, and may be terminated
immediately upon the mutual written consent of LMFA and the fund.
The fund pays all of its expenses which are not expressly assumed by
LMFA. These expenses include, among others, interest expense, taxes, brokerage
fees and commissions, expenses of preparing 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 LMFA.
Western Asset Management Company ("Adviser"), 117 East Colorado
Boulevard, Pasadena, CA 91105, an affiliate of Legg Mason, serves as investment
adviser to the fund pursuant to an Investment Advisory Agreement ("Advisory
Agreement"), between the Adviser and LMFA.
Under the Advisory Agreement, the Adviser is responsible, subject to
the supervision of LMFA 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, LMFA (not the fund)
pays the Adviser a fee, computed daily and payable monthly, at an annual rate of
30% of the fee received by LMFA from the fund. During the fiscal years ended
8
<PAGE>
August 31, 2000, 1999 and 1998, LMFA paid the Adviser $2,559,361, $2,269,922,
and $1,885,232, 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 LMFA 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 Advisory
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 LMFA 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, LMFA and the fund.
The fund, LMFA, Legg Mason and the Adviser each has adopted a code of
ethics under Rule 17j-1 of the 1940 Act, which permits personnel covered by the
code to invest in securities that may be purchased or held by a fund, but
prohibits fraudulent, deceptive, or manipulative conduct in connection with
personal investing.
THE FUND'S DISTRIBUTOR
Legg Mason acts as distributor of the fund's shares pursuant to an
Underwriting Agreement with the fund. The Underwriting Agreement obligates Legg
Mason to promote the sale of fund shares and to pay certain expenses in
connection with its distribution efforts, including expenses for the printing
and distribution of prospectuses and periodic reports used in connection with
the offering to prospective investors (after the prospectuses and reports have
been prepared, set in type and mailed to existing shareholders at the fund's
expense), and for supplementary sales literature and advertising costs.
The fund has adopted a Distribution 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. Legg
Mason has agreed that it will not request payment of more than 0.10% annually
from the fund indefinitely. 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.
During the fiscal years ended August 31, 2000, 1999 and 1998, the fund
paid Legg Mason distribution and/or service fees of $1,792,732, $1,546,661, and
$1,299,123, respectively. 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.
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 LMFA.
9
<PAGE>
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 LMFA would earn greater management fees if
the fund's assets were increased, because such fees are calculated as a
percentage of the fund's assets and thus would increase if net assets increase.
The 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 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 fund's
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 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"), 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.
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.
For the fiscal year ended August 31, 2000, Legg Mason incurred the
following distribution and shareholder servicing expenses with respect to the
fund:
Compensation to sales personnel $1,185,000
Advertising $ 178,000
Printing and mailing of prospectuses to prospective
shareholders $ 82,000
Other (Funds Marketing, Branch System Processing,
Executive and Sales Management, Funds Accounting
and Training) $4,239,000
Total expenses $5,684,000
The foregoing are estimated and do not include all expenses fairly allocable to
the efforts of Legg Mason or its affiliates to distribute the fund's shares.
Legg Mason receives payment under the Plan regardless of the actual expenses it
incurs.
10
<PAGE>
ADDITIONAL TAX INFORMATION
To qualify for treatment as a registered investment company ("RIC")
under the Internal Revenue Code of 1986, as amended ("Code"), the fund must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally, net investment income and net short-term capital
gain, if any) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities, or other income derived with respect to its business
of investing in securities ("Income Requirement"); (2) at the close of each
quarter of the fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the fund's taxable year, not more than 25% of the value of its total
assets may be invested in the securities (other than U.S. Government securities
or the securities of other RICs) of any one issuer.
