As filed with the Securities and Exchange Commission on April 30, 1996.
1933 Act File No. 2-78562
1940 Act File No. 811-3526
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
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Post-Effective Amendment No: 19 [X]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 17
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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 LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on May 1 , 1996 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1996 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1996 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 29, 1996.
<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>
TABLE OF CONTENTS
Prospectus Highlights 2 PROSPECTUS
MAY 1, 1996
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 10
How You Can Redeem Your Fund Shares 10 LEGG MASON
How Net Asset Value is Determined 11 TAX
Dividends 11 EXEMPT
Tax Treatment of Dividends 12 TRUST, INC.
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 15
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 PUTTING YOUR FUTURE FIRST
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 Massachusetts Avenue, N.W.,
Washington, DC 20036-1800 [LEGG MASON LOGO]
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] PRINTED ON RECYCLED PAPER
LMF-015
<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. AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. ALTHOUGH THE FUND ATTEMPTS TO MAINTAIN A CONSTANT NET ASSET
VALUE OF $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THE FUND WILL ALWAYS BE
ABLE TO DO SO.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. It should be retained for
future reference. A Statement of Additional Information about the Fund dated May
1, 1996 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).
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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, 1996
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 $266 million as of February 29, 1996
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
13.
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:
$500 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, 1995.
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.50%
12b-1 fees None
Other expenses 0.16%*
Total operating expenses 0.66%*
* The Fund has entered into an arrangement with its custodian whereby interest
earned on uninvested cash balances was used to reduce custodian expenses. The
Total operating expenses with this reduction were 0.65% of the Fund's average
net assets, and Other expenses were 0.15%.
EXAMPLE
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.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$7 $21 $37 $ 82
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 years ended December 31, 1986 through
1995 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, 1995 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,
1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income .0313 .0223 .0174 .0231 .0386 .0518 .0571 .0464
Dividends paid from net
investment income (.0313) (.0223) (.0174) (.0231) (.0386) (.0518) (.0571) (.0464)
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total return 3.17% 2.25% 1.75% 2.34% 3.93% 5.30% 5.86% 4.74%
RATIO/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Total expensesA .66% -- -- -- -- -- -- --
Net expensesB .65% .65% .69% .73% .69% .70% .72% .69%
Net investment
income 3.14% 2.23% 1.74% 2.33% 3.88% 5.18% 5.69% 4.63%
Net assets, end of
year (in
thousands) $224,656 $222,490 $237,611 $170,046 $176,752 $183,756 $159,815 $95,364
</TABLE>
<TABLE>
<CAPTION>
1987 1986
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year $1.00 $1.00
Net investment income .0392 .0410
Dividends paid from net
investment income (.0392) (.0410)
Net asset value, end of year $1.00 $1.00
Total return 3.99% 4.18%
RATIO/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Total expensesA -- --
Net expensesB .74% .71%
Net investment
income 3.97% 4.04%
Net assets, end of
year (in
thousands) $81,769 $84,857
</TABLE>
(A)PURSUANT TO NEW SECURITIES AND EXCHANGE COMMISSION REGULATIONS, EFFECTIVE
DECEMBER 31, 1995, THIS RATIO REFLECTS TOTAL EXPENSES BEFORE COMPENSATING
BALANCE CREDITS. PREVIOUSLY, THE CREDITS WERE INCLUDED IN THE RATIO.
(B)THIS RATIO REFLECTS TOTAL EXPENSES INCLUDING COMPENSATING BALANCE CREDITS.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may quote its yield, including its 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 shareholder reinvests income earned by an investment. 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 after-tax income at a stated tax rate as the Fund's tax-exempt yield.
Tax-equivalent effective yield shows the taxable effective yield that would
produce the same after-tax income at a stated tax rate as the Fund's tax-exempt
effective yield.
Yield information may be useful in reviewing the Fund's performance and
providing a basis for comparison with other investment alternatives. However,
the Fund's yield may change in response to fluctuations in market interest rates
and Fund expenses. Past performance is not a guarantee of future performance.
The Fund's yield for the seven-day period ended December 31, 1995 was 3.47%.
The effective yield for the same period was 3.53%.
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. Under normal conditions, the Fund 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 the Fund will always be able to maintain a net
asset value of $1.00 per share or that it will achieve its investment
objectives.
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 persons related to such "substantial users." See "Tax
Treatment of Dividends," page 11, and "Additional Tax Information" in the
Statement of Additional Information.
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. For purposes of the above policy, the remaining maturities of variable or
floating rate demand notes are calculated under the applicable SEC guidelines.
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 ("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. In certain
circumstances, the non-government user of facilities financed by industrial
development bonds or private activity bonds is 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.
