As filed with the Securities and Exchange Commission on April 30, 1998.
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: [ ]
----
Post-Effective Amendment No: 21 [X]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 19
----
LEGG MASON TAX EXEMPT TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIAGALUPO ARTHUR C. DELIBERT, ESQ.
100 Light 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, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on ______________, 1998 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on ______________, 1998 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason 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
---------------------------------
<TABLE>
<CAPTION>
Part A Item No. Prospectus Caption
- --------------- ------------------
<S><C>
1 Cover Page
2 Prospectus Highlights;
Expenses
3 Financial Highlights;
Performance Information
4 Investment Objective
and Policies;
Description of the Corporation and Its Shares
5 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
</TABLE>
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
Form N-1A Cross Reference Sheet
---------------------------------
<TABLE>
<CAPTION>
Statement of Additional
Part B Item No. Information Caption
- --------------- -----------------------
<S><C>
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
</TABLE>
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 3
Financial Highlights 4
Performance Information 5
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
How Net Asset Value is Determined 11
Dividends 11
Tax Treatment of Dividends 12
Shareholder Services 12
The Fund's Management and Investment
Adviser 13
The Fund's Distributor 14
The Fund's Custodian and Transfer Agent 14
Description of the Corporation and Its
Shares 14
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
250 W. Pratt Street, Baltimore, Maryland 21201
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.
LMF-015
PROSPECTUS
MAY 1, 1998
LEGG MASON
TAX
EXEMPT
TRUST, INC.
THE ART OF INVESTING
[LEGG MASON FUNDS LOGO APPEARS HERE]
<PAGE>
THE LEGG MASON TAX EXEMPT TRUST, INC.
PROSPECTUS
Legg Mason Tax Exempt Trust, Inc. ("Corporation") is a money market
fund seeking to produce high current income exempt from federal income
tax, to preserve capital, and to maintain liquidity.
The Corporation offers a single portfolio ("Fund"), which normally
invests primarily in short-term, high-quality municipal obligations, the
interest on which is exempt from federal income tax and is not a tax
preference item for purposes of the federal alternative minimum tax
("TPI"). Shares in the Fund are issued and redeemed at net asset value,
without an initial sales charge or redemption fee. 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, 1998 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: May 1, 1998
Legg Mason Wood Walker, Inc.
100 Light 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 and in the
Statement of Additional Information.
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 $338 million as of March 31, 1998
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 "Investment Objectives and Policies," page 6.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
ADVISER:
Legg Mason Capital Management, Inc.
ADMINISTRATOR:
Legg Mason Fund Adviser, Inc. ("LMFA")
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 major 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.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Fund," page 8.
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>
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,
1997.
<TABLE>
<S><C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.50 %
12b-1 fees 0.10 %(A)
Other expenses 0.13 %
------
Total operating expenses 0.73 %
------
</TABLE>
- ---------------
A After fee waivers. The fee shown reflects determination by Legg Mason to
request payment of, and determination by the Board to pay, less than the full
amount of the authorized 12b-1 fee. If the full amount of the fee were paid,
12b-1 fees would be 0.20% and total operating expenses would be 0.83%.
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. The Fund charges
no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------
$7 $23 $41 $ 91
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 TABLE AND
EXAMPLE 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 information in the table below has been audited by
Coopers & Lybrand L.L.P., independent accountants. The Fund's financial
statements for the year ended December 31, 1997 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 financial advisor or Legg Mason's Funds Marketing
Department at 800-822-5544.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------
<S><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 .0292 .0282 .0313 .0223 .0174 .0231 .0386 .0518
Dividends to shareholders from
net investment income (.0292) (.0282) (.0313) (.0223) (.0174) (.0231) (.0386) (.0518)
----------------------------------------------------------------------------------------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------------------------
Total return 2.95% 2.85% 3.17% 2.25% 1.75% 2.34% 3.93% 5.30%
RATIO/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses(A) .73% .64% .66% -- -- -- -- --
Net expenses(B) .72% .64% .65% .65% .69% .73% .69% .70%
Net investment income 2.92% 2.82% 3.14% 2.23% 1.74% 2.33% 3.88% 5.18%
Net assets, end of
year (in thousands) $ 307,371 $ 278,492 $ 224,656 $ 222,490 $ 237,611 $ 170,046 $ 176,752 $ 183,756
<CAPTION>
---------------------
1989 1988
---------------------
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year $1.00 $1.00
---------------------
Net investment income .0571 .0464
Dividends to shareholders from
net investment income (.0571) (.0464)
---------------------
Net asset value, end of year $1.00 $1.00
=====================
Total return 5.86% 4.74%
RATIO/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses(A) -- --
Net expenses(B) .72% .69%
Net investment income 5.69% 4.63%
Net assets, end of
year (in thousands) $159,815 $95,364
</TABLE>
(A) THIS RATIO REFLECTS TOTAL EXPENSES BEFORE COMPENSATING BALANCE CREDITS.
PRIOR TO 1995, THE CREDITS WERE INCLUDED IN THE RATIO.
