<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1995.
1933 Act File No. 2-78562
1940 Act File No. 811-3526
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: 18 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 16
LEGG MASON TAX EXEMPT TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIAGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart
Baltimore, Maryland 21202 1800 M Street, N.W.
(Name and Address of South Lobby - Ninth Floor
Agent for Service) Washington, D.C. 20036-5891
It is proposed that this filing will become effective:
[___] immediately upon filing pursuant to Rule 485(b)
[_X_] on May 1, 1995 pursuant to Rule 485(b)
[___] 60 days after filing pursuant to Rule 485(a)(i)
[___] on ___________________, 1995 pursuant to Rule 485(a)(i)
[___] 75 days after filing pursuant to Rule 485(a)(ii)
[___] on ___________________, 1995 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.
Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and filed the notice required by such Rule
for its most recent fiscal year on February 24, 1995.
<PAGE>
Legg Mason Tax-Exempt Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and
documents.
Cover Sheet
Table of Contents
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
Form N-1A Cross Reference Sheet
--------------------------------
Part A Item No. Prospectus Caption
-------------- ------------------
1 Cover Page
2 Prospectus Highlights;
Fund Expenses
3 Financial Highlights;
Performance Information
4 The Fund's Investment Objective
and Policies;
Description of the Corporation
and Its Shares
5 Fund Expenses; Dividends;
The Fund's Management and
Investment Adviser;
The Fund's Distributor;
The Fund's Custodian and
Transfer Agent
6 Prospectus Highlights;
Dividends;
Shareholder Services;
Tax Treatment of Dividends;
How Your Shareholder Account Is
Maintained;
Description of the Corporation
and Its Shares
7 How You Can Invest In the Fund;
How Your Shareholder Account Is
Maintained;
How Net Asset Value Is Determined;
The Fund's Distributor
8 How You Can Redeem Your Fund
Shares
9 Not Applicable
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
Form N-1A Cross Reference Sheet
---------------------------------
Statement of Additional
Part B Item No. Information Caption
--------------- -----------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About Investment
Objectives, Limitations and Policies;
Portfolio Transactions and Brokerage
14 The Corporation's Directors and Officers
15 The Corporation's Directors and Officers
16 The Corporation's Independent
Accountants;
The Corporation's Custodian and Transfer
and Dividend - Disbursing Agent;
The Fund's Investment Adviser;
The Fund's Distributor
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Shares;
Additional Purchase and Redemption
Information
20 Additional Tax Information
21 Portfolio Transactions and Brokerage;
The Fund's Distributor;
22 How the Fund's Yield is Calculated
23 Financial Statements
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Highlights 2
Fund Expenses 3
Financial Highlights 4
Performance Information 5
The Fund's Investment Objectives and
Policies 6
How You Can Invest in the Fund 8
How Your Shareholder Account is Maintained 9
How You Can Redeem Your Fund Shares 10
How Net Asset Value is Determined 11
Dividends 11
Tax Treatment of Dividends 11
Shareholder Services 12
The Fund's Management and Investment
Adviser 14
The Fund's Distributor 14
The Fund's Custodian and Transfer Agent 14
Description of the Corporation and Its
Shares 14
</TABLE>
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart
1800 M Street, N.W., Washington, DC 20036
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING 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 DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE PRINCIPAL UNDERWRITER IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
(Recycle Logo appears here) PRINTED ON RECYCLED PAPER
LMF-015
PROSPECTUS
MAY 1, 1995
LEGG MASON
TAX
EXEMPT
TRUST INC.
PUTTING YOUR FUTURE FIRST
(Legg Mason Funds Logo appears here)
<PAGE>
THE LEGG MASON TAX EXEMPT TRUST, INC.
PROSPECTUS
Legg Mason Tax Exempt Trust, Inc. ("Corporation") is a money market
fund seeking to produce high current income exempt from federal income
tax, to preserve capital, and to maintain liquidity.
The Corporation offers a single portfolio ("Fund"), which normally
invests primarily in short-term, high-quality municipal obligations, the
interest on which is exempt from federal income tax and is not a tax
preference item for purposes of the federal alternative minimum tax
("TPI"). Shares in the Fund are issued and redeemed at net asset value,
without an initial sales charge or redemption fee. The Fund attempts to
maintain a constant net asset value of $1.00 per share. AN INVESTMENT IN
THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE
CAN BE NO ASSURANCE THAT THE FUND WILL ALWAYS BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information about the Fund
that a prospective investor ought to know before investing. It should be
retained for future reference. A Statement of Additional Information about
the Fund dated May 1, 1995 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by reference. The Statement of Additional Information
is available without charge upon request from Legg Mason Wood Walker,
Incorporated ("Legg Mason"), the Fund's distributor (address and telephone
number listed at right).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: May 1, 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
THE LEGG MASON TAX EXEMPT TRUST, INC.
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus.
FUND TYPE:
The Fund is a no-load, open-end, diversified management investment
company. You may purchase or redeem shares of the Fund through a brokerage
account with Legg Mason or certain of its affiliates. See "How You Can
Invest in the Fund," page 8, and "How You Can Redeem Your Fund Shares,"
page 10.
FUND STARTED:
July 14, 1983
NET ASSETS:
Over $227 million as of February 28, 1995
INVESTMENT OBJECTIVES AND POLICIES:
The Fund's investment objectives are to produce high current income
exempt from federal income tax, to preserve capital, and to maintain
liquidity. The Fund normally attempts to meet these investment objectives
by investing its assets primarily in short-term, high-quality municipal
obligations, the interest on which is exempt from federal income tax and
is not a TPI. Of course, there can be no assurance that the Fund will
achieve its objectives. See "The Fund's Investment Objectives and
Policies," page 6.
DISTRIBUTOR :
Legg Mason Wood Walker, Incorporated
MANAGEMENT AND ADVISER :
Legg Mason Fund Adviser, Inc. serves as the Fund's manager and
investment adviser.
TRANSFER AND SHAREHOLDER SERVICING AGENT :
Boston Financial Data Services
CUSTODIAN:
State Street Bank and Trust Company
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 12.
YIELD:
Varies with current tax-exempt money market rates; quoted in the
financial section of most newspapers.
DIVIDENDS:
Declared daily and paid monthly.
REINVESTMENT :
All dividends are automatically reinvested in Fund shares unless cash
payments are requested.
INITIAL PURCHASE:
$1,000 minimum, generally.
SUBSEQUENT PURCHASES:
$100 minimum, generally. See "How You Can Invest in the Fund," page 8.
PURCHASE METHODS:
Send bank/personal check or wire federal funds.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value, which the Fund seeks to maintain at $1.00 per share.
CHECKWRITING:
Available to qualified shareholders upon request. Unlimited number of
checks. Minimum amount per check: $250.
2
<PAGE>
FUND EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The expenses and fees set forth in the table are based on average
net assets and annual Fund operating expenses for the year ended December 31,
1994.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases or
reinvested dividends None
Redemption and exchange fees None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.50%
12b-1 fees None
Other expenses 0.15%
Total operating expenses 0.65%
</TABLE>
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example illustrates the expenses that you would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return and (2) full redemption at the end of each time period. As noted in the
table above, the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$7 $21 $36 $ 81
</TABLE>
This example assumes that all dividends are reinvested and that the
percentage amounts listed under "Annual Fund Operating Expenses" remain the same
over the time periods shown. The above table and the assumption in the example
of a 5% annual return are required by regulations of the SEC applicable to all
mutual funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT
REPRESENT, THE FUND'S PROJECTED OR ACTUAL PERFORMANCE. THE ABOVE TABLES SHOULD
NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund's actual expenses will depend
upon, among other things, the level of average net assets, the levels of sales
and redemptions of shares, and the extent to which the Fund incurs variable
expenses, such as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the year ended March 31, 1985, for the
nine months ended December 31, 1985 and for the years ended December 31,
1986 through 1994 have been derived from financial statements which have
been audited by Coopers & Lybrand L.L.P., independent accountants. The
Fund's financial statements for the year ended December 31, 1994 and the
report of Coopers & Lybrand L.L.P. thereon are included in the Fund's
annual report and are incorporated by reference in the Statement of
Additional Information. The annual report is available to shareholders
without charge by calling your Legg Mason or affiliated investment
executive or Legg Mason's Funds Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income .0223 .0174 .0231 .0386 .0518 .0571 .0464 .0392 .0410
Dividends paid from
net investment
income (.0223) (.0174) (.0231) (.0386) (.0518) (.0571) (.0464) (.0392) (.0410)
Net asset value, end
of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total return 2.25% 1.75% 2.34% 3.93% 5.30% 5.86% 4.74% 3.99% 4.18%
RATIO/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses .65% .69% .73% .69% .70% .72% .69% .74% .71%
Net investment
income 2.23% 1.74% 2.33% 3.88% 5.18% 5.69% 4.63% 3.97% 4.04%
Net assets, end of
period (in
thousands) $222,490 $237,611 $170,046 $176,752 $183,756 $159,815 $95,364 $81,769 $84,857
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
12/31/85* 3/31/85
<S> <C> <C>
PER SHARE OPERATING PERFORM
Net asset value,
beginning of period $1.00 $1.00
Net investment income .0323 .0526
Dividends paid from
net investment
income (.0323) (.0526)
Net asset value, end
of period $1.00 $1.00
Total return 3.28%(1) 5.39%
RATIO/SUPPLEMENTAL DATA:
Ratios to average net
Expenses .75%(3) .65%(2)
Net investment
income 4.29%(3) 5.18%(2)
Net assets, end of
period (in
thousands) $49,066 $52,881
</TABLE>
* FISCAL YEAR-END WAS CHANGED TO DECEMBER 31 FROM MARCH 31.
(1) NOT ANNUALIZED.
(2) WITHOUT FEES WAIVED OR ASSUMED BY THE ADVISER, THE RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS WOULD HAVE BEEN .85% ANNUALIZED, AND THE RATIO
OF NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
4.98% ANNUALIZED, FOR THE YEAR ENDED MARCH 31, 1985.
(3) ANNUALIZED.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may quote its yield, including a compound
effective yield, in advertisements or in reports or other communications to
shareholders. The Fund's "yield" refers to the income generated by an investment
in the Fund over a stated seven-day period. This income is then "annualized."
That is, the average daily net income generated by the investment during that
week is assumed to be generated each day over a 365-day period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but
assumes that the income earned by an investment is reinvested. The Fund's
effective yield will be slightly higher than the Fund's yield because of the
compounding effect of this assumed reinvestment.
The Fund also may quote its tax-equivalent yield and tax-equivalent
effective yield. Tax-equivalent yield shows the taxable yield that would produce
the same income after a stated rate of taxes as the Fund's tax-exempt yield.
Tax-equivalent effective yield shows the taxable effective yield that would
produce the same income after a stated rate of taxes as the Fund's tax-exempt
effective yield.
Yield information may be useful in reviewing the Fund's performance and for
providing a basis for comparison with other investment alternatives. However,
since the calculation is based on past performance and the Fund's yield changes
in response to fluctuations in market interest rates and Fund expenses, any
given yield quotation should not be considered representative of the Fund's
yield for any future period.
The Fund's yield for the seven-day period ended December 31, 1994 was 3.75%.
The effective yield for the same period was 3.82%.