6
<PAGE>
Municipal Obligations include debt obligations issued to obtain funds for
various public purposes, 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 adversely
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. Efforts are also under way that may result in a "flat tax"
or other restructuring of the federal income tax system. These developments
could reduce the value of all municipal securities, or the securities of
particular issuers.
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) that entitles the Fund to same day settlement. Under a
stand-by commitment, a broker, dealer or bank agrees to purchase, at the Fund's
option, specified Municipal Obligations at amortized cost plus accrued interest.
The
7
<PAGE>
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.
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. These notes may be supported by an unconditional
bank letter of credit guaranteeing payment of the principal or both the
principal and accrued interest. The Fund, as permitted by the SEC, may rely on
the credit enhancement in purchasing demand notes. Because the Fund invests in
such securities backed by banks and other financial institutions, changes in the
credit quality of these institutions could cause losses to the Fund and affect
its share price. 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 397 days 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 397 days 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 $500, except as
noted below. Those investing through the Fund's Future First Systematic
Investment Plan, payroll deduction plans and plans involving automatic transfer
of funds from Legg Mason brokerage accounts, accounts with other financial
institutions and 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.
Clients of certain institutions that maintain omnibus accounts with the
Fund's transfer agent may obtain shares through those institutions. Such
institutions may receive payments from the Fund's distributor for account
servicing, and may receive
8
<PAGE>
payments from their clients for other services performed. Investors can purchase
Fund shares from Legg Mason without receiving or paying for such other services.
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 $500 or more (payable to "Legg Mason Tax Exempt
Trust, Inc.") to:
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 by 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. 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 ("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.
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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 10 business days after purchase of such
shares by check unless the Fund can be reasonably assured during that period
that payment of the full purchase price 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.
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 three business days of redemption but may take longer, as permitted by
law (up to seven days in some cases) if the Adviser believes that immediate
payment could adversely affect the Fund. 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
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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 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 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 three business 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 to make an
additional investment to avoid having your account closed.
The Statement of Additional Information describes several circumstances in
which the date of redemption may be postponed or the right of redemption
suspended 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.
Because the Fund's policy is, under normal circumstances, to hold portfolio
securities to
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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, if any), as designated by the Fund, equal to the
excess of the excludable interest 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 maintained by a shareholder in order to
purchase or hold 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
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 VISA Gold debit card and 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.
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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.
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 International Equity Trust
A mutual fund seeking maximum long-term total return, by investing primarily
in common stocks of companies located in at least three different countries
other than the United States.
Legg Mason Emerging Markets Trust
A mutual fund seeking long-term capital appreciation, by investing primarily
in equity securities of companies based in or doing business in emerging markets
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, through investment in
a diversified portfolio consisting primarily 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)
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)
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,B)
A tax-exempt municipal bond fund seeking a high level of current income
exempt from federal income tax, consistent with prudent investment risk.
(A) Shares of these funds are sold with an initial sales charge.
(B) Effective August 1, 1995 through July 31, 1996, the sales charge will be
waived for all new accounts and subsequent investments into existing
accounts. After July 31, 1996, any exchanges of these shares will be subject
to the full sales charge, if any, since no sales charge will have been paid
on shares purchased during this period.
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<PAGE>
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 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 sixteen
investment company portfolios which had aggregate assets under management of
over $5.4 billion as of February 29, 1996. 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, 1995, Legg
Mason received $41,658 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.
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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 material increase in the
fees payable under the 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.
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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, 1996, 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, 1996
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 5
Additional Purchase and Redemption Information 7
How the Fund's Yield Is Calculated 11
Additional Tax Information 13
Valuation of Shares 15
The Corporation's Directors and Officers 16
The Fund's Investment Adviser 21
The Fund's Distributor 22
Portfolio Transactions and Brokerage 23
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 24
The Corporation's Legal Counsel 24
The Corporation's Independent Accountants 24
Financial Statements 24
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 do 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, limitations and policies 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 is not a TPI
("Municipal Obligations").
The Prospectus explains that the Fund, in selecting investments,
considers the ratings assigned to securities by nationally recognized
statistical rating organizations ("NRSROs"), such as Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's ("S&P"). The ratings of NRSROs represent
their opinions 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 to that interest's
not being a TPI 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.
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 litigation or other
conditions may materially and adversely affect the power or ability of issuers
to meet their obligations for the payment of interest and principal on their
Municipal Obligations.
From time to time, Congress has considered
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<PAGE>
proposals that would restrict or eliminate the federal income tax exemption for
interest on Municipal Obligations. If Congress enacted such a proposal, 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 take 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.
Commencing on the date of such commitment agreement, the Fund maintains
in a segregated account with the custodian, 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 to such a commitment, 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.