(B) THIS RATIO REFLECTS EXPENSES NET OF 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, 1997 was 3.22%.
The effective yield for the same period was 3.27%.
5
<PAGE>
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
"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 of the municipal securities,
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 normally is invested in Municipal
Obligations that have remaining maturities of 397 days or less or that are
variable or floating rate notes. The Fund maintains a dollar-weighted average
maturity of 90 days or less. For purposes of the above policies, the remaining
maturities of variable or floating rate notes are calculated under the
applicable SEC guidelines.
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 five 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, private activity bonds or other
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
6
<PAGE>
of NRSROs represent their opinion as to the quality of the Municipal Obligations
that they undertake to rate. The ratings are not guarantees as to quality and
may change after the Fund has acquired a security.
Municipal Obligations include debt obligations issued to obtain funds for
various public purposes, 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
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 appropriate liquid 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
7
<PAGE>
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 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 and floating rate Municipal Obligations and
notes. Variable rate obligations have an interest rate 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 up to 20% of its net assets
in: 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, with an affiliate that has an agreement with Legg Mason, or with an
unaffiliated entity having an agreement with Legg Mason ("Financial Advisor or
Service Provider"). Your Financial Advisor or Service Provider 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
8
<PAGE>
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 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 in
person or by mailing a check for $500 or more (payable to "Legg Mason Tax Exempt
Trust, Inc.") to your Financial Advisor or Service Provider.
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 other
brokerage account or by wire transfer of funds from your bank directly to Legg
Mason. Please contact your Financial Advisor or Service Provider for further
information. Wire transfers may be subject to a service charge by your bank.
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 transfer funds each month from
your Legg Mason account or from your checking account. Please contact your
Financial Advisor or Service Provider 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 their Financial Advisor or Service Provider.
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. Purchases made by telephone from available cash balances in
your Legg Mason or other brokerage account or by wire payments representing
federal funds will normally be completed on the same or the next business day.
If an order and payment in federal funds is received by your Financial Advisor
or Service Provider 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, or
on days the Exchange is closed, 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. Some Service Providers may
place other conditions on the purchase of shares. Consult their program
literature for further information.
9
<PAGE>
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. Shares may not be held in or transferred to an account with any
brokerage firm that does not have an agreement with Legg Mason. The Fund does
not issue share certificates.
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 Financial Advisor or
Service Provider. The minimum amount for telephone redemptions is $100 unless
you require a lesser amount to complete a transaction in your Legg Mason or
other 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
normally be credited to your Legg Mason or other brokerage account the same day.
Wire transfers of proceeds to you or your Legg Mason or other brokerage account
will normally be transmitted the same day.
To make a telephone redemption, you should call your Financial Advisor or
Service Provider 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 Financial Advisor or Service Provider 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 above.
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 Financial Advisor
or Service Provider 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. A fee for using the wire redemption service may be
deducted by Legg Mason or your other brokerage firm from the redemption proceeds
that are wired to your bank.
The Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable procedures to
identify the caller. The Fund may request identifying information from callers
or employ identification numbers. The Fund may be liable for losses due to
unauthorized or fraudulent instructions if it does not follow reasonable
procedures. Telephone redemption privileges are available automatically to all
shareholders unless certificates have been issued. Shareholders who do not wish
to have telephone redemption privileges should call their Financial Advisor or
Service Provider 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
10
<PAGE>
your Financial Advisor or Service Provider 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 your other brokerage firm 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 Financial Advisor
or Service Provider 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 Financial Advisor or
Service Provider 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 you will be allowed 60 days to make
an additional investment to avoid having your account closed.
To the extent permitted by law, the Fund reserves the right to take up to
seven days to make payment upon redemption if, in the judgment of the Adviser,
the Fund could be adversely affected by immediate payment. (The Statement of
Additional Information describes several circumstances in which the date of
redemption may be postponed or the right of redemption suspended.)
Some Service Providers may have other procedures, either in addition to or
instead of those described above. Consult your Service Provider's literature for
more information.
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 your Financial Advisor or Service Provider. 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.
If a shareholder has elected to receive dividends in cash and the postal or
other delivery service is unable to deliver checks to the shareholder's address
of record, such shareholder's distribution option will automatically be
converted to having all dividends reinvested in additional shares. No interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
In certain cases, you may reinvest your dividends in shares of another Legg
Mason fund. Please contact your Financial Advisor or Service
11
<PAGE>
Provider for additional information about this option.
Because the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect to realize any capital gain or loss. If the Fund does realize
any net short-term capital gains, it will distribute them at least once every 12
months.
TAX TREATMENT OF DIVIDENDS
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986. If the Fund so
qualifies and, at the close of each quarter of its taxable year, at least 50% of
the value of its total assets consists of certain obligations the interest on
which is excludable from gross income for federal income tax purposes, the Fund
may pay "exempt-interest" dividends to its shareholders. Those dividends
constitute the portion of the aggregate dividends (other than distributions of
net short-term capital gains, if any, and any other taxable income), 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 Financial Advisor
or Service Provider for further information.