5
<PAGE>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES
The Fund is a diversified, open-end management investment company which
seeks to produce high current income exempt from federal income tax, to preserve
capital, and to maintain liquidity. The Fund normally invests primarily in
short-term, high-quality municipal securities, the interest on which is exempt
from federal income tax and is not a TPI. The Fund may also invest to a limited
extent in taxable short-term money market instruments. The Fund attempts to
maintain a constant net asset value of $1.00 per share. There is, of course, no
assurance that this policy or the Fund's investment objectives will be achieved.
The Fund is not intended to be a balanced investment program and is not
designed for investors who are unable to benefit from tax-exempt income or for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. The Fund is not an appropriate investment for
"substantial users" of certain facilities financed by industrial development or
private activity bonds or related persons thereof. See "Tax Treatment of
Dividends," page 11.
Municipal Obligations
The Fund normally invests substantially all of its assets in a diversified
portfolio of obligations issued by or on behalf of the states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies, instrumentalities or authorities, the interest
on which, in the opinion of counsel to the issuer, is exempt from federal income
tax and is not a TPI ("Municipal Obligations"). As a matter of fundamental
policy, except during defensive periods, the Fund will maintain at least 80% of
its assets invested in Municipal Obligations that have remaining maturities of
one year or less or that are variable or floating rate demand notes. The balance
of the Fund's assets is invested in Municipal Obligations that have remaining
maturities of 397 days or less or that are variable or floating rate demand
notes. Under normal circumstances, the Fund maintains a dollar-weighted average
maturity of 90 days or less.
The Fund limits its investments to obligations which, pursuant to procedures
adopted by the Board of Directors, present minimal credit risk in the opinion of
the Adviser, and are rated in one of the two highest short-term ratings
categories by at least two nationally recognized statistical rating
organizations ("NRSROs"), or one NRSRO if only rated by one or, if unrated by
any NRSRO, are determined to be of comparable quality by the Adviser. Currently
there are six NRSROs, including Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P"). A discussion of the S&P and Moody's
ratings is contained in the Statement of Additional Information. The Fund does
not intend to invest more than 25% of its net assets in (1) Municipal
Obligations whose issuers are located in the same state, (2) Municipal
Obligations which are repayable out of revenue streams generated from
economically related projects or facilities, or (3) industrial development bonds
or private activity bonds issued by issuers in the same industries, provided
that, for the purpose of this restriction, there is no limitation with respect
to investments in U.S. Treasury bills or other obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. The Fund considers
the "issuer" of a Municipal Obligation to be the entity responsible for payment.
Thus, the District of Columbia, each state, each political subdivision, agency,
instrumentality and authority thereof, and each multi-state agency of which a
state is a member is a separate "issuer" as that term is used in this
Prospectus. The non-government user of facilities financed by industrial
development bonds or private activity bonds may also be considered to be the
issuer.
The yields on Municipal Obligations are dependent on a variety of factors,
including general money market conditions, general conditions of the Municipal
Obligations market, the financial condition of the issuer, the size of the
particular offering, the maturity of the obligation, the credit quality and
ratings of the issue and expectations regarding changes in income tax rates. The
ratings of NRSROs represent their opinion as to the quality of the Municipal
Obligations that they undertake to rate. The ratings are not guarantees as to
quality and may change after the Fund has acquired a security.
Municipal Obligations include debt obligations issued to obtain funds for
various public purposes,
6
<PAGE>
including constructing a wide range of public facilities, refunding outstanding
obligations, obtaining funds for general operating expenses and making loans to
other public institutions and facilities. Industrial development bonds and
private activity bonds are issued by or on behalf of public authorities to
finance various privately operated facilities, including pollution control
facilities.
"General obligation bonds" are secured by the issuer's pledge of its full
faith and credit, including its taxing power. "Revenue bonds" are payable only
from the revenues derived from a particular facility or class of facilities or
from the proceeds of a special excise tax or other specific revenue source such
as the corporate user of the facility being financed. Industrial development
bonds and private activity bonds are usually revenue bonds and are not payable
from the unrestricted revenues of a municipality. The credit quality of
industrial development bonds and private activity bonds is usually directly
related to the credit standing of the corporate user of the facilities.
Municipal Obligations also include short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes and other forms of short-term
debt obligations. Such notes may be issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues.
The Fund's portfolio will be affected by general changes in market interest
rates resulting in increases or decreases in the value of the Municipal
Obligations held by the Fund. Investors should recognize that, in periods of
declining interest rates, the Fund's yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates, the Fund's
yield will tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to the Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of its portfolio, thereby reducing the current yield of the Fund. In
periods of rising interest rates, the opposite can be expected to occur.
Current efforts to restructure the federal budget and the relationship
between the federal government and state and local governments may impact the
financing of some issuers of municipal securities. Some states and localities
are experiencing substantial deficits and may find it difficult for political or
economic reasons to increase taxes. Some local jurisdictions have invested
heavily in derivative instruments and may now hold portfolios of uncertain
valuation. Each of these factors may affect the ability of an issuer of
municipal securities to meet its obligations.
When-Issued Securities
The Fund may enter into commitments to purchase Municipal Obligations on a
when-issued basis. When-issued securities are often the most efficiently priced
and have the best liquidity in the bond market. As with the purchase of any
security, when the Fund purchases securities on a when-issued basis, it assumes
the risks of ownership, including the risk of price fluctuation, at the time of
purchase, not at the time of receipt. However, the Fund does not pay for such
securities until they are delivered to the Fund, normally 7 to 45 days later. To
meet that payment obligation, the Fund will establish a segregated account with
its custodian and maintain cash or liquid high grade debt securities, in an
amount at least equal in value to the payment that will be due. Failure by the
issuer to deliver a security purchased on a when-issued basis may result in a
loss or missed opportunity by the Fund to make an alternative investment.
Commitments to purchase when-issued securities will not exceed, in the
aggregate, 25% of the Fund's total assets.
Stand-By Commitments
The Fund may acquire "stand-by commitments" with respect to its investments
in Municipal Obligations. A stand-by commitment is a put (that is, the right to
sell the underlying security within a specified period of time at a specified
exercise price) that may be sold, transferred or assigned only with the
underlying security. Under a stand-by commitment, a broker, dealer or bank
agrees to purchase, at the Fund's option, specified Municipal Obligations at a
specified price. The total amount paid for outstanding stand-by commitments held
by the Fund will not exceed 1/2 of 1% of the Fund's total asset value calculated
immediately after each stand-by commitment is acquired.
7
<PAGE>
Variable Rate and Floating Rate Obligations
The Fund may invest in variable rate Municipal Obligations and notes.
Variable rate obligations have a yield that is adjusted periodically based upon
market conditions.
The Fund may also invest in floating rate and variable rate demand notes.
Demand notes provide that the holder may demand payment of the note at its par
value plus accrued interest and may be supported by an unconditional bank letter
of credit guaranteeing payment of the principal or both the principal and
accrued interest. Floating rate demand notes have an interest rate related to a
known lending rate, such as the prime rate, and are automatically adjusted when
such known rate changes. The Fund may invest in variable rate and floating rate
notes carrying stated maturities in excess of one year at the date of purchase
by the Fund if such obligations carry demand features that comply with
conditions established by the SEC. In such cases, the Fund is entitled to
consider the note as having a maturity of one year or less, based on the date
the interest rate will be reset or when the principal can be recovered through
demand.
Temporary Investments
From time to time for liquidity purposes or pending the investment of the
proceeds of the sale of shares, the Fund may invest in and derive up to 20% of
its income from taxable short-term investments consisting of: obligations of the
U.S. Government, its agencies and instrumentalities; certificates of deposit and
bankers' acceptances of U.S. domestic banks with assets of one billion dollars
or more; commercial paper or other corporate notes of high-grade quality; and
any of such items subject to short-term repurchase agreements. Interest earned
from such taxable investments will be taxable to investors as ordinary income
when distributed to them. For temporary defensive purposes the Fund may invest
up to 100% of its assets in U.S. government securities and other taxable
short-term instruments.
Investment Limitations
The Fund has adopted certain fundamental limitations that, like its
investment objectives and its policy of investing (except during defensive
periods) at least 80% of its assets in short-term Municipal Obligations, can be
changed only by the vote of Fund shareholders. These investment limitations are
set forth under "Investment Limitations" in the Statement of Additional
Information. Other Fund policies, unless described as fundamental, can be
changed by action of the Board of Directors.
HOW YOU CAN INVEST IN THE FUND
You may purchase shares of the Fund through a brokerage account with Legg
Mason or with an affiliate that has a dealer agreement with Legg Mason (Legg
Mason is a wholly owned subsidiary of Legg Mason, Inc., a financial services
holding company). Your Legg Mason or affiliated investment executive will be
pleased to explain the shareholder services available from the Fund and answer
any questions you may have.
The minimum initial investment in the Fund for each account, including
investments made by exchange from other Legg Mason funds, is $1,000, and the
minimum investment for each purchase of additional shares is $100, except as
noted below. Those investing through the Fund's Future First Systematic
Investment Plan, payroll deduction plans and plans involving automatic payment
of funds from financial institutions or automatic investment of dividends from
certain unit investment trusts are subject to lower minimum initial and
subsequent investments. The Fund reserves the right to change the minimum amount
requirements at its discretion. You should always furnish your shareholder
account number when making additional purchases of shares.
Cash held in Legg Mason brokerage accounts of Fund shareholders may be
invested in the Fund during regularly scheduled "sweeps" of such accounts made
twice each month. (Brokerage accounts participating in the Premier Asset
Management Account described on page 12 are swept daily for free credit balances
of $100 or more and weekly for free credit balances of less than $100.)
There are four ways you can invest:
1. BY MAIL
Once you have opened an account with the Fund, you may purchase shares by
mail by sending a check for $100 or more (payable to "Legg Mason Tax Exempt
Trust, Inc.") to:
8
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
P.O. Box 1476
Baltimore, Maryland 21203-1476
[Insert your name and account number]
2. BY TELEPHONE OR WIRE TRANSFER OF FUNDS
Once you have opened an account with the Fund, you may also purchase shares
by telephone from available cash balances in your Legg Mason or affiliated
brokerage account or by wire transfer of funds from your bank directly to Legg
Mason. Please contact any Legg Mason or affiliated investment executive for
further information.
Purchases made by telephone from available cash balances in your Legg Mason
or affiliated brokerage account or wire payments representing federal funds will
normally be completed on the same or the next business day. Wire transfers may
be subject to a service charge by your bank. Any order for which your investment
executive has submitted a purchase order by 12:00 noon, Eastern time, and for
which wired funds have been received, will earn dividends on shares purchased
that day.
3. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares in the Fund through the Future First Systematic
Investment Plan. Under this plan, you may arrange for automatic monthly
investments in the Fund of $50 or more by authorizing Boston Financial Data
Services ("BFDS"), the Fund's transfer agent, to prepare a check each month
drawn on your checking account. There is no minimum initial investment. Please
contact any Legg Mason or affiliated investment executive for further
information.
4. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial institutions,
such as banks or credit unions, for regular automatic monthly investments of $50
or more in shares of the Fund. In addition, it may be possible for dividends
from certain unit investment trusts to be invested automatically in Fund shares.
Persons interested in establishing such automatic investment programs should
contact the Fund through any Legg Mason or affiliated investment executive.