Stand-By Commitments
When the Fund exercises a stand-by commitment that it has acquired from
a dealer with respect to its investments in Municipal Obligations, the dealer
normally pays 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
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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 will be valued at zero in determining
net asset value. Where the Fund paid directly or indirectly for a stand-by
commitment, its cost will be reflected as unrealized depreciation during the
period the commitment is held by the Fund. Stand-by commitments will 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, generally the
value of a fixed rate obligation increases and the obligation sells at a
premium. Should interest rates increase , 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. Shortterm 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,
however, 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
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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. The note may be supported by an
unconditional bank letter of credit guaranteeing payment of the principal or
both the principal and accrued interest. The Adviser, as permitted by the SEC,
may take into consideration the creditworthiness of the bank issuing the letter
in making the investment decision. A change in the credit quality of the bank
backing a variable rate demand note could result in a loss to the Fund and
affect its share price.
The Board of Directors of the Corporation has approved investments by
the Fund in floating rate and variable rate demand notes. The SEC permits some
instruments to be deemed to have remaining maturities of 397 days or less,
notwithstanding that the date on which final payment is due may be 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.
The Fund may suffer a loss to the extent that proceeds from the sale
upon a default of the obligation to repurchase are less than the repurchase
price. 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
expenses in connection with this trading, because the transactions ordinarily
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are made directly with the issuer or a dealer on a net price basis.
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 Investment Company Act of 1940 ("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;
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;
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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 the 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.
Although demand features and stand-by commitments are techniques that
are defined as "puts" under Rule 2a-7 of the 1940 Act, 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.
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.
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 $500. 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 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.
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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
If you own shares with a net asset value of $5,000 or more, you may
also elect to make systematic withdrawals from your Fund account of a minimum of
$50 on a monthly basis . The amounts paid to you each month are obtained by
redeeming sufficient shares from your account to provide the withdrawal amount
that you have specified. 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 ("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 and distributions, if any, the amount of your original
investment will be correspondingly reduced.
The Fund will not knowingly accept purchase orders 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.
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Legg Mason Premier Asset Management Account/VISA Account
Shareholders of the Fund who have cash or negotiable securities
(including Fund shares) valued at $20,000 or more in accounts with Legg Mason
may subscribe to Legg Mason's Premier Asset Management Account ("Premier"). This
program provides a direct link between a shareholder's Fund account and his or
her Brokerage Account. Premier provides shareholders with a convenient method to
invest in the Fund through their Brokerage Accounts, which includes automatic
daily investment of free credit balances of $100 or more and automatic weekly
investment of free credit balances of less than $100 into your designated money
market fund.
Premier is a comprehensive financial service which combines a
shareholder's Fund account, a VISA Gold debit card, a Legg Mason Brokerage
Account and unlimited checkwriting with no minimum check amount.
The VISA Gold debit card may be used to purchase merchandise or
services from merchants honoring VISA or to obtain cash advances (which a bank
may limit to $5,000 or less, per account per day) from any bank honoring VISA.
Checks, VISA charges and cash advances are posted to the shareholder's
account and create automatic same-day redemptions if shares are available in the
Fund. If Fund shares have been exhausted, the debits will remain in the margin
account, reducing the cash available. The shareholder will receive one
consolidated monthly statement which details all Fund transactions, securities
activity, checkwriting activity and VISA Gold purchases and cash advances.
BankOne Columbus ("BankOne"), 757 Carolyn Avenue, Columbus, Ohio 43271,
is the Fund's agent for processing payment of VISA Gold debit card charges and
clearance of checks written on the Premier Account. Shareholders are subject to
BankOne's rules and regulations governing VISA accounts, including BankOne's
right not to honor VISA drafts in amounts exceeding the authorization limit of
the shareholder's account at the time the VISA draft is presented for payment.
The authorization limit is determined daily by taking the shareholder's Fund
account balance and subtracting (1) all shares purchased by other than federal
funds wired within 15 days; (2) all shares for which certificates have been
issued; and (3) any previously authorized VISA transaction.
PREMIER CARD SERVICES Unlike some other investment programs which offer
the VISA card privilege, Premier also includes travel/accident insurance at no
added cost when shareholders purchase travel tickets with their Premier VISA
Gold debit card. Coverage is provided through VISA and extends up to $250,000.
If a VISA Gold debit card is lost or stolen, the shareholder should
report the loss immediately by contacting Legg Mason directly between the hours
of 8:30 a.m. and 5:00 p.m. eastern time, or BankOne collect after hours at
1-614-248-4242. Those shareholders who subscribe to the Premier VISA account
privilege may be liable for the unauthorized use of their VISA Gold debit card
in amounts up to $50.
Legg Mason is responsible for all Premier VISA Gold debit card
inquiries as well as billing and account resolutions. Simply call Legg Mason
Premier Client Services directly between 8:30 a.m. and 5:00 p.m. eastern time,
at 1-800-253-0454 or 1-410-528-2066 with your account inquiries.