LEGG MASON PREMIER ASSET MANAGEMENT ACCOUNT
Certain shareholders may participate in Legg Mason's Premier Asset
Management Account, which combines the Fund account, a preferred customer VISA
Gold debit card, a Legg Mason brokerage account with margin borrowing
availability and unlimited checks with no minimum check amount. Other services
include automatic transfer of free credit balances in a participant's brokerage
account to the Fund account and automatic redemption of Fund shares to offset
debit balances in the participant's brokerage account. Legg Mason charges an
annual fee for the Premier Asset Management Account, which is currently $85 for
individuals and $100 for corporations and businesses. For further information,
contact your Financial Advisor or Service Provider.
12
<PAGE>
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your shares of the Fund
for shares of any of the Legg Mason Funds, provided that such shares are
eligible for sale in your state of residence.
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 Financial Advisor or Service Provider. To effect an exchange by telephone,
please call your Financial Advisor or Service Provider 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 fund(s) carefully before you invest by exchange.
The Fund reserves the right to modify or terminate the exchange privilege upon
60 days' notice to shareholders. Some Service Providers may not offer all of the
Legg Mason Funds for exchange.
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 Capital Management, Inc.
("Adviser"), serves as the Fund's investment adviser. The Adviser 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's address is 100 Light Street, Baltimore, Maryland 21202.
For the year ended December 31, 1997, the Fund's total expense ratio was
0.73%.
The Adviser acts as investment adviser to four investment company portfolios
and to private accounts for institutions and individuals. Aggregate assets under
management as of March 31, 1998 were $2.85 billion.
ADMINISTRATOR
Pursuant to an agreement with the Adviser ("Administration Agreement"),
which was approved by the Corporation's Board of Directors, LMFA serves as the
Fund's administrator ("Administrator"). The Administrator manages the affairs of
the Fund and provides the Fund with office facilities and personnel reasonably
necessary for the operation of the Fund. The Adviser pays the Administrator,
pursuant to the Administration Agreement, a fee equal to an annual rate of 0.05%
of the Fund's average daily net assets.
LMFA acts as investment adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of over $11.2 billion as
of March 31, 1998.
Like other mutual funds, financial and business organizations around the
world, the Fund could be adversely affected if the computer systems used by its
investment adviser and other service providers do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Adviser is taking steps that
it believes are reasonably designed to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurances that
comparable steps are being taken by the
13
<PAGE>
Fund's other, major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Fund.
THE FUND'S DISTRIBUTOR
Legg Mason is the distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Fund. Pursuant to the Fund's Distribution Plan,
the Fund may pay a distribution fee for distribution services not to exceed an
annual rate of 0.20% of the Fund's average daily net assets. However, Legg Mason
has agreed that it will not request payment of more than 0.10% annually from the
Fund until January 10, 1999. The distribution fee and the service fee are
calculated daily and paid monthly. The offering of shares normally is
continuous.
Activities for which payments may be made include, but are not limited to,
compensation to persons, including Legg Mason financial advisors, who engage in
or support distribution of shares or who provide shareholder services, printing
of prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead and
telephone expenses.
The fees received by Legg Mason during any year may be more or less than its
costs of providing distribution and shareholder services for the Fund.
NASD rules limit the amount of annual distribution and service fees that may
be paid by mutual funds, and impose a ceiling on the cumulative distribution
fees paid. The Fund's Distribution Plan complies with those rules.
Legg Mason receives a fee from BFDS for assisting it with its transfer agent
and shareholder servicing functions. For the year ended December 31, 1997, Legg
Mason received $37,000 for performing such services in connection with this
Fund.
Legg Mason is a wholly owned subsidiary of Legg Mason, Inc., which is also
the parent of the Adviser.
The President and Treasurer of the Fund are employed by Legg Mason.
THE FUND'S CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is
custodian for the securities and cash of the Fund. Boston Financial Data
Services, P.O. Box 953, Boston, MA 02103 is transfer agent for Fund shares, and
dividend-disbursing agent for the Fund.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation is a diversified, open-end management investment company
which was incorporated in Maryland on July 26, 1982. The Corporation is
authorized to issue multiple series of capital stock, each with a par value of
$.001 per share, at the discretion of the Board of Directors. To date, the
directors have authorized the issuance of only one series: shares in the Fund.
Each share in the Fund is entitled to one vote for the election of directors and
any other matter submitted to a shareholder vote. Fractional shares have
fractional voting rights. Voting rights are not cumulative. All shares in the
Fund are fully paid and nonassessable and have no preemptive or conversion
rights.
Shareholder meetings will not be held except where the Investment Company
Act of 1940 requires a shareholder vote on certain matters (including the
election of directors, approval of an advisory contract, and certain amendments
to 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 100 Light Street, Baltimore, Maryland 21202, stating the purpose of
the proposed meeting and the matters to be acted upon.
14
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
THE LEGG MASON TAX EXEMPT TRUST, INC.