Shares of the Fund are issued at the net asset value next determined after
receipt of a purchase order and payment in proper form. Many instruments in
which the Fund invests must be paid for in immediately available money called
"federal funds." Therefore, payments received from you for the purchase of
shares in other than federal funds form will require conversion into federal
funds before your purchase order may be executed. For checks, this normally will
take two days but may take up to nine days. All checks are accepted subject to
collection at full face value in federal funds and must be drawn in U.S. dollars
on a domestic bank. If an order and payment in federal funds is received by your
Legg Mason or affiliated investment executive prior to 12:00 noon, Eastern time,
on any day that the New York Stock Exchange, Inc. ("Exchange") is open, the
shares will be purchased and earn dividends on that day; if such an order is
received at 12:00 noon or later, the shares will be purchased at the next
determined net asset value and will earn dividends on the next day the Exchange
is open. See "How Net Asset Value is Determined," page 11.
The Fund reserves the right to reject any order for shares of the Fund or to
suspend the offering of shares for a period of time.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares of the Fund, a shareholder account is
automatically established for you. Any shares that you purchase or receive as a
dividend will be credited directly to your account at the time of purchase or
receipt. No certificates are issued unless you specifically request them in
writing. Shareholders who elect to receive certificates can redeem their shares
only by mail. Certificates will be issued in full shares only. No certificates
will be issued for shares prior to 15 business days after purchase of such
shares by check unless the Fund can be reasonably assured during that period
that payment of the purchase of such shares has been collected. Fund shares may
not be held in, or transferred to, an account with any brokerage firm other than
Legg Mason or its affiliates.
9
<PAGE>
HOW YOU CAN REDEEM YOUR FUND SHARES
All redemptions will be made in cash at the net asset value per share next
determined after the receipt by the Fund of a redemption request in proper form
either in writing or by telephone as described below. Requests for redemption
received after 12:00 noon, Eastern time, will be executed on the next day the
Exchange is open, at the net asset value next determined. However, payment of
redemption proceeds for shares purchased by check and shares acquired through
reinvestment of dividends on such shares may be delayed for up to 10 days after
receipt of the check in order to allow time for the check to clear. Any of the
following methods may be used to redeem shares:
1. REDEMPTION BY TELEPHONE
Telephone redemptions may be made by calling your Legg Mason or affiliated
investment executive. However, you may not redeem shares by telephone for which
certificates have been issued. The minimum amount for telephone redemptions is
$100 unless you require a lesser amount to complete a transaction in your Legg
Mason or affiliated brokerage account. Proceeds of redemptions requested by
telephone will be transmitted only to you. They may be transferred by mail or
wire, at your direction (see below). Proceeds of redemptions authorized by
telephone will be credited to your Legg Mason or affiliated brokerage account
the same day. Checks representing redemption proceeds normally will be mailed
within seven calendar days of redemption. Wire transfers of proceeds to you from
your Legg Mason or affiliated brokerage account will normally be transmitted
within two business days.
To make a telephone redemption, you should call your Legg Mason or
affiliated investment executive and provide your name, the Fund's name, your
Fund account number and the number of shares or dollar amount you wish to
redeem. In the event that you are unable to reach your Legg Mason or affiliated
investment executive by telephone, you may make a redemption request by mail.
There is no fee for telephone redemptions with the exception of wire redemptions
made by telephone, as described below.
You may request by telephone that your shares be redeemed and the proceeds
wired to your account at a commercial bank in the United States. In order to
initiate a wire redemption by telephone, you must inform your Legg Mason or
affiliated investment executive of the name and address of your bank and your
bank account number. If your designated bank is not a member of the Federal
Reserve System, the proceeds will be wired to a member bank that has a
correspondent relationship with your bank. The failure of the member bank to
notify your bank immediately of the wire transfer could delay the crediting of
redemption proceeds to your bank. An $18 fee for using the wire redemption
service will be deducted by Legg Mason or its affiliate from the redemption
proceeds that are wired to your bank.
The Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable procedures to
identify the caller. The Fund may request identifying information from callers
or employ identification numbers. The Fund may be liable for losses due to
unauthorized or fraudulent instructions if it does not follow reasonable
procedures. Telephone redemption privileges are available automatically to all
shareholders unless certificates have been issued. Shareholders who do not wish
to have telephone redemption privileges should call their Legg Mason or
affiliated investment executive for further instructions.
2. REDEMPTION BY CHECK
The Fund offers a free checkwriting service that permits you to write checks
to anyone in amounts of $250 or more. The checks will be paid at the time they
are received by BFDS for payment by redeeming the appropriate number of shares
in your account; the shares will earn dividends until the check clears BFDS for
payment. Please contact your Legg Mason or affiliated investment executive for
further information regarding this service.
3. REDEMPTION BY MAIL
You may request the redemption of your shares by sending a letter signed by
all of the registered owners of the account to: "Legg Mason Tax Exempt Trust,
Inc., c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476." Any stock certificates issued for the shares must be surrendered at
the same time. For
10
<PAGE>
your protection, certificates, if any, should be sent by registered mail. On all
requests for the redemption of shares valued at $10,000 or more, or when the
proceeds of the redemption are to be paid to someone other than you, your
signature must have been guaranteed without qualification by a national bank, a
state bank, a member firm of a principal stock exchange or other entity
described in Rule 17Ad-15 under the Securities Exchange Act of 1934. Legg Mason
or its affiliates may request further documentation from corporations,
executors, partnerships, administrators, trustees or custodians. Checks normally
will be mailed within seven calendar days of receipt of a proper redemption
request to your address of record or, in accordance with your written request,
to some other person.
4. REDEMPTION TO PAY FOR SECURITIES PURCHASES AT LEGG MASON
Legg Mason has established special redemption procedures for Fund
shareholders who wish to purchase stocks, bonds or other securities at Legg
Mason. You may place an order to buy securities through your Legg Mason or
affiliated investment executive and, in the absence of any indication that you
wish to make payment in another manner, Fund shares will be redeemed on the
settlement date for the amount due. Fund shares may also be redeemed by Legg
Mason to cover debit balances in your brokerage account. Contact your Legg Mason
or affiliated investment executive for details.
Because of the relatively high cost of maintaining small accounts, the Fund
may elect to close any account with a current value due to redemptions of less
than $500, by redeeming all of the shares in the account and mailing the
proceeds to you. If the Fund elects to redeem the shares in your account, you
will be notified that your account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having your account
closed.
The Statement of Additional Information describes the circumstances in which
redemptions may be suspended or postponed for more than seven days.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Fund share is determined twice daily, as of 12:00 noon,
Eastern time, and as of the close of business of the Exchange (normally 4:00
p.m., Eastern time), on every day that the Exchange is open, by subtracting the
Fund's liabilities from its total assets and dividing the result by the number
of shares outstanding. The Fund attempts to maintain a per share net asset value
of $1.00 by using the amortized cost method of valuation. The Fund cannot
guarantee that net asset value will always remain at $1.00 per share.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in shares of the Fund unless cash payments are
requested by writing to a Legg Mason or affiliated investment executive.
Requests for payments of dividends in cash must be received at least 10 days
prior to a payment date in order to be honored on that date.
In certain cases, you may reinvest your dividends in shares of another Legg
Mason fund. Please contact your Legg Mason or affiliated investment executive
for additional information about this option.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect to realize any capital gain or loss. If the Fund does realize
any net short-term capital gains, it will distribute them at least once every 12
months.
TAX TREATMENT OF DIVIDENDS
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986. If the Fund so
qualifies and, at the close of each quarter of its taxable year, at least 50% of
the value of its total assets consists of certain obligations the interest on
which is excludable from gross income for federal income tax purposes, the Fund
may pay "exempt-interest" dividends to its shareholders. Those dividends
constitute the portion of the aggregate dividends (other than distributions of
net short-term capital gains), as designated by the Fund, equal to the excess of
the excludable interest
11
<PAGE>
over certain amounts disallowed as deductions. Exempt-interest dividends are
excludable from a shareholder's gross income; however, the amount of such
dividends must be reported on the recipient's federal income tax return.
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry Fund shares is not deductible. Dividends derived from interest
on Municipal Obligations may not be exempt from taxation under state or local
law.
Shareholders receive information after the close of each calendar year
concerning the federal income tax status of all dividends.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition to
those considerations, which are applicable to any investment in the Fund, there
may be other federal, state or local tax considerations applicable to a
particular investor. Prospective shareholders are urged to consult their tax
advisers with respect to the effects of this investment on their own tax
situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
As transfer agent for the Fund, BFDS maintains a share account for each
shareholder. Share certificates are not issued unless requested by writing to
your Legg Mason or affiliated investment executive.
You will receive from the distributor a confirmation after each transaction
(except a reinvestment of dividends, capital gains and shares purchased through
the Future First Systematic Investment Plan or through automatic investments).
An account statement will be sent to you monthly unless there has been no
activity in the account or you are purchasing shares through the Future First
Systematic Investment Plan or through automatic investments, in which case an
account statement will be sent quarterly. Reports will be sent to shareholders
at least semiannually showing the Fund's portfolio and other information; the
annual report will contain financial statements audited by the Fund's
independent accountants.
Shareholder inquiries should be addressed to "Legg Mason Tax Exempt Trust,
Inc., c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476."
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis if you are purchasing or already own shares
with a net asset value of $5,000 or more. Please contact your Legg Mason or
affiliated investment executive for further information.
PREMIER ASSET MANAGEMENT ACCOUNT
Shareholders may participate in Legg Mason's Premier Asset Management
Account, which combines the Fund account, a preferred customer VISA Gold debit
card, a Legg Mason brokerage account with margin borrowing availability and
unlimited checks with no minimum check amount. Other services include automatic
transfer of free credit balances in a participant's brokerage account to the
Fund account and automatic redemption of Fund shares to offset debit balances in
the participant's brokerage account. Legg Mason charges an annual fee for the
Premier Asset Management Account, which is currently $85 for individuals and
$100 for corporations and businesses. For further information, contact your Legg
Mason or affiliated investment executive.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your shares of the Fund
for shares of the following funds in the Legg Mason Family of Funds, provided
that such shares are eligible for sale in your state of residence:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Legg Mason U.S. Government Money Market Portfolio
A money market fund seeking high current income consistent with liquidity
and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
12
<PAGE>
Legg Mason Special Investment Trust, Inc.
A mutual fund seeking appreciation by investing principally in issuers with
market capitalizations of less than $2.5 billion.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk.
Legg Mason American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current income
consistent with prudent investment risk.
Legg Mason Global Equity Trust
A mutual fund seeking maximum long-term total return, by investing in common
stocks of companies located in at least three different countries.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by investing
principally in debt securities issued or guaranteed by foreign governments, the
U.S. Government, their agencies, instrumentalities and political subdivisions.
Legg Mason U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent investment
risk and liquidity needs, primarily by investing in debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, while
maintaining an average dollar-weighted maturity of between three and ten years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, primarily through
investment in a diversified portfolio of investment grade debt securities.
Legg Mason High Yield Portfolio
A mutual fund primarily seeking a high level of current income and
secondarily, capital appreciation, by investing principally in lower-rated,
fixed-income securities.
Legg Mason Maryland Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current income
exempt from federal and Maryland state and local income taxes, consistent with
prudent investment risk and preservation of capital.
Legg Mason Pennsylvania Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current income
exempt from federal income tax and Pennsylvania personal income tax, consistent
with prudent investment risk and preservation of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust*
A tax-exempt municipal bond fund seeking a high level of current income
exempt from federal income tax, consistent with prudent investment risk.
* Shares of these funds are sold with an initial sales charge.
Investments by exchange into the Legg Mason funds sold without an initial
sales charge are made at the per share net asset value next determined on the
same business day as redemption of the Fund shares you wish to exchange.