By qualifying for treatment as a RIC, the fund (but not its
shareholders) will be relieved of federal income tax on the part of the
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
its shareholders. If the fund failed to qualify for treatment as a RIC for any
taxable year, (1) it would be taxed at corporate rates on the full amount of its
taxable income for that year without being able to deduct the distributions it
makes to its shareholders and (2) the shareholders would treat all those
distributions, including distributions of net capital gain, as dividends (that
is, ordinary income) to the extent of the fund's earnings and profits. In
addition, the fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
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
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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 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
All Legg Mason funds in any Legg Mason account are eligible for the
Systematic Withdrawal Plan ("Plan"). Except for Individual Retirement Accounts
("IRA accounts"), any account with a net asset value of $5000 or more may elect
to make withdrawals of a minimum of $50 on a monthly basis. IRA accounts are not
subject to the $5000 minimum balance requirement. 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. Except IRA accounts, there are
three ways to receive payment of proceeds of redemptions made through the Plan:
(1) Credit to brokerage account - fund shares will be redeemed on the first
business day of each month and credited to the brokerage account on the third
business day; or (2) Check mailed by the funds' transfer agent - fund shares
will be redeemed on the 25th of each month or the next business day and a check
will be mailed within 3 business days; or (3) ACH to checking or savings account
- redemptions of fund shares may occur on any day of the month and the checking
or savings account will be credited in approximately two business days. Credit
to brokerage account is the only option available to IRA accounts. Redemptions
will be made at the net asset value per share determined as of the close of
regular trading of the Exchange (normally 4:00 p.m., Eastern time) on the day
corresponding to the redemption option designated by the investor. If the
Exchange is not open for business on that day, the shares will be redeemed at
the per share net asset value determined as of the close of the Exchange on the
next business day. You may change the monthly amount to be paid to you without
charge by notifying Legg Mason or the affiliate with which you have an account.
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You may terminate the Systematic Withdrawal Plan at any time without charge or
penalty. The fund, its transfer agent, and Legg Mason also reserve the right to
modify or terminate the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the fund in
which you have an account if you maintain a Systematic Withdrawal Plan, because
you may incur tax liabilities in connection with such purchases and withdrawals.
No fund will knowingly accept purchase orders from you for additional shares if
you maintain a Systematic Withdrawal Plan unless your purchase is equal to at
least one year's scheduled withdrawals. In addition, if you maintain a
Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
Legg Mason Premier Asset Management Account/VISA Account
Shareholders of the fund who have cash or negotiable securities
(including fund shares) valued at $10,000 or more in accounts with Legg Mason
may subscribe to Legg Mason's Premier Asset Management Account ("Premier"). This
program allows shareholders to link their fund account and their 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 allows shareholders
to combine their fund account with a preferred customer VISA Gold debit card, a
Legg Mason Brokerage Account and unlimited checkwriting with no minimum check
amount.
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 be satisfied
with available cash or through the sale of securities in the Brokerage Account
or, if the Premier account has been established as a margin account, 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"), 4151 Executive Parkway, Suite 100,
Westerville, Ohio 43081, 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.
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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 after hours at 1-800-996-4324. 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 1-410-454-2066 with your account inquiries.
AUTOMATIC PURCHASES OF FUND SHARES Shareholders participating in the
Premier program who elect to establish a fund account will have free credit
balances resulting from the sale of securities in their Brokerage Account
automatically invested in shares of the fund. Amounts of $100 or more will be
invested 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 securities
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 the necessary Premier agreements. Legg Mason
charges a fee for the Premier service, which is currently $100 per year for
individuals and $175 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.
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.
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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 QUALIFIED PLANS
Investors may invest in shares of the fund through IRAs and through
SEPs, SIMPLES and other qualified retirement plans (collectively, "qualified
plans"). In general, income earned through the investment of assets of qualified
plans is not taxed to their beneficiaries until the income is distributed to
them. Investors who are considering establishing a qualified plan should consult
their attorneys or other tax advisers with respect to individual tax questions.
Please consult your financial adviser or other entity offering the funds for
further information with respect to these plans.
Individual Retirement Account - IRAs
TRADITIONAL IRA. Certain shareholders may obtain tax advantages by
establishing an IRA. Specifically, except as noted below, if neither you nor
your spouse is an active participant in a qualified employer or government
retirement plan, or if either you or your spouse is an active participant in
such a plan and your adjusted gross income does not exceed a certain level, then
each of you may deduct cash contributions made to an IRA in an amount for each
taxable year not exceeding the lesser of 100% of your earned income or $2,000.