MONEY MARKET PORTFOLIO
Legg Mason Tax Exempt Trust, Inc. ("Corporation") is a money market
fund seeking to produce high current income exempt from federal income tax, to
preserve capital, and to maintain liquidity.
The Corporation offers a single portfolio, the Money Market Portfolio
("Fund"). In attempting to achieve its objectives, the Fund's investment
adviser, Legg Mason Capital Management, Inc. ("Adviser"), normally invests
primarily in short-term, high-quality municipal obligations, the interest on
which is exempt from federal income tax and is not a tax preference item for
purposes of the federal alternative minimum tax ("TPI"). Shares in the Fund are
issued and redeemed at net asset value, without an initial sales charge or
redemption fee. The Fund attempts to maintain a 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, 1998, 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, 1998
LEGG MASON WOOD WALKER,
INCORPORATED
- --------------------------------------------------------------------------------
100 Light 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 10
Additional Tax Information 12
Valuation of Shares 13
The Corporation's Directors and Officers 14
The Fund's Investment Adviser 16
The Fund's Distributor 17
Portfolio Transactions and Brokerage 18
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 19
The Corporation's Legal Counsel 19
The Corporation's Independent Accountants 19
Financial Statements 19
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 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 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, 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 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
2
<PAGE>
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, cash or appropriate liquid 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 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. Short-term fixed rate obligations
3
<PAGE>
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 net assets.
Floating rate obligations also are not fixed, but are adjusted as
specified benchmark interest rates change. In other respects, their
characteristics are similar to variable rate notes, as discussed previously.
As stated in the Prospectus, the Fund may also invest in floating rate
and variable rate demand notes. A demand feature entitles the Fund to receive
the principal amount of the instrument from the issuer or a third party (1) on
no more than 30 days' notice or (2) at specified intervals, not exceeding 397
days, and upon no more than 30 days' notice. 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 or floating rate demand note could result in a loss to
the Fund and affect its share price. 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 a custodian bank 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 agreement. 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
4
<PAGE>
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
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;
5
<PAGE>
10. Buy securities which have legal or contractual restrictions on
resale, if the purchase causes more than 10% of the Fund's assets to be invested
in illiquid securities and repurchase agreements maturing in more than seven
days;
11. Buy securities issued by any other investment company, except in
connection with a merger, consolidation, acquisition or reorganization;
12. Invest more than 5% of its total assets in securities of issuers
which, including their predecessors, have been in operation for less than three
years;
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;
14. Issue senior securities, except as permitted by the 1940 Act;
15. Purchase any security if, as a result of that purchase, 25% or more
of its total assets would be invested in securities having their principal
business activities in the same industry, except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. State or local governments or subdivisions thereof are not
considered members of any industry for purposes of this 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. For purposes of fundamental policy #15, the Fund considers the
"issuer" of an obligation of any state or local government or subdivision
thereof to be the entity responsible for payment.
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
6
<PAGE>
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
transfer funds each month to be used to buy shares of the Fund. Legg Mason, the
Fund's distributor, will send you a cumulative account statement quarterly. You
may terminate the Future First Systematic Investment Plan at any time without
charge or penalty. Forms to enroll in the Future First Systematic Investment
Plan are available from any Legg Mason or affiliated office.
You may also buy additional shares of the Fund through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow you, on a pre-authorized basis, to have $50 or more
automatically transferred monthly for investment in shares of the Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If your check is not honored by the institution it is drawn on, you may
be subject to extra charges in order to cover collection costs. These charges
may be deducted from your shareholder account.
SYSTEMATIC WITHDRAWAL PLAN
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
brokerage firm 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
7
<PAGE>
A cash deposit made after the daily cashiering deadline of the Legg
Mason office in which the deposit is made will be credited to your Legg Mason
brokerage account ("Brokerage Account") on the next business day following the
day of deposit, and the resulting free credit balance will be invested on the
second business day following the day of receipt.
LEGG MASON PREMIER ASSET MANAGEMENT ACCOUNT/VISA ACCOUNT
Shareholders of the Fund who have cash or negotiable securities
(including Fund shares) valued at $20,000 or more in accounts with Legg Mason
may subscribe to Legg Mason's Premier Asset Management Account ("Premier"). This
program provides a direct link between a shareholder's Fund account and his or
her Brokerage Account. Premier provides shareholders with a convenient method to
invest in the Fund through their Brokerage 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 preferred customer VISA Gold debit card, a Legg
Mason Brokerage Account and unlimited checkwriting with no minimum check amount.
Premier is offered as an exclusive preferred customer service for shareholders
of certain Legg Mason funds.
The VISA Gold debit card may be used to purchase merchandise or
services from merchants honoring VISA or to obtain cash advances (which a bank
may limit to $5,000 or less, per account per day) from any bank honoring VISA.
Checks, VISA charges and cash advances are posted to the shareholder's
margin account and create automatic same-day redemptions if shares are available
in the Fund. If Fund shares have been exhausted, the debits will remain in the
margin account, reducing the cash available. The shareholder will receive one
consolidated monthly statement which details all Fund transactions, securities
activity, checkwriting activity and VISA Gold purchases and cash advances.