Investments by exchange into the Legg Mason funds sold with an initial sales
charge are made at the per share net asset value, plus the applicable sales
charge, determined on the same business day as redemption of the Fund shares you
wish to redeem; except that no sales charge will be imposed upon proceeds from
the redemption of Fund shares to be exchanged that were originally purchased by
exchange from a fund on which the same or higher initial sales charge previously
was paid. There is no charge for the exchange privilege, but the Fund reserves
the right to terminate or limit the exchange privilege of any shareholder who
makes more than four exchanges from the Fund in one calendar year. To obtain
further information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Legg Mason or
affiliated investment executive. To effect an exchange by telephone, please call
your Legg Mason or affiliated investment executive with the information
described in the section "How You Can Redeem Your Fund Shares -- Redemption by
Telephone," page 10. The other factors relating to telephone redemptions
described in that section apply also to telephone exchanges. Please read the
prospectus
13
<PAGE>
for the other funds carefully before you invest by exchange. The Fund reserves
the right to modify or terminate the exchange privilege upon 60 days' notice to
shareholders.
There is no assurance the money market funds will be able to maintain a
$1.00 share price. None of the funds is insured or guaranteed by the U.S.
Government.
THE FUND'S MANAGEMENT AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction of the
Corporation's Board of Directors.
ADVISER
Pursuant to an advisory agreement with the Fund, which was approved by the
Corporation's Board of Directors, Legg Mason Fund Adviser, Inc. ("Adviser"), a
wholly owned subsidiary of Legg Mason, Inc., serves as the Fund's investment
adviser and manager. The Adviser manages the investment and other affairs of the
Fund and directs the investments of the Fund in accordance with its investment
objectives, policies and limitations. The Fund pays the Adviser, pursuant to the
Advisory Agreement, a fee equal to an annual rate of 0.50% of the Fund's average
daily net assets.
The Adviser acts as investment adviser, manager or consultant to fifteen
investment company portfolios (excluding the Fund) which had aggregate assets
under management of over $3.8 billion as of February 28, 1995. The Adviser's
address is 111 South Calvert Street, Baltimore, Maryland 21202.
Legg Mason receives a fee from BFDS for assisting it with its transfer agent
and shareholder servicing functions. For the year ended December 31, 1994, Legg
Mason received $38,385 for performing such services in connection with this
Fund.
THE FUND'S DISTRIBUTOR
Legg Mason acts as distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Fund. Pursuant to the Fund's Distribution Plan,
which was adopted by the Fund and approved by shareholders in accordance with
Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"), the Fund may
pay a distribution fee for these distribution services not to exceed an annual
rate of 0.20% of the Fund's average daily net assets. Legg Mason has not
requested any such payments from the Fund and has no present intention of doing
so, but may do so in the future.
The Chairman, President and Treasurer of the Fund are employed by Legg
Mason.
THE FUND'S CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is
custodian for the securities and cash of the Fund. Boston Financial Data
Services, P.O. Box 953, Boston, MA 02103 is transfer agent for Fund shares, and
dividend-disbursing agent for the Fund.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation is a diversified, open-end management investment company
which was incorporated in Maryland on July 26, 1982. The Corporation is
authorized to issue multiple series of capital stock, each with a par value of
$.001 per share, at the discretion of the Board of Directors. To date, the
directors have authorized the issuance of only one series: shares in the Fund.
Each share in the Fund is entitled to one vote for the election of directors and
any other matter submitted to a shareholder vote. Fractional shares have
fractional voting rights. Voting rights are not cumulative. All shares in the
Fund are fully paid and nonassessable and have no preemptive or conversion
rights.
Shareholder meetings will not be held except where the 1940 Act requires a
shareholder vote on certain matters (including the election of directors,
approval of an advisory contract, and approval of a plan of distribution
pursuant to Rule 12b-1). The Corporation will call a special meeting of the
shareholders at the request of 10% or more of the shares entitled to vote;
shareholders wishing to call such a meeting should submit a written request to
the Fund at 111 South Calvert Street, Baltimore, Maryland 21202, stating the
purpose of the proposed meeting and the matters to be acted upon.
14
<PAGE>
Statement of
Additional Information
THE LEGG MASON TAX EXEMPT TRUST, INC.
MONEY MARKET PORTFOLIO
Legg Mason Tax Exempt Trust, Inc. ("Corporation") is a money
market fund seeking to produce high current income exempt from federal
income tax, to preserve capital, and to maintain liquidity.
The Corporation offers a single portfolio, the Money Market
Portfolio ("Fund"). In attempting to achieve its objectives, the Fund's
investment adviser, Legg Mason Fund Adviser, Inc. ("Adviser"), invests
primarily in short-term, high-quality municipal obligations, the interest
on which is exempt from federal income tax and is not a tax preference
item for purposes of the federal alternative minimum tax ("TPI"). Shares
in the Fund are issued and redeemed at net asset value, without an initial
sales charge or redemption fee. The Fund attempts to maintain a stable
net asset value of $1.00 per share, although there can be no assurance
that it will always be able to do so.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Fund's Prospectus, dated May 1,
1995, which has been filed with the Securities and Exchange Commission
("SEC"). A copy of the Prospectus is available without charge from the
Fund's distributor, Legg Mason Wood Walker, Incorporated ("Legg Mason")
(address and telephone numbers listed below).
Dated: May 1, 1995
Legg Mason Wood Walker,
Incorporated
--------------------------------------------------------------------------
111 South Calvert Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
Table of Contents
Page
Additional Information About Investment Objectives,
Limitations, and Policies 2
Investment Limitations
Additional Purchase and Redemption Information
How the Fund's Yield Is Calculated
Additional Tax Information
Valuation of Shares
The Corporation's Directors and Officers
The Fund's Investment Adviser
The Fund's Distributor
Portfolio Transactions and Brokerage
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent
The Corporation's Legal Counsel
The Corporation's Independent Accountants
Financial Statements
Appendix A: Ratings of Securities 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
offering 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 does not constitute
an offering by the Fund or by the distributor in any jurisdiction
in which such offering may not lawfully be made.
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES, LIMITATIONS, AND
POLICIES
The following information supplements the information concerning the
Fund's investment objectives, policies and limitations found in the
Prospectus. The Fund invests primarily in a diversified portfolio of
obligations issued by or on behalf of the states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies, instrumentalities or authorities, the
interest on which, in the opinion of counsel to the issuers, is exempt
from federal income tax and the federal alternative minimum tax
("Municipal Obligations").
The Prospectus explains that the Fund, in selecting investments,
considers the ratings assigned securities by nationally recognized
statistical rating organizations ("NRSROs"), such as Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P").
The ratings of NRSROs represent their opinion as to the quality of the
Municipal Obligations which they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, Municipal Obligations with the same
maturity, interest rate and rating may have different market prices. The
Appendix to this Statement of Additional Information contains information
concerning the ratings of Moody's and S&P and their significance. The
Fund considers each rating to include any modifiers, e.g., "+" or "-".
Municipal Obligations include "general obligation bonds," which are
secured by the issuer's pledge of its full faith and credit, including its
taxing power, and "revenue bonds," which are payable only from the
revenues derived from a particular facility or class of facilities or from
the proceeds of a special excise tax or other specific revenue source such
as the corporate user of the facility being financed. Industrial
development bonds and private activity bonds usually are revenue bonds and
are not payable from the unrestricted revenues of the issuer. The credit
quality of industrial development bonds and private activity bonds is
usually directly related to the credit standing of the corporate user of
the facilities. Municipal Obligations also include short-term tax
anticipation notes, bond anticipation notes, revenue anticipation notes
and other forms of short-term debt obligations. Such notes may be issued
with a short-term maturity in anticipation of the receipt of tax funds,
the proceeds of bond placements or other revenues.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax and the alternative
minimum tax are rendered by bond counsel to the issuers at the time of
issuance. Neither the Fund nor the Adviser will independently review the
basis for such opinions.
2
<PAGE>
An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Act, and
laws that may be enacted by Congress or state legislatures extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations. There is also the
possibility that as a result of litigation or other conditions the power
or ability of issuers to meet their obligations for the payment of
interest and principal on their Municipal Obligations may be materially
and adversely affected.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption
for interest on Municipal Obligations. If other legislative proposals
further restricting, or eliminating, the exemption of Municipal
Obligations interest from federal income tax were enacted, the
availability of Municipal Obligations for investment by the Fund and the
value of its assets could be materially and adversely affected. In that
event, the Fund would re-evaluate its investment objectives and policies
and consider changes in its structure or possible dissolution.
When-Issued Securities
As stated in the Prospectus, the Fund may enter into commitments to
purchase new issues of municipal bonds on a when-issued basis. Delivery
of and payment for these securities normally takes place 7 to 45 days
after the date of the commitment. Interest rates on when-issued
securities are normally fixed at the time of the commitment.
Consequently, increases in the market rate of interest between the
commitment date and settlement date may result in a market value for the
security on the settlement date that is less than its purchase price.
With regard to each such commitment agreement, the Fund maintains in a
segregated account with the custodian, commencing on the date of such
agreement, cash, U.S. government securities or other high-quality liquid
debt securities equal in value to the purchase price for the when-issued
securities due on the settlement date. The Fund makes when-issued
commitments only with the intention of actually acquiring the securities
subject thereto, but the Fund may sell these securities before the
settlement date if market conditions warrant. When payment is due for
when-issued securities, the Fund meets its obligations from then-available
cash flow, from the sale of securities or, although it would not normally
expect to do so, from the sale of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). As the Prospectus states, commitments to purchase when-
issued securities will not exceed 25% of the Fund's total assets.
3
<PAGE>
Stand-By Commitments
When the Fund exercises a stand-by commitment that it has acquired
from a dealer with respect to Municipal Obligations held by it, the dealer
normally pays to the Fund an amount equal to (1) the Fund's acquisition
cost of the Municipal Obligations (excluding any accrued interest which
the Fund paid on its acquisition), less any amortized market premium or
plus any amortized market or original issue discount during the period the
Fund owned the securities, plus (2) all interest accrued on the securities
since the last interest payment date or the date the securities were
purchased by the Fund, whichever is later. The Fund's right to exercise
stand-by commitments is unconditional and unqualified and exercisable by
the Fund at any time prior to the underlying securities' maturity.
A stand-by commitment is not transferable by the Fund without the
underlying securities, although the Fund could sell the underlying
Municipal Obligations to a third party at any time. The Fund may pay for
stand-by commitments either separately in cash or by paying a higher price
for portfolio securities which are acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities). The total amount paid in either manner for outstanding
stand-by commitments held by the Fund will not exceed 1/2 of 1% of the
Fund's total asset value calculated immediately after each stand-by
commitment is acquired. The Fund intends to enter into stand-by
commitments only with those banks, brokers and dealers that in the
Adviser's opinion present minimal credit risks.
The Fund intends to acquire stand-by commitments solely to facilitate
liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not
ordinarily affect the valuation or assumed maturity of the underlying
Municipal Obligations, which will continue to be valued in accordance with
the amortized cost method. Stand-by commitments acquired by the Fund
would be valued at zero in determining net asset value. Where the Fund
paid directly or indirectly for a stand-by commitment, its cost would be
reflected as unrealized depreciation during the period the commitment is
held by the Fund. Stand-by commitments would not affect the average
weighted maturity of the assets of the Fund.