However, a married shareholder who is not an active participant in such a plan
and files a joint income tax return with his or her spouse (and their combined
adjusted gross income does not exceed $150,000) is not affected by the spouse's
active participant status. In addition, if your spouse is not employed and you
file a joint return, you may establish a separate IRA for your spouse and
contribute up to a total of $4,000 to the two IRAs, provided that the
contribution to either does not exceed $2,000. If your employer's plan qualifies
as a SIMPLE, permits voluntary contributions and meets certain requirements, you
may make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in the fund through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your fund shares are then not immediately taxable to
you or the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than April 1 following the calendar year in which
you attain age 70 1/2. Distributions made before age 59 1/2, in addition to
being taxable, generally are subject to a penalty equal to 10% of the
distribution, except in the case of death or disability, where the distribution
is rolled over into another qualified plan or certain other situations.
ROTH IRA. A shareholder whose adjusted gross income (or combined
adjusted gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
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IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
EDUCATION IRA. Although not technically for retirement savings, an
Education IRA provides a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a qualified family
member).
Simplified Employee Pension Plan - SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in the fund.
Savings Incentive Match Plan for Employees - SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan may establish a SIMPLE either as separate IRAs or as
part of a Code section 401(k) plan. A SIMPLE, which is not subject to the
complicated nondiscrimination rules that generally apply to qualified retirement
plans, will allow certain employees to make elective contributions of up to
$6,000 per year and will require the employer to make matching contributions up
to 3% of each such employee's salary or a 2% non-elective contribution.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from qualified plans (except IRAs and SEPs), unless the recipient
transfers the distribution directly to an "eligible retirement plan" (including
IRAs and other qualified plans) that accepts those distributions. Other
distributions generally are subject to regular wage withholding at the rate of
10% (depending on the type and amount of the distribution), unless the recipient
elects not to have any withholding apply. Investors should consult their plan
administrator or tax advisor for further information.
VALUATION OF FUND 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 Day and Christmas Day.
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.
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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 established 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 A.
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 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
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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.
PERFORMANCE INFORMATION
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.
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 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,
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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 independent third parties such as
Ibbotson Associates and Frontier Analytics, Inc. to compare the returns of
various capital markets and to show the value of a hypothetical investment in a
capital market. Typically, different indices are used 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 $134 billion as of September
30, 2000.
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.
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's 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.
Fractional shares have fractional voting rights. There is no cumulative voting
in the election of Trustees. Fund shares are fully paid and non-assessable, and
have no preemptive or conversion rights.
19
<PAGE>
Special meetings of shareholders may be called by the Trustees or Chief
Executive Officer of the fund and shall be called by the Trustees upon the
written request of shareholders owning at least one-tenth of the outstanding
shares entitled to vote. Shareholders shall be entitled to at least fifteen days
notice of any meeting.
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, the fund
believes that 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 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 that 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.
20
<PAGE>
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, MA 02105 serves as custodian of the fund's assets. BFDS, P.O. Box 953,
Boston, MA 02103, as agent for State Street, serves as transfer and
dividend-disbursing agent and administrator of various shareholder services.
Legg Mason assists BFDS with certain of its duties as transfer agent and
receives compensation from BFDS for its services. The fund reserves the right,
upon 60 days' written notice, to make other charges to investors to cover
administrative costs.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036-1800, serves as counsel to the fund.
THE FUND'S INDEPENDENT AUDITORS
Ernst & Young LLP, Two Commerce Square, 2001 Market Street,
Philadelphia, PA, 19103 serves as the fund's independent auditors.
FINANCIAL STATEMENTS
The fund's Statements of Net Assets as of August 31, 2000; the
Statement of Operations for the year ended August 31, 2000; the Statement of
Changes in Net Assets for the years ended August 31, 2000 and 1999; the
Financial Highlights for the years ended August 31, 1996 through 2000; the Notes
to Financial Statements and the Report of Ernst & Young LLP are hereby
incorporated by reference in this Statement of Additional Information from the
fund's annual report for the year ended August 31, 2000.