BancOne Columbus ("BancOne"), 757 Carolyn Avenue, Columbus, Ohio 43271,
is the Fund's agent for processing payment of VISA Gold debit card charges and
clearance of checks written on the Premier Account. Shareholders are subject to
BancOne's rules and regulations governing VISA accounts, including BancOne'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.
PREFERRED CUSTOMER CARD SERVICES Unlike some other investment programs
which offer the VISA card privilege, Premier also includes travel/accident
insurance at no added cost when shareholders purchase travel tickets with their
Premier VISA Gold debit card. Coverage is provided through VISA and extends up
to $250,000.
If a VISA Gold debit card is lost or stolen, the shareholder should
report the loss immediately by contacting Legg Mason directly between the
business hours of 8:30 a.m. and 5:00 p.m. eastern time, or BancOne collect after
hours at 1-614-248-4242. Those shareholders who subscribe to the Premier VISA
account privilege may be liable for the unauthorized use of their VISA Gold
debit card in amounts up to $50.
Legg Mason is responsible for all Premier VISA Gold debit card
inquiries as well as billing and account resolutions. Simply call Legg Mason
Premier Client Services directly between 8:30 a.m. and 5:00 p.m. eastern time,
at 1-800-253-0454 or 1-410-528-2066 with your account inquiries.
8
<PAGE>
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., same-day 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,
shareholders must contact their Financial Advisor or Service Provider to execute
both a Premier Agreement with Legg Mason and a VISA Account Application with
BancOne. Legg Mason charges a fee for the Premier service, which is currently
$85 per year for individuals and $100 per year for businesses and corporations.
Legg Mason reserves the right to alter or waive the conditions upon which a
Premier Account may be opened. Both Legg Mason and BancOne reserve the right to
terminate or modify any shareholder's Premier services at their discretion.
You may request Premier Account status by filling out the Premier Asset
Management Account Agreement and Check Application which can be obtained from
your Financial Advisor or Service Provider. You will receive your VISA Gold
debit card (if applicable) from BancOne. The Premier VISA Gold debit card may be
used at over 8 million locations, including 23,000 ATMs, in 24 countries around
the world. Premier checks will be sent to you directly. There is no limit 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 Financial Advisor or Service
Provider 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. Canceled
checks will be returned to you.
Check redemption is subject to State Street's rules and regulations
governing checking accounts. Checks should not be used to close a Fund account,
because when the check is written you will not know the exact value of the
account, including accrued dividends, on the day the check clears. Persons who
obtained certificates for their shares may not use the checkwriting service.
The date of payment for a redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, except (a) for any
period during which the Exchange is closed (other
9
<PAGE>
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 as described
above), raising the sum to a power equal to 365 divided by 7, and subtracting
one.
The Fund's yield may fluctuate daily depending upon such factors as the
average maturity of its securities, changes in investments, changes in interest
rates and variations in operating expenses. Therefore, current yield does not
provide a basis for determining future yields.
The 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, 1997 were 5.35% and 5.43%, respectively.
OTHER INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to predict or indicate future results. The return on an investment in
the Fund will fluctuate. In Performance Advertisements, the Fund may compare its
taxable or tax-free yield with data published by Lipper Analytical Services,
Inc. for money funds ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
IBC/Donoghue's Money Market Fund Report ("Donoghue"),
10
<PAGE>
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 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.
11
<PAGE>
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 $71.0 billion as of March 31,
1998.
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) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities
and other securities, with those other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's total
assets; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the securities
(other than U.S. government securities) of any one issuer.
If the Fund receives tax-exempt interest attributable to certain
"private activity bonds," a proportionate part of the exempt-interest dividends
paid by the Fund will be 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.
If 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.
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
12
<PAGE>
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 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, Martin Luther King's
Birthday, 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, 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 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 or its delegate, present minimal
credit risk and are rated in one of the two highest short-term ratings
categories by a requisite number of nationally recognized statistical rating
organizations or, if unrated (as defined in the Rule), 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
13
<PAGE>
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 100 Light Street Baltimore, Maryland 21202, unless
otherwise indicated.
JOHN F. CURLEY, JR.*, [07/24/39] Chairman of the Board and Director;
Retired Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg
Mason, Inc.; President and Director of three Legg Mason funds; Chairman of the
Board and Director of three Legg Mason funds; President and/or Chairman of the
Board and Trustee of two Legg Mason funds.
EDMUND J. CASHMAN, JR.*, [08/31/36] 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.; Trustee of Bartlett
Capital Trust; Vice Chairman and Director of one Legg Mason fund; President and
Trustee of one Legg Mason fund.
RICHARD G. GILMORE, [06/09/27] 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.
14
<PAGE>
CHARLES F. HAUGH, [12/27/25] 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, [07/18/44] Director; 200 Eastern Parkway, Brooklyn,
New York. Director of the Brooklyn Museum of Art; Director of six Legg Mason
funds; Trustee of two Legg Mason funds. Formerly: Director of the Baltimore
Museum of Art (1981-1997).