Variable Rate and Floating Rate Obligations
The Prospectus states that the Fund may invest in variable and
floating rate Municipal Obligations. A variable rate obligation differs
from an obligation with a fixed rate coupon, the value of which fluctuates
in inverse relation to interest rate changes. If interest rates decline
4
<PAGE>
below the coupon rate, generally the value of a fixed rate obligation
increases and the obligation sells at a premium. Should interest rates
increase above the coupon rate, generally the value of a fixed rate
obligation decreases and the obligation sells at a discount. The
magnitude of such capital fluctuations is also a function of the period of
time remaining until the obligation matures. Short-term fixed rate
obligations are minimally affected by interest rate changes; the greater
the remaining period until maturity, the greater the fluctuation in value
of a fixed rate obligation is likely to be.
Variable rate obligation coupons are not fixed for the full term of
the obligation, but are adjusted periodically based upon changes in
prevailing interest rates. As a result, the value of variable rate
obligations is less affected by changes in interest rates. The more
frequently such obligations are adjusted, the less such obligations are
affected by interest rate changes during the period between adjustments.
The value of a variable rate obligation, however, may fluctuate in
response to market factors and changes in the creditworthiness of the
issuer.
By investing in variable rate obligations, the Fund hopes to take
advantage of the normal yield curve function that usually results in
higher yields on longer-term investments. This policy also means that
should interest rates decline, the yield of the Fund will decline, and the
Fund and its shareholders will forgo the opportunity for capital
appreciation of its portfolio investments and of their shares. Should
interest rates increase, the yield of the Fund will increase, and the Fund
and its shareholders will diminish the risk of capital depreciation of its
portfolio investments and of their shares. There is no limitation on the
percentage of the Fund's assets that may be invested in variable rate
obligations. However, the Fund will limit the value of its investments in
any variable rate securities that are illiquid and in all other illiquid
securities to 10% or less of its total assets.
Floating rate obligations also are not fixed, but are adjusted as
specified benchmark interest rates change. In other respects, their
characteristics are similar to variable rate notes, as discussed
previously.
As stated in the Prospectus, the Fund may also invest in floating rate
and variable rate demand notes. 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 397 days, and upon no more than 30 days' notice. When the
note is supported by an unconditional bank letter of credit guaranteeing
payment of the principal or both the principal and accrued interest, the
Adviser may take into consideration the creditworthiness of the bank
issuing the letter in making the investment decision.
5
<PAGE>
The Board of Directors of the Corporation has approved investments in
floating rate and variable rate demand notes by the Fund that comply with
conditions established by the SEC, which, among other things, permit such
instruments to be deemed to have remaining maturities of 397 days or less,
notwithstanding that they may otherwise have a stated maturity in excess
of 397 days.
Repurchase Agreements
A repurchase agreement is an agreement under which U.S. government
obligations or other high-quality debt securities are acquired by the Fund
from a securities dealer or bank subject to resale at a previously agreed-
upon price and date. The resale price reflects an agreed interest rate
effective for the period the securities are held and is unrelated to the
interest rate provided by the securities. In these transactions, the
securities acquired by the Fund are held by the Fund's custodian until
resold and will be supplemented by additional collateral if necessary to
maintain a total value equal to or in excess of the value of the
repurchase agreements. Repurchase agreements are usually for periods of
one week or less, but may be for longer periods. The Fund will not enter
into repurchase agreements of more than seven days duration if more than
10% of its net assets would be invested in such agreements and other
illiquid investments. The Fund's income from repurchase agreements is
taxable as interest income.
To the extent that proceeds from the sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund
might suffer a loss. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, realization upon the
collateral by the Fund could be delayed or limited. However, the Fund has
adopted standards for the parties with whom it will enter into repurchase
agreements that the Corporation's Board believes are reasonably designed
to assure that each party presents no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the
repurchase agreement.
Trading Policies
In seeking increased income, the Fund may not always hold its
securities to maturity but may sell a security to buy another with a
higher yield because of short-term market movements. This may result in
high portfolio turnover. The Fund, however, does not anticipate incurring
significant brokerage expense in connection with this trading because the
transactions ordinarily are made directly with the issuer or a dealer on a
net price basis.
6
<PAGE>
INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental policies that can be changed
only by the vote of a majority of the outstanding voting securities of the
Fund. Under the 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.
As a matter of fundamental policy, the Fund may not:
1. Borrow money, except for temporary purposes in an
aggregate amount not to exceed 10% of the value of the total assets of the
Fund; provided that borrowings in excess of 5% of such value will be only
from banks, and the Fund will not purchase portfolio securities while its
borrowings exceed 5% (interest paid on borrowed money would reduce income
to the Fund);
2. Underwrite the securities of other issuers except insofar
as the Fund may be deemed an underwriter under the Securities Act of 1933,
as amended, in disposing of a portfolio security;
3. Purchase common stocks, preferred stocks, warrants, or
other equity securities;
4. Buy or hold any real estate other than municipal bonds
secured by real estate or interests therein;
5. Buy or hold any commodity or commodity futures contracts,
or any oil, gas or mineral exploration or development program;
6. Make loans, except loans of portfolio securities and
except to the extent the purchase of a portion of an issue of publicly
distributed notes, bonds or other evidences of indebtedness, the entry
into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
7. Mortgage or pledge any of the Fund's assets, except to
the extent, up to a maximum of 10% of the value of its total assets,
necessary to secure borrowings permitted by paragraph 1;
7
<PAGE>
8. Buy securities on "margin" or make "short" sales of
securities;
9. Write or purchase put or call options except to the
extent that securities subject to stand-by commitments may be purchased as
set forth under "Additional Information About Investment Objectives,
Limitations, and Policies," in this Statement of Additional Information;
10. Buy securities which have legal or contractual
restrictions on resale, if the purchase causes more than 10% of the Fund's
assets to be invested in illiquid securities and repurchase agreements
maturing in more than seven days;
11. Buy securities issued by any other investment company,
except in connection with a merger, consolidation, acquisition or
reorganization;
12. Invest more than 5% of its total assets in securities of
issuers which, including their predecessors, have been in operation for
less than three years; or
13. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if immediately after such purchase more than 5% of the
Fund's total asset value would be invested in such issuer, except that up
to 25% of the Fund's total asset value may be invested without regard to
such 5% limitation.
If a percentage restriction described above is complied with at the
time an investment is made, a later increase or decrease in percentage
resulting from a change in value of portfolio securities or in the amount
of net assets of the Fund will not be considered a violation of any of
those restrictions.
Except as expressly stated otherwise, the policies and limitations
described in this Statement of Additional Information are not fundamental
and can be changed by vote of the Board of Directors.
The Corporation in the future may organize additional separate
investment portfolios, each of which will invest in particular types of
tax-exempt, interest-bearing securities and will have separate investment
objectives, policies and limitations.
8
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Prospectus explains that the minimum initial investment in
the Fund is $1,000 and subsequent investments must be at least $100.
Purchases made through the Future First Systematic Investment Plan,
payroll deduction plans and plans involving automatic payment of funds
from financial institutions or automatic investment of dividends from
certain unit investment trusts are subject to no initial minimum and to a
minimum monthly investment of only $50.
Future First Systematic Investment Plan and Transfer of Funds from
Financial Institutions
When you purchase shares through the Future First Systematic
Investment Plan, Boston Financial Data Services ("BFDS"), the Fund's
transfer agent, will send a check each month to your bank for collection,
and the proceeds of the check will be used to buy shares of the Fund.
Legg Mason, the Fund's distributor, will send you a cumulative account
statement quarterly. The check will also be reflected on your regular
checking account statement. You may terminate the Future First Systematic
Investment Plan at any time without charge or penalty. Forms to enroll in
the Future First Systematic Investment Plan are available from any Legg
Mason or affiliated office.
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:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If your check is not honored by the institution it is drawn on,
you may be subject to extra charges in order to cover collection costs.
These charges may be deducted from your shareholder account.
Systematic Withdrawal Plan
You may also elect to make systematic withdrawals from your Fund
account of a minimum of $50 on a monthly basis if you own shares with a
net asset value of $5,000 or more. The amounts paid to you each month are
9
<PAGE>
obtained by redeeming sufficient shares from your account to provide the
withdrawal amount that you have specified. You may change the monthly
amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the net asset value determined as of the close
of business of the New York Stock Exchange, Inc. ("Exchange") on the first
day of each month. If the Exchange is not open for business on that day,
the shares will be redeemed at the net asset value as determined as of the
close of regular trading of the Exchange on the preceding business day.
The check for the withdrawal payment will usually be mailed to you on the
next business day following redemption. If you elect to participate in
the Systematic Withdrawal Plan, dividends and distributions, if any, on
all shares in your Fund account must automatically be reinvested in Fund
shares. You may terminate the Systematic Withdrawal Plan at any time
without charge or penalty. The Fund, its transfer agent, Legg Mason and
its affiliates also reserve the right to modify or terminate the
Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than
as a dividend or capital gain distribution. To the extent periodic
withdrawals exceed reinvested dividends, if any, the amount of your
original investment will be correspondingly reduced.
The Fund will not knowingly accept purchase orders from you for
additional shares if you maintain a Systematic Withdrawal Plan unless your
purchase is equal to at least one year's scheduled withdrawals. In
addition, if you maintain a Systematic Withdrawal Plan, you may not make
periodic investments under the Future First Systematic Investment Plan.
Conversion to Federal Funds
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.
Legg Mason Premier Asset Management Account/VISA Account
Shareholders of the Fund who have cash or negotiable securities
(including Fund shares) valued at $20,000 or more in accounts with Legg
Mason may subscribe to Legg Mason's Premier Asset Management Account
("Premier"). This program provides a direct link between a shareholder's
Fund account and his or her Brokerage Account. Premier provides
shareholders with a convenient method to invest in the Fund through their
Brokerage Account, which includes automatic daily investment of free
10
<PAGE>
r 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 (a) for any period during which the Exchange is closed (other than
for customary weekend and holiday closings), (b) 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 (c) for such other periods as the SEC, by order, may
permit for protection of the Fund's shareholders. In the case of any such
suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the
suspension is lifted.
The Fund further reserves the right, under certain conditions, to
honor any request or combination of requests for redemption from the same
shareholder in any 90-day period, totalling $250,000 or 1% of the net
assets of the Fund, whichever is less, by making payment in whole or in
part by 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
13
<PAGE>
made in securities, a shareholder should expect to incur brokerage
expenses in converting those securities into cash and will be subject to
fluctuation in the market price of those securities until they are sold.
The Fund does not redeem "in kind" under normal circumstances, but would
do so where the Adviser determines that it would be in the best interests
of the shareholders as a whole.
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.
HOW THE FUND'S YIELD IS CALCULATED
The current annualized yield for the Fund is based upon 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 realized 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 by dividing the Fund's net investment income for a seven-day
period ("Period"), by the average number of shares entitled to receive
dividends during the Period), 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-yield 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 from time to time also may advertise its tax-equivalent
yield and tax-equivalent effective yield, based on a recently ended
thirty-day period. These quotations are calculated by dividing that
portion of the Fund's yield (or effective yield, as the case may be) that
is tax-exempt by 1 minus a stated income tax rate and adding the product
to that portion, if any, of the Fund's yield that is not tax-exempt.
Assuming a maximum tax rate of 39.6%, the Fund's tax-equivalent yield and
14
<PAGE>
tax-equivalent effective yield for the thirty-day period ended December
31, 1994 wwere 5.35% and 5.43%, respectively.