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AUTOMATIC PURCHASES OF FUND SHARES For shareholders participating in
the Premier program who sell shares held in their Brokerage Account, any free
credit balances of $100 or more resulting from any such sale will automatically
be invested in shares of the Fund on the same business day the sale proceeds are
credited to the Brokerage Account. Free credit balances of less than $100 will
be invested in Fund shares weekly.
Free credit balances arising from sales of Brokerage Account shares for
cash (i.e., sameday settlement), redemption of debt securities, dividend and
interest payments and deposits of $100 or more will be invested automatically in
Fund shares on the next business day following the day the transaction is
credited to the Brokerage Account.
Fund shares will receive the next dividend declared following purchase
(normally 12:00 noon, eastern time, on the following business day). A purchase
order will not become effective until cash in the form of federal funds is
received by the Fund.
HOW TO OPEN A PREMIER ACCOUNT To subscribe to Premier services, clients
must contact their Legg Mason investment executive to execute a Premier Asset
Management Account Agreement with Legg Mason . Legg Mason charges a fee for the
Premier service, which is currently $85 per year for individuals and $100 per
year for businesses and corporations. Legg Mason reserves the right to alter or
waive the conditions upon which a Premier Account may be opened. Both Legg Mason
and BankOne reserve the right to terminate or modify any shareholder's Premier
services at their discretion.
You will receive your VISA Gold debit card (if applicable) from
BankOne. The Premier VISA Gold debit card may be used at over 8 million
locations, including 23,000 ATMs, in 24 countries around the world. Premier
checks will be sent to you directly. There is no limit to the number of checks
you may write against your Premier account.
Shareholders should be aware that the various features of the Premier
program are intended to provide easy access to assets in their accounts and that
the Premier Account is not a bank account. Additional information about the
Premier program is available by calling your Legg Mason or affiliated investment
executive or Legg Mason's Premier Client Services.
Other Information Regarding Redemption
The Fund reserves the right to modify or terminate the check, wire,
telephone or VISA Gold card redemption services described in the Prospectus and
this Statement of Additional Information at any time.
You may request the Fund's checkwriting service by sending a written
request to Legg Mason. State Street Bank and Trust Company ("State Street"), the
Fund's custodian, will supply you with checks which can be drawn on an account
of the Fund maintained with State Street. When honoring a check presented for
payment, the Fund will cause State Street to redeem exactly enough full and
fractional shares in your account to cover the amount of the check. Cancelled
checks will be returned to you.
Check redemption is subject to State Street's rules and regulations
governing checking
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accounts. Checks should not be used to close a Fund account, because when the
check is written you will not know the exact value of the account, including
accrued dividends, on the day the check clears. Persons obtaining certificates
for their shares may not use the checkwriting service.
The date of payment for a redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended except (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 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 portfolios, the method used to compute the yield
11
<PAGE>
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 seven-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 tax-equivalent effective yield for the seven-day period
ended December 31, 1995 were 5.75% and 5.84%, 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 will 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 will increase more quickly than if
dividends or other distributions were 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 are not insured or guaranteed
by the U.S. Government or any agency thereof and returns on such shares 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.
Fund advertisements may reference the history of the distributor and
its affiliates, and the education and experience of the portfolio manager.
The Fund may also include in advertising
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biographical information on key investment and managerial personnel.
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 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 $31 billion as of December
31, 1995.
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
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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.
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. 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 are still
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 substantially all of its taxable ordinary income by the
end of the calendar 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 of such income 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
14
<PAGE>
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
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 Board of Directors has 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 depends on its compliance
with Rule 2a-7 under the 1940 Act. Under that Rule, the Board of Directors must
establish procedures reasonably designed to stabilize the net asset value at
$1.00 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.
Monitoring Procedures
The Fund's procedures include monitoring the relationship between the
amortized cost value per share and net asset value per share based upon
available indications of market value. If there is a difference of more than
0.5% between the two, the Board of Directors will take any steps it considers
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
15
<PAGE>
methods of determining net asset value.
Investment Restrictions
Rule 2a-7 requires the Fund to limit its investments to instruments
that, in the opinion of the Board of 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.
The Fund usually holds portfolio securities to maturity and realizes
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, which is computed by dividing the annualized daily income on
the Fund's investment portfolio by the net asset value computed as above, may
tend to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on
shares of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
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.*, [57] 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
16
<PAGE>
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.*, [60] 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, [69] Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company 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; Trustee of two Legg Mason funds. 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 (bank holding
company) and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH, [71] Director; 14201 Laurel Park Drive, Laurel,
Maryland. Real Estate Developer and Investor; President and Director of Resource
Enterprises, Inc. (real estate brokerage); Chairman of Resource Realty LLC
(management of retail and office space); 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, [53] 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, [52] 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); Senior
Assistant to the President of The Johns Hopkins University (1986- 1991).