21
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. ("Moody's") Ratings:
Corporate Bonds
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-1
<PAGE>
Commercial Paper
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers with a Prime-1 ("P-1") rating will normally have the following
characteristics: (1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (4) broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and (5) well-established access to a range of financial markets and
assured sources of alternate liquidity.
Description of Standard & Poor's ("S&P") Ratings:
Corporate Bonds
AAA-An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA -An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A-An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB-An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. Obligations rated BB, B, CCC, CC, and C are regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB-An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B-An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC-An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC-An obligation rated CC is currently highly vulnerable to nonpayment.
C-A subordinated debt or preferred stock obligation rated C is
currently highly vulnerable to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued. A C also will be
assigned to a preferred stock issue in arrears on dividends or sinking fund
payments but that is currently paying.
A-2
<PAGE>
D-An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-)-The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r-This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R.-This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
Commercial Paper
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3. A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
A-3
<PAGE>
Legg Mason Cash Reserve Trust
Part C. Other Information
Item 23. Exhibits
(a) (i) Declaration of Trust (1)
(ii) Amendment No.1 to Declaration of Trust (1)
(iii) Amendment No.2 to Declaration of Trust (1)
(b) By-laws (As Restated and Amended February 2, 1987) (1)
(c) Instruments defining the rights of security holders with
respect to Legg Mason Cash Reserve Trust are contained in the
Declaration of Trust and subsequent amendments and Bylaws
which are incorporated herein by reference to Exhibits (b)(1)
and (b)(2) to Part C of Post-Effective Amendment No. 35 to the
Registration Statement, SEC File No. 2-62218, filed December
31, 1997.
(d) (i) Management Agreement (1)
(ii) Investment Advisory Contract (1)
(e) Amended Underwriting Agreement - filed herewith
(f) Bonus, profit sharing or pension plans--none
(g) Custodian Agreement (1)
(h) Transfer Agency and Service Agreement (1)
(i) Opinion of Counsel - filed herewith
(j) Consent of Independent Auditors - filed herewith
(k) Financial statements omitted from Item 22--none
(l) Not Applicable
(m) Amended Distribution Plan pursuant to Rule 12b-1 - filed
herewith
(n) Financial Data Schedules - not applicable
(o) Plan pursuant to Rule 18f-3 - none
(p) Code of Ethics for the fund, its investment adviser and its
principal underwriter (2)
(1) Incorporated herein by reference to corresponding exhibit of
Post-Effective Amendment No. 35 to the Registration Statement, SEC File No.
2-62218, filed December 31, 1997.
(2) Incorporated herein by reference to corresponding exhibit of
Post-Effective Amendment No. 2 to the Registration Statement of Legg Mason
Investment Trust, Inc., SEC File No. 333-88715 filed March 28, 2000.
<PAGE>
Item 24. Persons Controlled By or Under Common Control with Registrant
None
Item 25. Indemnification
This Item is incorporated herein by reference to Item 27 of Part C
of Post-Effective Amendment No. 35 to the Registration Statement,
SEC File No. 2-62218, filed December 31, 1997.
Item 26. Business and Other Connections of Manager and Investment Adviser
I. Legg Mason Fund Adviser, Inc. ("LMFA") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940. The following is a list of other substantial business activities in which
directors, officers or partners of LMFA have been engaged as director, officer,
employee, partner or trustee.
Deepak Chowdhury President, LMFA
Senior Vice President, LMWW
Raymond A. Mason Chairman and Director, LMFA
Chairman, President, and CEO, Legg Mason, Inc.
Director, Chairman and President, Legg Mason
Holdings Limited
Director, 3040692 Nova Scotia Company
Director, Legg Mason Canada Holdings Ltd.
Director, Legg Mason UK Holdings Plc
Director, LM Holdings Limited
Chairman and Director, LMFM
Chairman and Director, LMWW
Director, Batterymarch
Director, Howard Weil
Director, Gray, Seifert
Director, Brandywine
Director, Berkshire
Director, WAM
Director, WAMCL
Director, LMRE
Director, LMCM
Philip E. Sachs Vice President, LMFA
Director, LMCM
Timothy C. Scheve Director, LMFA
Executive Vice President, Legg Mason, Inc.