Other Information
The Fund's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represent past
performance and are not intended to predict or indicate future results.
The return on an investment in the Fund will fluctuate. In Performance
Advertisements, the Fund may compare its taxable or tax-free yield with
data published by Lipper Analytical Services, Inc. for money funds
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), IBC/Donoghue's
Money Market Fund Report ("Donoghue"), Wiesenberger Investment Companies
Service ("Wiesenberger") or Investment Company Data Inc. ("ICD"), 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 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, Wiesenberger or ICD. Performance Advertisements
also may refer to discussions of the Fund and comparative mutual fund data
and ratings reported in independent periodicals, including (but not
limited to) THE WALL STREET JOURNAL, MONEY , FORBES, BUSINESS WEEK,
FINANCIAL WORLD, BARRON'S, THE NEW YORK TIMES and FORTUNE.
The Fund may include discussions or illustrations of the effects
of compounding in performance advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on an investment in the
Fund are reinvested in additional Fund shares, any future income or
capital appreciation of the Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been
paid in cash.
The Fund may also compare its performance with the performance of
bank certificates of deposit ("CDs") as measured by the CDA Investment
Technologies, Inc., Certificate of Deposit Index and the Bank Rate Monitor
National Index. In comparing the Fund's performance to CD performance,
investors should keep in mind that bank CDs are insured in whole or in
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 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.
15
<PAGE>
Fund advertisements may reference the history of the distributor
and its affiliates, and the education and experience of the portfolio
manager. Advertisements may also describe techniques the Adviser employs
in selecting among the sectors of the fixed-income market and adjusting
average portfolio maturity. In particular, the advertisements may focus on
the technique of "value investing." With value investing, the Adviser
invests in those securities it believes to be undervalued in relation to
the long-term earning power or asset value of their issuers. Securities
may be undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling, or actual or anticipated
unfavorable developments affecting the issuer of the security.
In advertising, the Fund may illustrate hypothetical investment
plans designed to help investors meet long-term financial goals, such as
saving for a child's college education or for retirement. Sources such as
the Internal Revenue Service, the Social Security Administration, the
Consumer Price Index and Chase Global Data and Research may supply data
concerning interest rates, college tuitions, the rate of inflation, Social
Security benefits, mortality statistics and other relevant information.
The Fund may use other recognized sources as they become available.
The Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets
and to show the value of a hypothetical investment in a capital market.
Ibbotson relies on different indices to calculate the performance of
common stocks, corporate and government bonds and Treasury bills.
The Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is
represented by the performance of an appropriate market index, such as the
S&P 500 and the performance of bonds is represented by a nationally
recognized bond index, such as the Lehman Brothers Long-Term Government
Bond Index.
The Fund may also include in advertising biographical information
on key investment and managerial personnel.
The Fund may discuss Legg Mason's tradition of service. Since
1899, Legg Mason and its affiliated companies have helped investors meet
their specific investment goals and have provided a full spectrum of
financial services. Legg Mason affiliates serve as investment advisors
for private accounts and mutual funds with assets of more than $17 billion
as of December 31, 1994.
16
<PAGE>
ADDITIONAL TAX INFORMATION
Federal Tax
In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended ("Code"), the Fund must distribute annually to its shareholders at
least 90% of the sum of its net interest income excludable from gross
income under section 103(a) of the Code plus its investment company
taxable income (generally, taxable net investment income plus net short-
term capital gain, if any) and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, and gains from the sale or
other disposition of securities, or other income derived with respect to
its business of investing in securities; (2) the Fund must derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities held for less than three months; (3) at the
close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed
5% of the value of the Fund's total assets; and (4) 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) of any one issuer.
Tax-exempt interest attributable to certain "private activity
bonds" (including, if the Fund receives interest on such bonds, a
proportionate part of the exempt-interest dividends paid by the Fund) is a
TPI. Exempt-interest dividends received by a corporate shareholder also
may be indirectly subject to the alternative minimum tax, without regard
to whether the Fund's tax-exempt interest was attributable to those bonds.
Private activity bonds are issued by or on behalf of public authorities to
finance various privately operated facilities.
To the extent the Fund invests in instruments that generate
taxable income, distributions of the interest earned thereon will be
taxable to the Fund's shareholders as ordinary income to the extent of the
Fund's earnings and profits. Moreover, if the Fund realizes capital gains
as a result of market transactions, any distributions of those gains will
be taxable to its shareholders.
If Fund shares are sold at a loss after being held for six months
or less, the loss will be disallowed to the extent of any exempt-interest
dividends received with respect to those shares.
17
<PAGE>
Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by industrial
development bonds or private activity bonds should consult their tax
advisers before purchasing Fund shares because, for users of certain of
these facilities, the interest on those bonds is not exempt from federal
income tax. For these purposes, a "substantial user" generally includes a
"non-exempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of industrial development bonds or
private activity bonds.
Up to 85% of social security and railroad retirement benefits may
be included in taxable income for recipients whose adjusted gross income
(including income from tax-exempt sources such as the Fund) plus 50% of
their benefits exceeds certain base amounts. Exempt-interest dividends
from the Fund still are tax-exempt to the extent described in the
Prospectus; they are only included in the calculation of whether a
recipient's income exceeds certain established amounts.
The Fund is required to withhold 31% of taxable dividends payable
to any individuals and certain other noncorporate shareholders who do not
provide the Fund with a certified taxpayer identification number or who
otherwise are subject to backup withholding.
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 taxable ordinary income for that year and capital
gain net income for the one-year period ending on October 31 of that year,
plus certain other amounts.
State and Local Income Tax
The exemption of certain interest income for federal income tax
purposes does not necessarily result in exemption thereof under the income
or other tax laws of any state or local taxing authority. A shareholder
may be exempt from state and local taxes on distributions of interest
income derived from obligations of the state and/or localities of the
state in which he or she is a resident, but generally will be taxed on
income derived from obligations of other jurisdictions. Shareholders
receive notification annually of the portion of the Fund's tax-exempt
income attributable to each state. Shareholders should consult their tax
advisers about the tax status in their own states and localities of
distributions from the Fund.
VALUATION OF SHARES
18
<PAGE>
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, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
Use of the Amortized Cost Method
The directors have determined that the interests of shareholders
are best served by using the amortized cost method for determining the
value of portfolio instruments. Under this method, portfolio instruments
are valued at acquisition cost, adjusted for amortization of premium or
accumulation of discount, rather than at current market value. The Board
of Directors periodically assesses the 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 Investment
Company Act of 1940 ("1940 Act"). Under that Rule, the directors must
establish procedures reasonably designed to stabilize the net asset value
per share, as computed for purposes of distribution and redemption, at
$1.00 per share, taking into account current market conditions and the
Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments
which are subject to demand features or stand-by 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 397 days
on no more than 30 days' notice. A stand-by 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 stand-by 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 stand-by commitments are features which enhance an
instrument's liquidity. The Fund's 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
19
<PAGE>
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 directors will take any steps they
consider appropriate (such as shortening the dollar-weighted average
portfolio maturity) to minimize any material dilution or other 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, in the
opinion of the directors, present minimal credit risk and are rated in one
of the two highest short-term ratings categories by nationally recognized
statistical rating organizations or, if unrated, are determined to be of
comparable quality. 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 in 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. However, the
Rule permits the Fund to treat certain floating and variable rate demand
notes as having maturities of 397 days or less, even if the notes specify
a final repayment date more than 397 days in the future.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90 days
or less as soon as possible.
It is the Fund's usual practice to hold portfolio securities to
maturity and realize par, unless the Adviser determines that sale or other
disposition is appropriate in light of the Fund's investment objective.
Under the amortized cost method of valuation, neither the amount of daily
income nor the net asset value is affected by any unrealized appreciation
or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield
on shares of the Fund, computed by dividing the annualized daily income on
the Fund's investment portfolio by the net asset value computed as above,
may tend to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
20
<PAGE>
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.
THE CORPORATION'S DIRECTORS AND OFFICERS
The Corporation's officers are responsible for the operation of
the Corporation under the direction of the Board of Directors. The
Corporation's officers and directors and their principal occupations
during the past five years are set forth below. An asterisk (*) indicates
those officers and/or directors who are "interested persons" of the
Corporation as defined in the 1940 Act, because of their relationship to
Legg Mason or the Adviser. The address of each officer and director is
111 South Calvert Street, Baltimore, Maryland 21202, unless otherwise
indicated.
JOHN F. CURLEY, JR.*, [55] Chairman of the Board and Director;
Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg Mason,
Inc.; Director of Legg Mason Fund Adviser, Inc. and Western Asset
Management Company; Officer and/or Director of various other affiliates of
Legg Mason, Inc.; President and Director of three Legg Mason funds;
Chairman of the Board and Director of three Legg Mason funds; President
and/or Chairman of the Board and Trustee of two Legg Mason funds.
EDMUND J. CASHMAN, JR.*, [58] President and Director; Senior
Executive Vice President and Director of Legg Mason, Inc.; Officer and/or
Director of various other affiliates of Legg Mason, Inc.; Director of
Worldwide Value Fund, Inc.; Vice Chairman and Director of one Legg Mason
fund; President and Trustee of one Legg Mason fund.
RICHARD G. GILMORE, [67] Director; 5534 Chanteclaire, Sarasota,
Florida. Independent Consultant; Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia
Electric Company); Director of six Legg Mason funds; and Trustee of one
Legg Mason fund. Formerly: Senior Vice President and Chief Financial
Officer of Philadelphia Electric Company (now PECO Energy Company);
Executive Vice President and Treasurer, Girard Bank, and Vice President of
its parent holding company, the Girard Company; and Director of Finance,
City of Philadelphia.
CHARLES F. HAUGH, [69] Director; 14201 Laurel Park Drive, Laurel,
Maryland. Real Estate Developer and Investor; Chairman of Resource Realty
21
<PAGE>
LLC (management of retail and office space); President and Director of
Resource Enterprises, Inc. (real estate brokerage); Partner in Greater
Laurel Health Park Ltd. Partnership (real estate investment and
development); Director of six Legg Mason funds; Trustee of two Legg Mason
funds.
ARNOLD L. LEHMAN, [51] Director; The Baltimore Museum of Art, Art
Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of
Art; Director of six Legg Mason funds; Trustee of two Legg Mason funds.
JILL E. McGOVERN, [50] Director; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation;
Director of six Legg Mason funds; Trustee of two Legg Mason funds.
Formerly: Executive Director of the Baltimore International Festival
(January, 1991 - March, 1993); and Senior Assistant to the President of
The Johns Hopkins University (1986-1991).
T. A. RODGERS, [60] Director; 2901 Boston Street, Baltimore,
Maryland. Principal, T.A. Rodgers & Associates (management consulting);
Director of six Legg Mason funds; Trustee of one Legg Mason fund.
Formerly: Director and Vice President of Corporate Development, Polk
Audio, Inc. (manufacturer of audio components).
The executive officers of the Corporation, other than those who
also serve as directors, are:
KATHI D. GLENN *, [30] Secretary and Assistant Treasurer;
Secretary and Assistant Treasurer of Legg Mason Special Investment Trust,
Inc. and Legg Mason Global Trust, Inc.; employee of Legg Mason.
MARIE K. KARPINSKI *, [46] Vice President and Treasurer;
Treasurer of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer
of eight Legg Mason funds; Secretary/Treasurer of Worldwide Value Fund,
Inc.; Vice President of Legg Mason.