T. A. RODGERS, [62] Director; 2901 Boston Street, Baltimore, Maryland.
Principal, T. A. Rodgers & Associates (management consulting); Director of six
Legg Mason funds; Trustee of two Legg Mason funds. Formerly: Director and Vice
President of Corporate Development, Polk Audio, Inc. (manufacturer of audio
components) (1991-1992).
The executive officers of the Corporation, other than those who also
serve as directors, are:
KATHI D. BAIR *, [31] Secretary and Assistant Treasurer; Secretary and
Assistant Treasurer/Secretary/Assistant Secretary of seven Legg Mason funds;
employee of Legg Mason.
MARIE K. KARPINSKI *, [47] 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 *, [47] Assistant Vice President and Assistant
Secretary; Assistant Vice President and Assistant Secretary of seven Legg Mason
funds; employee of Legg Mason
17
<PAGE>
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 and a fee of $400 for
each meeting of the Board of Directors attended by him or her. On April 1, 1996,
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 12.91% of the
Corporation's outstanding shares as of April 12, 1996.
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, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation From Corporation and Fund Complex
Name of Person and Position Corporation* Paid to Directors**
<S> <C> <C>
John F. Curley, Jr. -
Chairman of the Board and Director None None
Edmund J. Cashman, Jr. -
President and Director None None
Richard G. Gilmore -
Director $2,000 $21,600
Charles F. Haugh -
Director $2,000 $23,600
Arnold L. Lehman -
Director $2,000 $23,600
Jill E. McGovern -
Director $2,000 $23,600
T. A. Rodgers -
Director $2,000 $21,600
===================================================================================================
</TABLE>
* Represents fees paid to each director during the fiscal year ended
December 31, 1995.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1995.
18
<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 27, 1995. 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 that the
Adviser may be liable for 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.
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, 1995,
1994 and 1993, the Fund paid the Adviser fees of $1,178,059, $1,224,832 and
$877,564, respectively.
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.
19
<PAGE>
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
advisory fees (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
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"), which permits the directors to authorize the Fund to pay Legg Mason a
fee for 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 available source of funds.
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.
20
<PAGE>
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 27, 1995. The Plan was also approved
by vote of a majority of the outstanding shares of the Fund on July 20, 1984. In
accordance with the requirements of Rule 12b-1, the directors considered various
factors in approving and continuing the Plan, 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 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.
21
<PAGE>
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 953, Boston, MA 02103 serves as transfer and dividend-disbursing agent for
the Fund and administrator of various shareholder services.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C., 20036- 1800, 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, 1995; the
Statement of Operations for the year ended December 31, 1995; the Statement of
Changes in Net Assets for the years ended December 31, 1995 and 1994; 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, 1995, are
hereby incorporated by reference in this Statement of Additional Information.
22
<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 short-term
obligations are designated Moody's Investment Grade ("MIG") and for variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). The rating MIG recognizes the differences between short-term credit
risk and long-term credit risk, while VMIG differentiates variable rate demand
obligations to reflect such characteristics as payment upon periodic demand
rather than fixed maturity dates and payment relying on external liquidity.
Notes bearing the designation MIG-1 or VMIG-1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. 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) leading market positions in
well-established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structure with moderate reliance on debt and ample
asset protection; (4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and (5) well-established access to a
range of financial markets and assured sources of alternate liquidity. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1, -2, or -3.
A-1
<PAGE>
2. Description of Standard & Poor's ("S&P")
MUNICIPAL BONDS rated AAA by S&P are the highest grade obligations.
This rating indicates an extremely strong capacity to pay interest and repay
principal. Bonds rated AA have a very strong capacity to pay interest and repay
principal and 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 The highest commerical paper rating assigned by S&P,
A-1, indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
given the designation A-1+. Commerical paper rated A-2 has a satisfactory
capacity for timely payment. However, the relative degree of safety is not as
high for issues designated A-1.
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, 1995 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 Schedule appears as Exhibit 17.
(b) Exhibits
(1) (a) Charter1/
(b) Charter Amendment2/
(2) (a) Amended By-Laws3/
(b) Amendment to By-Laws (effective May 10, 1991)6/
(3) Voting Trust Agreement - none
(4) Specimen Security4/
(5) Investment Advisory and Management Agreement5/
(6) (a) Underwriting Agreement1/
(b) Underwriting Agreement -- (Form of) filed herewith
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement6/
(9) Transfer Agent and Service Agreement6/
(10) Opinion and Consent of Counsel4/
(11) Other opinions, appraisals, rulings and consents -Accountant's
consent -- filed herewith
(12) Financial statements omitted from prospectus -- none
(13) Agreement for providing initial capital4/
(14) Prototype Retirement Plan -- none
(15) (a) Plan pursuant to Rule 12b-15/
(b) Plan pursuant to Rule 12b-1 -- (Form of) filed herewith
(16) Schedule for Computation of Performance Quotations -- filed
herewith
(17) Financial Data Schedule - filed herewith
(18) Plan pursuant to Rule 18f-3 - none
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.