JILL E. McGOVERN, [08/29/44] 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, [10/22/34] 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 *, [12/15/64] Secretary and Assistant Treasurer;
Secretary and Assistant Treasurer/Secretary/Assistant Secretary of seven Legg
Mason funds; employee of Legg Mason.
MARIE K. KARPINSKI *, [01/01/49] Vice President and Treasurer;
Treasurer of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of
eight Legg Mason funds; Vice President of Legg Mason.
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 an annual retainer and a per meeting fee based on the average net assets
of the Fund at December 31 of the previous year.
On April 1, 1998, 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 15.12% of the
Corporation's outstanding shares as of April 20, 1998.
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
15
<PAGE>
directors for the fiscal year ended December 31, 1997. None of the Legg Mason
funds has any retirement plan for its directors.
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>
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 $2,300 $29,400
Charles F. Haugh -
Director $2,300 $29,400
Arnold L. Lehman -
Director $2,300 $29,400
Jill E. McGovern -
Director $2,300 $29,400
T. A. Rodgers -
Director $2,300 $29,400
</TABLE>
* Represents fees paid to each director during the fiscal year ended
December 31, 1997.
* Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1997.
There are nine open-end investment companies in the Legg Mason Complex
(with a total of seventeen funds).
THE FUND'S INVESTMENT ADVISER
The Adviser, located at 100 Light 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 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 November 7, 1997. Effective January 1, 1998, the Advisory Agreement
was transferred to the Adviser; prior to that date, Legg Mason Fund Adviser,
Inc., ("LMFA") a wholly owned subsidiary of Legg Mason, Inc., served as the
Fund's investment adviser and manager under the Advisory Agreement. 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 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.
16
<PAGE>
These expenses include, among others, interest expense, taxes, auditing and
accounting fees, distribution fees, 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 existing 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, 1997,
1996 and 1995, the Fund paid LMFA fees of $1,582,075, $1,373,646 and $1,178,059,
respectively.
The Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Corporation'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.
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.
Pursuant to an agreement with the Adviser ("Administration Agreement"),
LMFA serves as the Fund's administrator whereby it 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 pays LMFA, pursuant to the Administration
Agreement, a fee equal to an annual rate of 0.05% of the Fund's average daily
net assets.
Under the Administration Agreement, LMFA will not be liable for an
error of judgment or mistake of law or for any loss suffered by the Adviser or
the Fund in connection with the performance of the Administration Agreement,
except that LMFA 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 obligation
or duties thereunder.
To mitigate the possibility that the Fund will be affected by personal
trading of employees, the Corporation, the Adviser and LMFA 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.
17
<PAGE>
THE FUND'S DISTRIBUTOR
Legg Mason is 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 any compensation
to its Financial Advisors, 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 Board of Directors of the Corporation has adopted a Distribution
and Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the 1940
Act. The Plan provides that as compensation for Legg Mason's ongoing services to
investors in the Fund and its activities and expenses related to the sale and
distribution of shares, the Fund may pay Legg Mason a fee at an annual rate of
up to 0.20% of its average daily net assets. However, Legg Mason has agreed that
it will not request payment of more than 0.10% annually from the Fund until
January 10, 1999. The distribution fee is computed daily and paid monthly. The
fees received by Legg Mason during any year may be more or less than its costs
of providing distribution and shareholder services for the Fund. For the year
ended December 31, 1997, the Fund paid Legg Mason $309,363 for distribution and
service fees.
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 November 7, 1997. 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 directors noted that, to the extent the Plan
results in additional sales of Fund shares, the Plan may enable the Fund to
achieve economies of scale that could reduce expenses and to minimize the
prospects that the Fund will experience net redemptions and the accompanying
disruption of portfolio management.
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 a
majority of 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 disinterested directors
will be committed to the discretion of such disinterested directors.
For the year ended December 31, 1997, Legg Mason incurred the following expenses
with respect to Tax Exempt Trust:
Compensation to sales personnel $ 55,000
Printing and mailing of prospectuses to $145,000
prospective shareholders
Advertising $40,000
18
<PAGE>
Other $612,000
Total $852,000
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 without a
stated commission, either directly from the issuer or from dealers who
specialize in municipal bonds and money market instruments. Prices paid to a
dealer generally include a "spread," which is the difference between the price
at which the dealer is willing to purchase and sell the specific security at the
time, and includes the dealer's normal profit. 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.
Investment decisions for the Fund are made independently from those of
other funds and accounts advised by the Adviser. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this procedure may adversely affect the price or quantity of the security
available to a particular account. In other cases, however, an account's ability
to participate in large-volume transactions may produce better executions and
prices.
THE 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., 250 W. Pratt Street, Baltimore, MD 21201,
is the Corporation's independent accountants.
19
<PAGE>
FINANCIAL STATEMENTS
The Fund's Statement of Net Assets as of December 31, 1997; the
Statement of Operations for the year ended December 31, 1997; the Statement of
Changes in Net Assets for the years ended December 31, 1997 and 1996; 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, 1997, are
hereby incorporated by reference in this Statement of Additional Information.