BLANCHE P. ROCHE *, [46] Assistant Vice President and Assistant
Secretary; Assistant Vice President and Assistant Secretary of seven Legg
Mason funds; employee of Legg Mason since 1991. Formerly: Manager of
Consumer financial services Primerica Corporation (1989-1991).
Officers and directors of the Corporation who are "interested
persons" of the Corporation, as defined in the 1940 Act, receive no salary
or fees from the Corporation. Directors who are not interested persons of
the Corporation receive a fee of $400 annually for serving as a director
22
<PAGE>
and a fee of $400 for each meeting of the Board of Directors attended by
him or her. During the year ended December 31, 1994, the independent
directors as a group received a total of $10,000. On December 31, 1994,
the directors and officers of the Corporation beneficially owned, in the
aggregate, less than 1% of the Fund's outstanding shares.
The Commonwealth of Pennsylvania-Pennvest, Finance Building, Room
126, Harrisburg, PA 17120, owned of record and beneficially 11.69% of the
Corporation's outstanding shares as of February 28, 1995.
The Nominating Committee of the Board of Directors is responsible
for the selection and nomination of disinterested directors. The
Committee is composed of Messrs. Haugh, Gilmore, Lehman, Rodgers and Dr.
McGovern, each of whom is a disinterested director as that term is defined
in the 1940 Act.
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended
December 31, 1994.
23
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
Total Compensation
Pension or Retirement Estimated Annual From Corporation and
Name of Person and Aggregate Compensation Benefits Accrued as Part Benefits Upon Fund Complex Paid to
Position From Corporation* of Corporation's Expenses Retirement Directors**
John F. Curley, Jr. -
Chairman of the Board
and Director None N/A N/A None
Edmund J. Cashman, Jr.
Vice Chairman and
Director None N/A N/A None
Marie K. Karpinski -
Vice President and
Treasurer None N/A N/A None
Richard G. Gilmore -
Director $2,000 N/A N/A $21,600
Charles F. Haugh -
Director $2,000 N/A N/A $23,600
Arnold L. Lehman -
Director $2,000 N/A N/A $23,600
Jill E. McGovern -
Director $2,000 N/A N/A $23,600
T. A. Rodgers -
Director $2,000 N/A N/A $21,600
* Represents fees paid to each director during the fiscal year ended December 31, 1994.
** Represents aggregate compensation paid to each director during the calendar year ended December 31, 1994.
</TABLE>
24
<PAGE>
THE FUND'S INVESTMENT ADVISER
The Adviser, located at 111 South Calvert Street, Baltimore, Maryland
21202, is a wholly owned subsidiary of Legg Mason, Inc., which also is the
parent of Legg Mason . The Adviser serves as the Fund's investment
adviser and manager under an Investment Advisory and Management Agreement
("Advisory Agreement") dated July 1, 1983 that was most recently approved
by the Corporation's Board of Directors, including a majority of the
directors who are not "interested persons" of the Fund or the Adviser, on
October 21, 1994. The Advisory Agreement provides that, subject to
overall direction by the Board of Directors, the Adviser manages the
investment and other affairs of the Fund. The Adviser is responsible for
managing the Fund consistent with the Fund's investment objectives and
policies described in the Prospectus and this Statement of Additional
Information. The Adviser also is obligated to (a) furnish the Fund with
office space and executive and other personnel necessary for the
operations of the Fund; (b) supervise all aspects of the Fund's
operations; (c) bear the expense of certain informational and purchase and
redemption services to Fund shareholders; (d) arrange, but not pay for,
the periodic updating of prospectuses, proxy material, tax returns and
reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to the Corporation's officers and directors. The Adviser
and its affiliates pay all the compensation of directors and officers of
the Corporation who are employees of the Adviser. The Fund is obligated
to pay all its other expenses which are not assumed by the Adviser. These
expenses include, among others, interest expense, taxes, auditing and
accounting fees, distribution fees, if any, fees and expenses of the
independent directors of the Corporation, brokerage fees and commissions,
expenses of preparing prospectuses and of printing and distributing
prospectuses annually to existing shareholders, custodian charges,
transfer agency fees, legal expenses, insurance expenses, association
membership dues, governmental fees, expenses of registering and qualifying
Fund shares for sale under federal and state law, and the expense of
reports to shareholders, shareholders' meetings and proxy solicitations.
The Fund is also obligated to pay the expenses for maintenance of its
financial books and records, including computation of the Fund's daily net
asset value per share and dividends. The Fund is also liable for such
nonrecurring expenses as may arise, including litigation to which the Fund
may be a party. The Corporation may have an obligation to indemnify its
directors and officers with respect to any litigation.
Under the Advisory Agreement, the Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by the 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 thereunder.
25
<PAGE>
As explained in the Prospectus, the Adviser receives for its services
a fee, calculated daily and payable monthly, at an annual rate of 0.50% of
the average daily net assets of the Fund. For the years ended December
31, 1994, 1993 and 1992, fees of $1,224,832, $877,564 and $911,216,
respectively, were paid to the Adviser by the Fund.
The Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Fund's Board of
Directors, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser, on not less than 60 days' notice to the
Fund and may be terminated immediately upon the mutual written consent of
the Adviser and the Fund.
Certain states impose limitations on the annual expenses of investment
companies such as the Fund. The most restrictive annual expense
limitation requires that the Adviser reimburse the Fund for certain
expenses,including the advisory fees received by it (but excluding
expenses for interest, taxes, distribution fees, brokerage fees and
commissions and certain extraordinary charges, such as litigation
expenses) in any fiscal year in which the Fund's expenses exceed 2.5% of
the first $30 million, 2% of the next $70 million and 1.5% of the balance
over $100 million of average daily net assets. The Fund may suspend sales
in a state at its option in order to be subject to a less stringent
requirement. In such a case, shareholders and others in that state could
not purchase new shares of the Fund, but such shareholders could continue
to have dividends and other distributions on their existing Fund shares
automatically reinvested in additional shares and credited to their
accounts, unless prohibited by applicable state law. No reimbursement
pursuant to state expense limitations has been required since the Fund's
inception in 1983.
Under the Advisory Agreement, the Fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated or until the
right is withdrawn in writing by the Adviser.
To mitigate the possibility that the Fund will be affected by personal
trading of employees, the Corporation and the Adviser have adopted
policies that restrict securities trading in the personal accounts of
portfolio managers and others who normally come into advance possession of
information on portfolio transactions. These policies comply, in all
material respects, with the recommendations of the Investment Company
Institute.
THE FUND'S DISTRIBUTOR
26
<PAGE>
Legg Mason acts as distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Corporation. 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 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"), pursuant to which the directors in their sole discretion may
authorize the Fund to pay Legg Mason a fee for its distribution and
shareholder services not to exceed an annual rate of 0.20% of the Fund's
average daily net assets. Legg Mason has no present intention of
requesting such a fee, but may do so in the future. Any such payments
would be limited in accordance with the rules of the National Association
of Securities Dealers, Inc. Legg Mason may also receive payments for
shareholder services from the Adviser out of fees paid to the Adviser, its
past profits or any other source of funds available to it.
Any payments authorized under the Plan and the purpose of such
payments must be reviewed at least quarterly by the Board of Directors and
adjusted if appropriate. Activities for which such payments may be made
include, but are not limited to, compensation to persons who engage in or
support distribution and redemption of shares, printing of prospectuses
and reports for persons other than existing shareholders, advertising,
preparation and distribution of sales literature, overhead, travel and
telephone expenses.
As required by Rule 12b-1 under the 1940 Act, the Plan was most
recently approved by the Board of Directors, including a majority of the
directors who are not "interested persons" of the Fund and who have no
direct or indirect financial interest in the operation of the Plan or in
the Underwriting Agreement ("12b-1 directors"), on October 21, 1994. The
Plan was also approved by vote of a majority of the outstanding shares of
the Fund on July 20, 1984. In approving and continuing the Plan, in
accordance with the requirements of Rule 12b-1, the directors considered
various factors, including the amount of the distribution fee, and
determined that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders.
The Plan continues in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including
the 12b-1 directors, cast at a meeting called for the purpose of voting
on the Plan. The Plan may be terminated by vote of a majority of the 12b-
1 directors or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act). Any change in the
27
<PAGE>
Plan that would materially increase the distribution cost to the Fund
requires shareholder approval; otherwise, the Plan may be amended by the
directors, including a majority of the 12b-1 directors.
In accordance with Rule 12b-1, the Plan provides that Legg Mason will
give to the Corporation's Board of Directors, and the directors 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, so long as the Plan is in effect, the selection and
nomination of the 12b-1 directors will be committed to the discretion of
such 12b-1 directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement authorizes the Adviser (subject to the overall
direction of the Corporation's Board of Directors) to select brokers and
dealers to execute purchases and sales of the Fund's portfolio securities.
It directs the Adviser to use its best efforts to obtain the best
available price and most favorable execution with respect to all
transactions for the Fund. The Adviser undertakes to execute each
transaction at a price and commission that provides the most favorable
total cost or proceeds reasonably obtainable under the circumstances. The
Fund's portfolio securities are generally purchased either directly from
the issuer or from dealers who specialize in municipal bonds and money
market instruments. To the extent that the execution and price offered by
more than one dealer are comparable, the Adviser may, at its discretion,
effect transactions in portfolio securities with dealers who provide the
Fund with research, advice or other services. Since the commencement of
operations on July 14, 1983, the Fund has incurred no brokerage
commissions.
Portfolio securities are not purchased from or sold to the Adviser or
Legg Mason or any "affiliated person" (as defined in the 1940 Act)
thereof, except in accordance with SEC rules or actions. The
Corporation's Board of Directors has adopted procedures in conformity with
Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities
that are offered in underwritings in which Legg Mason or other affiliated
persons are participants, though no such purchases have occurred since
commencement of operations.
THE CORPORATION'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105
serves as custodian of the Fund's assets. Boston Financial Data Services,
P.O. Box 8000, Boston, MA 02266-8000 serves as transfer and dividend-
28
<PAGE>
disbursing agent for the Fund and administrator of various shareholder
services.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart, 1800 M Street, N.W., Washington, D.C., 20036,
serves as counsel to the Corporation.
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, MD
21202, are the Corporation's independent accountants.
FINANCIAL STATEMENTS
The Fund's Statement of Net Assets as of December 31, 1994; the
Statement of Operations for the year ended December 31, 1994; the
Statement of Changes in Net Assets for the years ended December 31, 1994
and 1993; the Financial Highlights for the periods presented; the Notes to
Financial Statements; and the Report of Independent Accountants, each of
which is included in the Annual Report to Shareholders of the Fund dated
December 31, 1994, are hereby incorporated by reference in this Statement
of Additional Information.
29
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
1. Description of Moody's Investors Service, Inc. ("Moody's") Ratings
Municipal Bonds which are rated Aaa by Moody's 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. Bonds 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 long-term
risks appear somewhat larger than in Aaa securities.
Municipal Notes Moody's ratings for state and municipal notes and
other short-term obligations are designated Moody's Investment Grade
("MIG") and for variable rate demand obligations are designated Variable
Moody's Investment Grade ("VMIG"). This distinction is in recognition of
the differences between short-term credit risk and long-term credit risk.
Notes bearing the designation MIG-1 or VMIG-1 are of the best quality,
enjoying strong protection from established cash flows for their servicing
or from established and broad-based access to the market for refinancing,
or both. Notes bearing the designation MIG-2 or VMIG-2 are judged to be
of high quality, with margins of protection ample although not so large as
in the preceding group.