Director, Executive Vice President and Treasurer, LMWW
Director, Legg Mason UK Holdings Plc
Director, Legg Mason Holdings Limited
Director, 3040692 Nova Scotia Company
Director, Legg Mason Canada Holdings Ltd.
Director, Bartlett
Director, WAM
Director, WAMCL
Director, LMFM
Director, LMCM
Director, LMT
<PAGE>
Edward A. Taber III Director and Chairman, LMFA
Senior Executive Vice President/Head of Investment
Management, Legg Mason, Inc.
Director and Vice President, 3040692 Nova Scotia Company
Director and Vice President, Legg Mason Canada
Holdings Ltd.
Senior Executive Vice President, LMWW
Director, Legg Mason Holdings Limited
Director, Legg Mason UK Holdings Plc
Director, LM Holdings Limited
Director and Chairman, LMIA
Director, Batterymarch
Director, Howard Weil
Director, Gray, Seifert
Director, Brandywine
Director, WAM
Director, WAMCL
Director, LMCM
Director, LMFM
Director, LMT
II. Western Asset Management Company ("WAM") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940. The following is a list of other substantial business activities in which
directors, officers or partners of WAM have been engaged as director, officer,
employee, partner or trustee.
James W. Hirschmann III Director and CEO, WAM
Managing Director and Director, WAMCL
Raymond A. Mason Director, WAM
Chairman, President, and CEO, Legg Mason, Inc.
Director, Chairman and President, Legg Mason
Holdings Limited
Director, 3040692 Nova Scotia Company
Director, Legg Mason Canada Holdings Ltd.
Director, Legg Mason UK Holdings Plc
Director, LM Holdings Limited
Chairman and Director, LMFM
Chairman and Director, LMWW
Director, Batterymarch
Director, Howard Weil
Director, Gray, Seifert
Director, Brandywine
Director, Berkshire
Director, WAMCL
Director, LMRE
Director, LMCM
Director, LMFA
Timothy C. Scheve Director, WAM
Executive Vice President, Legg Mason, Inc.
Director, Executive Vice President and Treasurer,
LMWW
Director, Legg Mason UK Holdings Plc
Director, Legg Mason Holdings Limited
<PAGE>
Director, 3040692 Nova Scotia Company
Director, Legg Mason Canada Holdings Ltd.
Director, Bartlett
Director, WAMCL
Director, LMFM
Director, LMFA
Director, LMCM
Director, LMT
Elisabeth N. Spector Director, WAM
Senior Vice President, Legg Mason, Inc.
Director, Vice President and Secretary, Legg Mason
Canada Holdings Limited
Vice President and Secretary, 3040692 Nova Scotia
Company
Director, LM Holdings Limited
Director, Batterymarch
Director, Brandywine
Director, Gray, Seifert
Director, WAMCL
Edward A. Taber III Director, WAM
Senior Executive Vice President/Head of Investment
Management, Legg Mason, Inc.
Director and Vice President, 3040692 Nova Scotia
Company
Director and Vice President, Legg Mason Canada
Holdings Ltd.
Senior Executive Vice President, LMWW
Director, Legg Mason Holdings Limited
Director, Legg Mason UK Holdings Plc
Director, LM Holdings Limited
Director and Chairman, LMIA
Director, Batterymarch
Director, Howard Weil
Director, Gray, Seifert
Director, Brandywine
Director, WAMCL
Director and Chairman, LMFA
Director, LMCM
Director, LMFM
Director, LMT
Bartlett & Co. ("Bartlett")
36 East Fourth Street
Cincinnati, OH 45202
Batterymarch Financial Management, Inc. ("Batterymarch")
200 Clarendon Street
Boston, MA 02116
Berkshire Asset Management, Inc. ("Berkshire")
46 Public Square, Suite 700
Wilkes-Barre, PA 18701
<PAGE>
Brandywine Asset Management, Inc. ("Brandywine")
Three Christina Centre, Suite 1200
201 North Walnut Street
Wilmington, DE 19801
Gray, Seifert & Co., Inc. ("Gray, Seifert")
380 Madison Avenue
New York, NY 10017
Howard, Weil, Labouisse, Friedrichs, Inc. ("Howard Weil")
1100 Poydras Street
New Orleans, LA 70163
Legg Mason Canada Holdings Ltd.