20
<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") RATINGS
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, 1997 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 27.
(b) Exhibits
(1) (a) Charter(1)
(b) Charter Amendment(1)
(2) (a) Amended By-Laws(1)
(b) Amendment to By-Laws (effective May 10, 1991)(1)
(3) Voting Trust Agreement - none
(4) Specimen Security -- none
(5) (a) Investment Advisory and Management Agreement(1)
(b) Substitution Agreement - filed herewith
(c) Administration agreement - filed herewith
(6) (a) Underwriting Agreement(1)
(b) Underwriting Agreement(1)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement(1)
(9) (a) Transfer Agent and Service Agreement(1)
(10) Opinion and Consent of Counsel(1)
(11) Other opinions, appraisals, rulings and consents
-Accountant's consent -- filed herewith
(12) Financial statements omitted from prospectus -- none
(13) Agreement for providing initial capital(1)
(14) Prototype Retirement Plan -- none
(15) (a) Amended Plan pursuant to Rule 12b-1(1)
(16) Schedule for Computation of Performance Quotations --
filed herewith
(17)(27) Financial Data Schedule - filed herewith
(18) Plan pursuant to Rule 18f-3 - none
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 20 to the Registration Statement filed on May 1, 1997.
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 April 14, 1998
- -------------- -----------------------------
Shares of Common Stock,
par value $0.001 per share 6,753
<PAGE>
Item 27. Indemnification
Article Thirteenth of the Registrant's Articles of Incorporation provides:
"The Corporation shall indemnify its present and past directors, officers,
employees, and agents, and persons who are serving or have served at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or enterprise, to the maximum
extent permitted by applicable law, in such manner as may be provided in the
By-Laws; provided, that no director, officer, investment adviser or principal
underwriter of the Corporation shall be indemnified in violation of Section
17(i) of the 1940 Act. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer or employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability."
Article X of the Registrant's By-laws provides in part: "The Corporation
shall indemnify its present and past directors, officers, employees, and agents,
and any persons who are serving or have served at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or enterprise, to the full extent provided and allowed by
section 2-418 of the annotated Corporations and Associations Code of Maryland
concerning Corporations, as amended from time to time, or any other applicable
provisions of laws. Notwithstanding anything herein to the contrary, no
director, officer, investment adviser or principal underwriter of the
Corporation shall be indemnified in violation of Sections 17(h) or (i) of the
1940 Act. The directors of the corporation may provide such liability insurance
to the persons named herein as is authorized by the Corporation's Articles of
Incorporation."
Pursuant to the Registrant's agreement with its principal underwriter, the
Registrant has agreed to indemnify the underwriter 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 it or any controlling person may incur, under the
Investment Company Act of 1940, or under common law or otherwise, arising out of
or based upon any alleged untrue statement of a material fact contained in the
Registrant's registration statement or prospectus 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 statements in either thereof not
misleading; provided, however, that the indemnity agreement, to the extent that
it might require indemnity of any person who is a controlling person and who is
also a director of the Registrant, may not inure to the benefit of such person
unless a court of competent jurisdiction shall determine, or its shall have been
determined by controlling precedent, that such result would not be against
public policy as expressed in the Investment Company Act of 1940; and further
provided that in no event shall anything contained in the indemnity agreement be
so construed as to protect the underwriter against any liability to the
Registrant or its security holders to which the underwriter 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 any
obligations and duties under the underwriting agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
The Registrant intends to purchase on behalf of its directors and officers
insurance against any liability resulting from their service in these capacities
to the extent permissable under the Articles and By-laws.
Item 28. Business and Connections of Manager and Investment Adviser
Legg Mason Capital Management, Inc. ("LMCM"), the Registrant's investment
adviser, is a registered investment adviser incorporated on October 4, 1982.
LMCM is engaged primarily in the investment advisory business. LMCM also serves
as investment adviser for four open-end investment companies and private
accounts. Information as to the officers and directors of LMCM is included in
its Form ADV filed on September 23, 1997 with the Securities and Exchange
Commission (registration number 801-18115) and is incorporated herein by
reference.
Legg Mason Fund Adviser, Inc. ("LMFA"), the Registrant's administrator, is
a registered investment adviser incorporated on January 20, 1982. LMFA is
engaged primarily in the investment advisory business. LMFA also serves as
investment adviser or manager for seventeen open-end investment companies.
Information as to the officers and directors of LMFA is included in its Form ADV
filed on August 11, 1997 with the Securities and Exchange Commission
(registration number 801-16958) and is incorporated herein by reference.
Item 29. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal underwriter,
Legg Mason Wood Walker, Incorporated ("LMWW").
<TABLE>
<CAPTION>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ------------------ ------------------ -------------
<S><C>
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman Chairman of the
of the Board Board and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive President and Director
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
President and
Director
Edward A. Taber III Senior Executive Vice None
President and
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President and
Director
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
Marvin H. 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
Joseph Sullivan Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Seth J. Lehr Senior Vice None
1735 Market St President
Philadelphia, PA 19103
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
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Gail Reichard Senior Vice None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
</TABLE>
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not
an affiliated person of the Registrant or an affiliated
person of such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
None
<PAGE>
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. 21 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 28th day of
April, 1998.