<PAGE>
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.
6/ Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement, SEC File No. 2-78562, filed April 30, 1992.
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, 1996
- -------------- ------------------------
Shares of Common Stock,
par value $0.001 per share 7,252
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 sixteen 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, 1995 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
<PAGE>
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").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman Chairman of the Board
and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive President and Director
Vice President and
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 None
President,
Secretary and
Director
<PAGE>
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
<PAGE>
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, NY 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
Douglas C. Petty, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
<PAGE>
President
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
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 None
and 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
<PAGE>
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
* 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.
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. 19 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 29th day of
April, 1996.
LEGG MASON TAX EXEMPT TRUST, INC.
by: /s/ John F. Curley, Jr.
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. 19 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
/s/John F. Curley Chairman of the Board April 29, 1996
- ------------------------- and Director
John F. Curley, Jr.
/s/Edmund J. Cashman, Jr. President and Director April 29, 1996
- -------------------------
Edmund J. Cashman, Jr.
/s/Richard G. Gilmore Director April 29, 1996
- -------------------------
Richard G. Gilmore*
/s/Charles F. Haugh Director April 29, 1996
- -------------------------
Charles F. Haugh*
/s/Arnold L. Lehman Director April 29, 1996
- -------------------------
Arnold L. Lehman*
/s/Jill E. McGovern Director April 29, 1996
- -------------------------
Jill E. McGovern*
/s/T.A. Rodgers Director April 29, 1996
- -------------------------
T.A. Rodgers*
/s/Marie K. Karpinski Vice President April 29, 1996
- ------------------------- and Treasurer
Marie K. Karpinski
*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.
FORM OF
AMENDED
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this st day of February, 1996, by
and between Legg Mason Tax-Exempt Trust, Inc., a Maryland corporation
(the "Corporation") and Legg Mason Wood Walker, Incorporated, a Maryland
corporation (the "Distributor").
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act") and has registered its shares of common stock
for sale to the public under the Securities Act of 1933 (the "1933 Act") and
various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the shares of
common stock of the Fund ("Shares") and to furnish certain other services to the
Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b) (2) of Rule 12b-1 under the
1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Fund. The
Distributor, as exclusive agent for the Corporation, upon the commencement of
operations of the Fund and subject to applicable federal and state law and the
Articles of Incorporation and By-Laws of the Corporation shall: (i) promote the
Fund, (ii) solicit orders for the purchase of the Shares subject to such terms
and conditions as the Corporation may specify; and (iii) accept orders for the
purchase of the Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and state
laws and offer the Shares on an agency or "best efforts" basis under which the
Corporation or any other list of investors which it obtains in connection with
its provision of services under this Agreement; provided, however, that the
Distributor shall not sell or knowingly provide such list or lists to any
unaffiliated person without the consent of the Corporation's Board of Directors.
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing shareholders
with information on their investments, and any other services now or hereafter
deemed to be appropriate subjects for the payments of "service fees" under
Article III, Section 26 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (collectively, "Shareholder Services").
<PAGE>
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services, and may enter into agreements with qualified dealers
and other qualified entities to perform recordkeeping and sub-accounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Corporation and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Corporation. No
such dealer or other entity is authorized to act as agent for the Corporation in
connection with the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares shall be the net asset value
per share (as determined by the Corporation) of the outstanding Shares plus any
applicable sales charge as described in the Registration Statement of the
Corporation. The Corporation shall furnish the Distributor with a statement of
each computation of public offering price and of the details entering into such
computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect the gross proceeds derived from the sale of the Shares,
remit the net asset value thereof to the Corporation upon receipt of the
proceeds and retain the sales charge, if any. The Distributor shall receive from
the Fund a distribution fee and a service fee at the rates and under the terms
and conditions of the Plan of Distribution ("Plan") adopted by the Corporation
with respect to the Fund, as such Plan is in effect from time to time, and
subject to any further limitations on such fees as the Corporation's Board of
Directors may impose. The Distributor may reallow any or all of the sales
charge, distribution fee and service fee that it has received under this
Agreement to such dealers or sub-accountants as it may from time to time
determine; provided, however, that the Distributor may not reallow to any dealer
for Shareholder Services an amount in excess of 0.25% of the average annual net
asset value of the shares with respect to which said dealer provides Shareholder
Services.
5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information filed by the Corporation as part of the Registration
Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or sub-accountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Corporation, and the Corporation shall not be responsible in
any way for any other information, statements or representations given or made
by the Distributor, any dealer or sub-accountant, or their representatives or
agents. Except as specifically provided in this Agreement, the Corporation
<PAGE>
shall bear none of the expenses of the Distributor in connection with its offer
and sale of the Shares.