PO Box 7289, Stn "A"
44 Chipman Hill
Saint John, NB E24 456
Legg Mason Capital Management, Inc. ("LMCM")
100 Light Street
Baltimore, MD 21202
Legg Mason Fund Adviser, Inc. ("LMFA")
100 Light Street
Baltimore, MD 21202
Legg Mason Funds Management, Inc. ("LMFM")
100 Light Street
Baltimore, MD 21202
Legg Mason Holdings Limited
155 Bishopsgate
London EC2M 3XG
England
Legg Mason, Inc.
100 Light Street
Baltimore, MD 21202
Legg Mason Real Estate Services, Inc. ("LMRE")
Mellon Bank Center, 12th Floor
1735 Market Street
Philadelphia, PA 19103
Legg Mason Trust, fsb ("LMT")
100 Light Street
Baltimore, MD 21202
Legg Mason UK Holdings Plc
20 Regent Street
London SW1Y 4PZ
<PAGE>
Legg Mason Wood Walker, Incorporated ("LMWW")
100 Light Street
Baltimore, MD 21202
LM Holdings Limited
20 Regent Street
London SW1Y 4PZ
LM Institutional Advisors, Inc. ("LMIA")
100 Light Street
Baltimore, MD 21202
LMM LLC ("LMM")
100 Light Street
Baltimore, MD 21202
Western Asset Management Company ("WAM")
117 East Colorado Boulevard
Pasadena, CA 91105
Western Asset Management Company Limited ("WAMCL")
155 Bishopsgate
London EC2M 3XG
England
3040692 Nova Scotia Company
Ste 800, 1959 Upper Water Street
PO Box 997
Halifax, N.S. B3J 2X2
Item 27. Principal Underwriters
(a) Legg Mason Income Trust, Inc.
Legg Mason Tax Exempt Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Focus Trust, Inc.
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Legg Mason Light Street Trust, Inc.
Legg Mason Investment Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal underwriter,
Legg Mason Wood Walker, Incorporated ("LMWW").
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Underwriter - with Registrant
LMWW
--------------------------------------------------------------------------------
Raymond A. Mason Chairman of the None
Board and Director
James W. Brinkley President, Chief None
Operating Officer
and Director
Timothy C. Scheve Executive Vice None
President and
Treasurer and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Thomas P. Mulroy Senior Vice None
President and
Director
Edmund J. Cashman, Jr. Senior Executive Trustee
Vice President
Richard J. Himelfarb Senior Executive None
Vice President
Edward A. Taber III Senior Executive Trustee
Vice President
Robert G. Donovan Executive Vice None
President
Manoochehr Abbaei Senior Vice President None
Charles A. Bacigalupo Senior Vice None
President and
Secretary
F. Barry Bilson Senior Vice President None
D. Stuart Bowers Senior Vice President None
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Underwriter - with Registrant
LMWW
--------------------------------------------------------------------------------
W. William Brab Senior Vice President None
Deepak Chowdhury Senior Vice President None
Thomas M. Daly, Jr. Senior Vice President None
Jeffrey W. Durkee Senior Vice President None
Harry M. Ford, Jr. Senior Vice President None
Dennis A. Green Senior Vice President None
Thomas E. Hill Senior Vice President None
218 N. Washington Street
Suite 31
Easton, MD 21601
Arnold S. Hoffman Senior Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice President None
2500 CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice President None
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Laura L. Lange Senior Vice President None
Horace M. Lowman, Jr. Senior Vice None
President and Asst.