Commercial Paper The ratings Prime-1 and Prime-2 are the two highest
commercial paper ratings assigned by Moody's. Among the factors
considered in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry
or industries and an appraisal of speculative-type risks which may be
inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount
and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships
which exist with the issuer; and (8) recognition by the management of
obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1, -2, or -3.
<PAGE>
2. Description of Standard & Poor's Ratings Group ("S&P")
Municipal Bonds rated AAA by S&P are the highest grade obligations.
This rating indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
Municipal Notes Municipal notes with maturities of three years or
less are usually given note ratings (designated SP-1, -2, or -3) by S&P to
distinguish more clearly the credit quality of notes as compared to bonds.
Notes rated SP-1 have a very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics are given the designation SP-1+.
Commercial Paper Commercial paper rated A (highest quality) by S&P
has the following characteristics: liquidity ratios are adequate to meet
cash requirements and long-term senior debt is rated "A" or better,
although in some cases "BBB" credits may be allowed; the issuer has access
to at least two additional channels of borrowing; basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances;
typically, the issuer's industry is well established and the issuer has a
strong position within the industry; the reliability and quality of
management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-
1 or A-2.
A-2
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
Part C. Other Information
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements: The financial statements of the
Fund for the year ended December 31, 1994 and the report
thereon of the independent accountants are incorporated
into the Statement of Additional Information by reference
to the Annual Report to Shareholders for the same period.
The Fund's Financial Data Schedules appear as Exhibit 27
(b) Exhibits
(1) (a) Charter 1/
(b) Charter Amendment 2/
(2) (a) Amended By-Laws 3/
(b) Amendment to By-Laws (effective May 10, 1991)
(3) Voting Trust Agreement - none
(4) Specimen Security 4/
(5) Investment Advisory and Management Agreement 5/
(6) Underwriting Agreement 1/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 6/
(9) Transfer Agent and Service Agreement 6/
(10) Opinion and Consent of Counsel 4/
(11) Other opinions, appraisals, rulings and consents
-Accountant's consent -- filed herewith
(12) Financial statements omitted from prospectus -- none
(13) Agreement for providing initial capital 4/
(14) Prototype Retirement Plan -- none
(15) Plan pursuant to Rule 12b-1 5/
(16) Schedule for Computation of Performance Quotations --
filed herewith
(27) Financial Data Schedules
____________________
1/ Incorporated by reference from the initial registration statement, SEC
File No. 2-78562, filed July 26, 1982.
2/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
registration statement, SEC File No. 2-78562, filed February 15, 1983.
3/ Incorporated by reference from Post-Effective Amendment No. 7 to the
registration statement, SEC File No. 2-78562, filed April 26, 1988.
4/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
initial registration statement, SEC File No. 2-78562, filed July 1, 1983.
5/ Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement, SEC File No. 2-78562, filed January 27, 1984.
<PAGE>
6/ Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement, SEC File No. 2-78562, filed April 30, 1992.
<PAGE>
Item 25. Persons Controlled By or Under Common Control with
Registrant
-------------------------------------------------
None
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Shareholders
Title of Class as of March 31, 1995
------------- -------------------------------
Shares of Common Stock,
par value $0.001 per share 6,984
Item 27. Indemnification
---------------
This item is incorporated by reference from Item 4 of Part II of Pre-
Effective Amendment No. 1 to the registration statement, SEC File No. 2-
78562, filed February 15, 1983.
Item 28. Business and Connections of Manager and Investment
Adviser
--------------------------------------------------
Legg Mason Fund Adviser, Inc. ("Fund Adviser"), the Registrant's
investment adviser, is a registered investment adviser incorporated on
January 20, 1982. Fund Adviser is engaged primarily in the investment
advisory business. Fund Adviser also serves as investment adviser or
manager for fourteen open-end investment companies, and as investment
consultant for a closed-end investment company. Information as to the
officers and directors of Fund Adviser is included in its Form ADV-S filed
on June 30, 1994 with the Securities and Exchange Commission (registration
number 801-16958) and is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, 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>
<TABLE>
<CAPTION
<C>
<S> <C> Positions and
Name and Principal Position and Offices Offices with
Business Address* with Underwriter - LMWW Registrant
------------------ ---------------------- -------------
Raymond A. Mason Chairman of the Board None
John F. Curley, Jr. Vice Chairman Chairman of the
Board and Director
James W. Brinkley President and Director None
Edmund J. Cashman, Jr. Senior Executive Vice President and
President and Director Director
Robert G. Sabelhaus Executive Vice None
President and Director
Richard J. Himelfarb Executive Vice None
President and Director
Edward A. Taber III Executive Vice None
President and Director
Charles A. Bacigalupo Senior Vice President, None
Secretary and Director
Thomas M. Daly, Jr. Senior Vice President None
and Director
Jerome M. Dattel Senior Vice President None
and Director
Robert G. Donovan Senior Vice President None
and Director
William F. Haneman, Jr. Senior Vice President None
One Battery Park Plaza and Director
New York, New York 10005
Thomas E. Hill Senior Vice President None
One Mill Place and Director
Easton, MD 21601
Arnold S. Hoffman Senior Vice President None
1735 Market Street and Director
Philadelphia, PA 19103
<PAGE>
<C>
<S> <C> Positions and
Name and Principal Position and Offices Offices with
Business Address* with Underwriter - LMWW Registrant
------------------ ---------------------- -------------
Carl Hohnbaum Senior Vice President None
24th Floor and Director
Two Oliver Plaza
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice President None
1747 Pennsylvania and Director
Avenue, N.W.
Washington, D.C. 20006
Laura L. Lange Senior Vice President None
and Director
Marvin McIntyre Senior Vice President None
1747 Pennsylvania and Director
Avenue, N.W.
Washington, D.C. 20006
Douglas C. Petty, Jr. Senior Vice President None
1747 Pennsylvania and Director
Avenue, N.W.
Washington, D.C. 20006
Mark I. Preston Senior Vice President None
and Director
F. Barry Bilson Senior Vice President None
and Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice President None
Edward R. Hipp, III Senior Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23607
Theodore S. Kaplan Senior Vice President None
and General Counsel
Horace M. Lowman, Jr. Senior Vice President None
and Asst. Secretary
Robert L. Meltzer Senior Vice President None
One Battery Park Plaza
New York, NY 10004
William H. Miller, III Senior Vice President None
<PAGE>
<C>
<S> <C> Positions and
Name and Principal Position and Offices Offices with
Business Address* with Underwriter - LMWW Registrant
------------------ ---------------------- -------------
John A. Pliakas Senior Vice President None
99 Summer Street
Boston, MA 02101
E. Robert Quasman Senior Vice None
Gail Reichard President Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice President None
and Treasurer
Elisabeth N. Spector Senior Vice President None
Joseph Sullivan Senior Vice President None
Peter J. Biche Vice President None
1735 Market Street
Philadelphia, PA 19103
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Robert Dickey, IV Vice President None
One World Trade Center
New York, NY 10048
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
John J. Koorey Vice President None
One Battery Park Plaza
New York, NY 10004
<PAGE>
<C>
<S> <C> Positions and
Name and Principal Position and Offices Offices with
Business Address* with Underwriter - LMWW Registrant
------------------ ---------------------- -------------
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
Eileen M. O'Rourke Vice President and None
Controller
Marie K. Karpinski Vice President Vice President
and Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
</TABLE>
----------------------
* All addresses are 111 South Calvert 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.
<PAGE>
Item 30. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
-------------------
None
Item 32. Undertakings
------------
Registrant hereby undertakes to provide each person to
whom a prospectus is delivered with a copy of its latest
annual report to shareholders upon request and without
charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Tax Exempt
Trust, Inc. certifies that it meets all the requirements for effectiveness
in this Post-Effective Amendment No. 18 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, thereunto duly authorized, in the City of Baltimore and State
of Maryland, on the 23rd day of April, 1995.
LEGG MASON TAX EXEMPT TRUST, INC.
/s/ John F. Curley, Jr.
by:_________________________________
John F. Curley, Jr.
Chairman of the Board and Director
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 18 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ John F. Curley, Jr. Chairman of the Board April 23, 1995
-------------------------- and Director
John F. Curley, Jr.
/s/ Edmund J. Cashman, Jr. President and Director April 23, 1995
--------------------------
Edmund J. Cashman, Jr.
/s/ Richard G. Gilmore Director April 23, 1995
--------------------------
Richard G. Gilmore*
/s/ Charles F. Haugh Director April 23, 1995
--------------------------
Charles F. Haugh*
/s/ Arnold L. Lehman Director April 23, 1995
--------------------------
Arnold L. Lehman*
/s/ Jill E. McGovern Director April 23, 1995
--------------------------
Jill E. McGovern*
<PAGE>
/s/ T.A. Rodgers Director April 23, 1995
--------------------------
T.A. Rodgers*
/s/ Marie K. Karpinski Vice President and April 23, 1995
-------------------------- Treasurer
Marie K. Karpinski
</TABLE>
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney,
dated May 18, 1992, incorporated herein by reference to Post-Effective
Amendment No. 14, filed August 27, 1992.
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
_______
To the Board of Directors of
Legg Mason Tax Exempt Trust, Inc.:
We consent to the incorporation by reference in Post-Effective
Amendment No. 18 to the Registration Statement of Legg Mason Tax Exempt
Trust, Inc. (the "Corporation") on Form N-1A (File No. 2-78562) of our
report dated February 3, 1995 on our audit of the financial statements and
financial highlights of the Corporation, which report is included in the
Annual Report to Shareholders for the year ended December 31, 1994, which
is incorporated by reference in the Registration Statement. We also
consent to the reference to our Firm under the caption "The Corporation's
Independent Accountants."
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 26, 1995
Exhibit 16
LEGG MASON TAX EXEMPT TRUST YIELD CALCULATIONS:
-----------------------------------------------
1. 7 day yield at 12/31/94 annualized:
[7 days dividends ended 12/31/94 divided by 7 x 365] =
----------------------------------------------------
$1.00 (NAV)
(.000719824 divided by 7 x 365) = 3.75%
-------------------------------
1.00
2. Effective yield:
365
-----
7
[base period return + 1] - 1 =
365
---
7
(.000719824 + 1) - 1 = 3.82%
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> Legg Mason Tax Exempt Trust, Inc.
<NUMBER>
<MULTIPLIER> 1
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> 31-Dec-94
<PERIOD-START> 01-Jan-94
<PERIOD-END> 31-Dec-94
<INVESTMENTS-AT-COST> 221,884,372
<INVESTMENTS-AT-VALUE> 221,884,372
<RECEIVABLES> 3,703,798
<ASSETS-OTHER> 18,774
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 225,606,944
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,116,916
<TOTAL-LIABILITIES> 3,116,916
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 222,517,691
<SHARES-COMMON-PRIOR> 237,630,977
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,663)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 222,490,028
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,048,725
<OTHER-INCOME> 0
<EXPENSES-NET> 1,584,222
<NET-INVESTMENT-INCOME> 5,464,503
<REALIZED-GAINS-CURRENT> (8,131)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,456,372
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,464,503)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 794,480,171
<NUMER-OF-SHARES-REDEEMED> (814,888,541)
<SHARES-REINVESTED> 5,295,100
<NET-CHANGE-IN-ASSETS> (15,121,418)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (19,532)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,224,832
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,584,222
<AVERAGE-NET-ASSETS> 244,966,329
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