7. The Corporation agrees at its own expense to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies,
and to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the Registration Statement. The Fund shall bear all
expenses related to preparing and typesetting such Prospectuses, Statements of
Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to the Fund's
communications with persons who are shareholders of the Fund.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of or
based upon any alleged untrue statement of a material fact contained in the
Registration Statement or arising out of or based upon any alleged omission to
state a material fact required to be stated in either thereof or necessary to
make the Registration Statement not misleading, provided that in no event shall
anything contained in this Agreement be construed so as to protect the
Distributor against any liability to the Corporation or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations and duties under this
Agreement, and further provided that the Corporation shall not indemnify the
Distributor for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Corporation, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Corporation for use
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading. As used in this paragraph, the term "employee" shall not include
a corporate entity under contract to provide services to the Corporation of the
Fund, or any employee of such a corporate entity, unless such persons otherwise
an employee of the Corporation.
10. The Corporation reserves the right at any time to withdraw all
offerings of the Shares by written notice to the Distributor at its principal
office.
- 3 -
<PAGE>
11. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by telex, or in writing, the
Corporation and State Street Bank and Trust Company, the Corporation's transfer
agent, of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the identity of
the shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by the
Distributor for the repurchase of such Shares in cash or in the form of a credit
against moneys due the Corporation from the Distributor as proceeds from the
sale of Shares. The Corporation reserves the right to suspend such repurchase
right upon written notice to the Distributor. The Distributor further agrees to
act as agent for the Corporation to receive and transmit promptly to the
Corporation's transfer agent shareholder and dealer requests for redemption of
Shares.
13. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the offer, sale and redemption of the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
15. The Distributor shall prepare and furnish such reports and
information as from time to time shall be reasonably requested by the Fund's
Board of Directors. In the event that the Distributor receives payments pursuant
to paragraph 3 of this Agreement, the Distributor shall provide to the Fund's
Board of Directors, at least quarterly, a written report concerning the purpose
and manner of expenditure of such amounts.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective with respect to each Fund on
the date first written above and, unless sooner terminated as provided herein,
will continue in effect for one year from the above written date. Thereafter, if
not terminated, this Agreement shall continue in effect for successive annual
periods ending on the same dater of each year, provided that such continuance is
specifically approved at least annually (i) by the Corporation's Board of
Directors or (ii) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the
- 4 -
<PAGE>
Corporation's directors who are not interested persons (as defined in the 1940
Act) of any party to this Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval.
18. This Agreement is terminable in its entirety without penalty by the
Corporation's Board of Directors, by vote of a majority of the outstanding
voting securities of the Fund (as defined in the 1940 Act), or by the
Distributor, on not less than 60 days' notice to the other party and will be
terminated upon the mutual written consent of the Distributor and the
Corporation. This Agreement will also automatically and immediately terminate in
the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharged
or terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON TAX-EXEMPT TRUST, INC.
By: By:
Attest: LEGG MASON WOOD WALKER,
INCORPORATED
By: By:
- 5 -
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. 19 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 1, 1996 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, 1995, which is incorporated by
reference in the Registration Statement. We also consent to the reference to our
Firm under the caption "Financial Highlights" in the Prospectus and
"Corporation's Independent Accountants" in the Statement of Additional
Information.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 29, 1996
FORM OF
AMENDED
DISTRIBUTION PLAN OF
LEGG MASON TAX EXEMPT TRUST, INC.
WHEREAS, Legg Mason Tax Exempt Trust, Inc. ("Corporation") is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended ("1940 Act"), and has offered, and intends to continue
offering, for public sale shares of common stock;
WHEREAS, the Corporation has registered the offering of its shares of
common stock under a Registration Statement filed with the Securities and
Exchange Commission and that Registration Statement is in effect as of the date
hereof;
WHEREAS, the Corporation's Board of Directors has established one
Series of shares of common stock of the Corporation: Legg Mason Tax Exempt
Trust, Inc.;
WHEREAS, the Corporation's Distribution Plan was adopted by the Board
of Directors on July 1, 1983, and was approved by shareholders;
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Amended Distribution
Plan ("Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. A. The Corporation shall pay to Legg Mason, as compensation for Legg
Mason's services as principal underwriter of the Corporation's shares, a
distribution fee at the rate of 0.10% on an annualized basis of the average
daily net assets of the Corporation's shares, such fee to be calculated and
accrued daily and paid monthly or at such other intervals as the Board shall
determine.
B. The Corporation shall pay to Legg Mason, as compensation for
ongoing services provided to the Corporation's shareholders, a service fee at
the rate of 0.10% on an annualized basis of the average daily net assets of
the Corporation's shares, such fee to be calculated and accrued daily and paid
monthly or at such other intervals as the Board shall determine.