Secretary
Marvin H. McIntyre Senior Vice President None
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Underwriter - with Registrant
LMWW
--------------------------------------------------------------------------------
Jonathan M. Pearl Senior Vice None
President
Mark I. Preston Senior Vice President None
Robert F. Price Senior Vice None
President and
General Counsel
Thomas L. Souders Senior Vice None
President and Chief
Financial Officer
Elisabeth N. Spector Senior Vice President None
Joseph A. Sullivan Senior Vice President None
Richard L. Baker Vice President None
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President and None
Deputy General
Counsel
Edwin J. Bradley, Jr. Vice President None
Carol A. Brown Vice President None
Scott R. Cousino Vice President None
Thomas W. Cullen Vice President None
Charles J. Daley, Jr. Vice President and None
Controller
Norman C. Frost, Jr. Vice President None
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Underwriter - with Registrant
LMWW
--------------------------------------------------------------------------------
James E. Furletti Vice President None
Legg Mason Center, Suite 200
600 Washington Avenue
Towson, MD 21204-3712
Daniel R. Greller Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
56 West Main Street
Newark, DE 19702
Kurt A. Lalomia Vice President None
Edward W. Lister, Jr. Vice President None
Theresa McGuire Vice President None
Julia A. McNeal Vice President None
Gregory B. McShea Vice President None
Edward P. Meehan Vice President None
12021 Sunset Hills Road
Suite 100
Reston, VA 20190
Thomas C. Merchant Vice President and None
Assistant General
Counsel
Paul Metzger Vice President None
Mark C. Micklem Vice President None
1747 Pennsylvania Ave., N.W.
Washington, DC 20006
John A. Moag, Jr. Vice President None
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Ann O'Shea Vice President None
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Underwriter - with Registrant
LMWW
--------------------------------------------------------------------------------
Robert E. Patterson Vice President and None
Deputy General
Counsel
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
Judith L. Ritchie Vice President None
8251 Greensboro Drive
Suite 300
McLean, VA 22102-0700
Thomas E. Robinson Vice President None
Theresa M. Romano Vice President None
James A. Rowan Vice President None
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Douglas M. Schmidt Vice President None
B. Andrew Schmucker Vice President None
1735 Market Street
Philadelphia, PA 19103
Robert W. Schnakenberg Vice President None
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris A. Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Jane Soybelman Vice President None
Alexsander M. Stewart Vice President None
Joseph E. Timmins III Vice President None
Joyce Ulrich Vice President None
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Underwriter - with Registrant
LMWW
--------------------------------------------------------------------------------
William A. Verch Vice President None
Sheila M. Vidmar Vice President and None
Deputy General
Counsel
Carol Converso-Burton Assistant Vice None
President
Ronald N. McKenna Assistant Vice None
President
Suzanne E. Peluso Assistant Vice None
President
Lauri F. Smith Assistant Vice None
President
Janet B. Sraver Assistant Vice None
President
Leslee Stahl Assistant Secretary None
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company and Legg Mason Fund Adviser, Inc.
P.O. Box 1713 100 Light Street
Boston, Massachusetts 02105 Baltimore, Maryland 21202
Item 29. Management Services
None
Item 30. Undertakings
None
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, Legg Mason Cash Reserve Trust, certifies
that it meets all the requirements for effectiveness of this Post-Effective
Amendment No. 38 to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Baltimore and State of Maryland, on the 20th day of November, 2000.
LEGG MASON CASH RESERVE TRUST
By: /s/ Marie K. Karpinski
--------------------------
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registrant's Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John F. Curley, Jr.* Chairman of the Board,
--------------------------------- President and Trustee November 20, 2000
John F. Curley, Jr.
/s/ Edmund J. Cashman Jr.* Trustee November 20, 2000
---------------------------------
Edmund J. Cashman Jr.
/s/ Nelson A. Diaz** Trustee November 20, 2000
---------------------------------
Nelson A. Diaz
/s/ Richard G. Gilmore* Trustee November 20, 2000
---------------------------------
Richard G. Gilmore
/s/ Arnold L. Lehman* Trustee November 20, 2000
---------------------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Trustee November 20, 2000
---------------------------------
Jill E. McGovern
/s/ G. Peter O'Brien* Trustee November 20, 2000
---------------------------------
G. Peter O'Brien
/s/ T. A. Rodgers* Trustee November 20, 2000
---------------------------------
T. A. Rodgers
/s/ Edward A. Taber, III* Trustee November 20, 2000
---------------------------------
Edward A. Taber, III
/s/ Marie K. Karpinski Vice President November 20, 2000
--------------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marc R. Duffy pursuant to a Power of Attorney dated
November 12, 1999, a copy of which is filed herewith.