C. The Corporation may pay a distribution or service fee to Legg
Mason at a lesser rate than the fees specified in paragraphs 1.A. and 1.B.,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 4 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Article III, Section 26(d) of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD") remain
in effect and apply to
- 1 -
DC-92191.4
<PAGE>
distributors or dealers in the Corporation's shares, the amounts paid hereunder
shall not exceed those limitations, including permissible interest.
2. As principal underwriter of the Corporation's shares, Legg Mason may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the shares of the Series and/or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason, other
broker-dealers other entities that engage in or support the distribution of
shares or who service shareholder accounts or provide sub-accounting and
recordkeeping services; expenses of Legg Mason and such other broker-dealers and
other entities, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
4. This Amended Plan shall take effect on , 1996 and
shall continue in effect for successive periods of one year from its execution
for so long as such continuance is specifically approved at least annually
together with any related agreements, by votes of a majority of both (a) the
Board of Directors of the Corporation and (b) those Directors who are not
"interested persons" of the Corporation, as defined in the 1940 Act, and
who have no direct or indirect financial interest in the operation of this Plan
or any agreements related to it (the "Rule 12b-1 Directors"), cast in person at
a meeting or meetings called for the purpose of voting on this Plan and such
related agreements; and only if the Directors who approve the Plan taking
effect have reached the conclusion required by Rule 12b-1(e) under the 1940
Act.
5. Any person authorized to direct the disposition of monies paid or
payable by any Series pursuant to this Plan or any related agreement shall
provide to the Corporation's Board of Directors and the Board shall review, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made. Legg Mason shall submit only information
regarding amounts expended for "distribution activities," as defined in this
paragraph 5, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this paragraph 5, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated , 1996, by
and between the Corporation and Legg Mason, that are not deemed "service
activities." As used herein, "distribution activities" also includes
subaccounting or recordkeeping services provided by an entity if the entity
is compensated, directly or indirectly, by the Fund or Legg Mason for such
services. Such entity may also be paid a service fee if it provides appropriate
services. Nothing in the foregoing is intended to or shall cause there to be any
implication that compensation for such services must be made only pursuant to
a plan of distribution under Rule 12b-1. "Service activities" shall mean
activities covered by the definition of "service fee" contained in amendments to
Article III, Section 26(d)
- 2 -
<PAGE>
of the NASD's Rules of Fair Practice that are currently scheduled to become
effective July 7, 1993, including the provision by Legg Mason of personal,
continuing services to investors in the Corporation's shares. Overhead and other
expenses of Legg Mason related to its "distribution activities" or "service
activities," including telephone and other communications expenses, may be
included in the information regarding amounts expended for such distribution or
service activities, respectively.
6. This Plan may be terminated with respect to any Series at any time
by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of
the outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1.A. hereof or the amount of service
fees provided for in paragraph 1.B. hereof unless such amendment is approved by
a vote of at least a majority of the outstanding securities, as defined in the
1940 Act, of the Corporation, and no material amendment to the Plan shall be
made unless such amendment is approved in the manner provided for continuing
approval in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in the
1940 Act, shall be committed to the discretion of directors who are themselves
not interested persons.
9. The Corporation shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 5 hereof for a period of not less than six years from the date of such
report, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
as of the day and year set forth below:
Date: LEGG MASON TAX EXEMPT TRUST, INC.
Attest:
By: By:
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
- 3 -
<PAGE>
By:
- 4 -
LEGG MASON TAX EXEMPT TRUST YIELD CALCULATIONS:
1. 7 day yield at 12/31/95 annualized:
[7 days dividends ended 12/31/95 / 7 x 365] =
-------------------------------------------
$1.00 (NAV)
(.0006655410 / 7 x 365) = 3.47%
-----------------------
1.00
2. Effective yield:
365/7
[base period return + 1] - 1 =
365/7
(.0006655410 + 1) - 1 = 3.53%
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 219,366
<INVESTMENTS-AT-VALUE> 219,366
<RECEIVABLES> 5,006
<ASSETS-OTHER> 891
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 225,263
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 607
<TOTAL-LIABILITIES> 607
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 224,684
<SHARES-COMMON-PRIOR> 222,518
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 224,656
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,922
<OTHER-INCOME> 0
<EXPENSES-NET> 1,539
<NET-INVESTMENT-INCOME> 7,383
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,383
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 879,501
<NUMBER-OF-SHARES-REDEEMED> 884,554
<SHARES-REINVESTED> 7,219
<NET-CHANGE-IN-ASSETS> 2,166
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,178
<INTEREST-EXPENSE> 0
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<PER-SHARE-DIVIDEND> (.03)
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</TABLE>