**Signature affixed by Marc R. Duffy pursuant to a Power of Attorney dated May
12, 2000, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of one or more of the following investment
companies (as set forth in the companies' current Registration Statements on
Form N-1A):
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND LEGG MASON LIGHT STREET TRUST, INC.
LEGG MASON FOCUS TRUST, INC. LEGG MASON INVESTMENT TRUST, INC.
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, MARC R. DUFFY, ANDREW J. BOWDEN, ARTHUR J. BROWN and ARTHUR C.
DELIBERT my true and lawful attorney-in-fact, with full power of substitution,
and with full power to sign for me and in my name in the appropriate capacity
and only for those above-listed companies for which I serve as Director/Trustee,
any Registration Statements on Form N-1A, all Pre-Effective Amendments to any
Registration Statements of the Funds, any and all subsequent Post-Effective
Amendments to said Registration Statements, and any and all supplements or other
instruments in connection therewith, to file the same with the Securities and
Exchange Commission and the securities regulators of appropriate states and
territories, and generally to do all such things in my name and behalf in
connection therewith as said attorney-in-fact deems necessary or appropriate, to
comply with the provisions of the Securities Act of 1933 and the Investment
Company Act of 1940, all related requirements of the Securities and Exchange
Commission and all requirements of appropriate states and territories. I hereby
ratify and confirm all that said attorney-in-fact or their substitutes may do or
cause to be done by virtue hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
/s/ Edmund J. Cashman, Jr. November 12, 1999
----------------------------------------
Edmund J. Cashman, Jr.
/s/ John F. Curley, Jr. November 12, 1999
----------------------------------------
John F. Curley, Jr.
/s/ Richard G. Gilmore November 12, 1999
----------------------------------------
Richard G. Gilmore
/s/ Arnold L. Lehman November 12, 1999
----------------------------------------
Arnold L. Lehman
/s/ Raymond A. Mason November 12, 1999
----------------------------------------
Raymond A. Mason
/s/ Jill E. McGovern November 12, 1999
----------------------------------------
Jill E. McGovern
/s/ Jennifer W. Murphy November 12, 1999
----------------------------------------
Jennifer W. Murphy
/s/ G. Peter O'Brien November 12, 1999
----------------------------------------
G. Peter O'Brien
/s/ T. A. Rodgers November 12, 1999
----------------------------------------
T. A. Rodgers
/s/ Edward A. Taber, III November 12, 1999
----------------------------------------
Edward A. Taber, III
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of one or more of the following investment
companies:
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON LIGHT STREET TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON INVESTORS TRUST, INC. LEGG MASON INVESTMENT TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND LEGG MASON FOCUS TRUST, INC.
plus any other investment company for which Legg Mason Fund Adviser, Inc. or one
of its affiliates acts as investment adviser or manager and for which the
undersigned individual serves as Director/Trustee ("Funds"), hereby severally
constitute and appoint each of MARIE K. KARPINSKI, MARC R. DUFFY, ANDREW J.
BOWDEN, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and lawful
attorney-in-fact, with full power of substitution, and with full power to sign
for me and in my name in the appropriate capacity and only for those Funds for
which I serve as Director/Trustee, any Registration Statements of the Funds on
Form N-1A, all Pre-Effective Amendments to any Registration Statements of the
Funds, any and all subsequent Post-Effective Amendments to said Registration
Statements, and any and all supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate to comply with the provisions of
the Securities Act of 1933 and the Investment Company Act of 1940, all related
requirements of the Securities and Exchange Commission and all requirements of
appropriate states and territories. I hereby ratify and confirm all that said
attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
/s/ Nelson Diaz May 12, 2000
-----------------------------
Nelson A. Diaz
<PAGE>
Legg Mason Cash Reserve Trust
Exhibit Index
Exhibit (e) Amended Underwriting Agreement
Exhibit (i) Opinion of Counsel
Exhibit (j) Consent of Independent Auditors
Exhibit (m) Amended Distribution Plan pursuant to Rule 12b-1