LEGG MASON TAX EXEMPT TRUST, INC.
by:/s/ Marie K. Karpinski
______________________________
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 21 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S><C>
/s/ John F. Curley, Jr. Chairman of the Board April 28, 1998
__________________________ and Director
John F. Curley, Jr.
/s/ Edmund J. Cashman, Jr. President and Director April 28, 1998
__________________________
Edmund J. Cashman, Jr.
/s/ Richard G. Gilmore Director April 28, 1998
__________________________
Richard G. Gilmore*
/s/ Charles F. Haugh Director April 28, 1998
__________________________
Charles F. Haugh*
/s/ Arnold L. Lehman Director April 28, 1998
__________________________
Arnold L. Lehman*
/s/ Jill E. McGovern Director April 28, 1998
__________________________
Jill E. McGovern*
/s/ T. A. Rodgers Director April 28, 1998
__________________________
T.A. Rodgers*
/s/ Marie K. Karpinski Vice President April 28, 1998
__________________________ and Treasurer
Marie K. Karpinski
</TABLE>
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 18, 1992, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director of Legg Mason Tax-Exempt trust, Inc. (the
"Fund") hereby severally consitute and appoint Marie K. Karpinski, Arthur J.
Brown and Dana L. Platt and each of them singly my true and lawful
attorney-in-fact, with full power of substitution, and with full power to sign
for me and in my name in the appropriate capacity, any and all Post-Effective
Amendments to the Fund's registration statement, any registration statements on
Form N-14, any supplements or other instruments in connection therewith, and
generally to do all such things in my name and behalf in connection therewith as
said attorney-in-fact deems necessary or appropriate, to comply with the
provisions of the Securities Act of 1933 and the Investment Company Act of 1940,
and all related requirements of the Securities and Exchange Commission. I hereby
ratify and confirm all that said attorney-in-fact or their substitutes may do or
cause to be done by virtue hereof.
WITNESS my hand on the date set forth below.
Signature Date
- --------- ----
/s/Richard G. Gilmore May 18, 1992
__________________________
Richard G. Gilmore
/s/Charles F. Haugh May 18, 1992
__________________________
Charles F. Haugh
/s/Arnold L. Lehman May 18, 1992
__________________________
Arnold L. Lehman
/s/Jill E. McGovern May 18, 1992
__________________________
Jill E. McGovern
/s/T. A. Rodgers May 18, 1992
__________________________
T.A. Rodgers
EXHIBIT 5(B)
SUBSTITUTION AGREEMENT
Legg Mason Tax Exempt Trust, Inc.
AGREEMENT, made this 1st day of January, 1998, by and among Legg Mason
Fund Adviser, Inc. ("LMFA"), Legg Mason Capital Management, Inc. ("LMCM"), and
Legg Mason Tax Exempt Trust, Inc. (the "Corporation"), each of which is a
Maryland corporation.
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act"), and currently consists of one
series; and
WHEREAS, LMFA serves as Investment Adviser and Manager to the
Corporation pursuant to an Investment Advisory and Management Agreement between
the Corporation and LMFA dated July 1, 1983; and
WHEREAS, the persons rendering portfolio management services for the
Corporation are employees of LMFA for purposes of the Investment Advisory and
Management Agreement, and for all other purposes are employees of LMCM; and
WHEREAS, LMFA wishes to substitute LMCM in place of LMFA, as a party to
the Investment Advisory and Management Agreement; and
WHEREAS, LMFA and LMCM wish to enter into an agreement on behalf of the
Corporation whereby LMFA will continue to provide administrative services to the
Corporation, whereby the services provided to the Corporation, and the total
fees paid by the Corporation for investment advisory, management and
administrative services, remain unchanged; and
WHEREAS, LMFA has represented to the Corporation that LMCM is under the
same management and control as LMFA, and that in the event of substitution as
requested by LMFA the persons rendering portfolio management services for the
Corporation will remain the same; and
WHEREAS, under these circumstances, the Corporation agrees to the
substitution of LMCM as a party to the Investment Advisory and Management
Agreement in place of LMFA.
NOW, THEREFORE, it is agreed as follows:
1. Substitution of Party. Effective as of the date first written above,
LMCM hereby assumes all of the interest, rights and responsibilities of LMFA
under the Investment Advisory and Management Agreement.
2. Performance of Duties. LMCM hereby assumes and agrees to perform all
of LMFA's duties and obligations under the Investment Advisory and Management
Agreement and be subject to all of the terms and conditions of said Agreement as
if they applied to LMCM. Nothing in this Substitution Agreement shall make LMCM
responsible for any claim or demand arising under the Investment Advisory and
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by LMCM; and nothing in this
Substitution Agreement shall make LMFA responsible for any claim or demand
arising under the Investment Advisory and Management Agreement from services
rendered after the effective date of this Substitution Agreement unless
otherwise agreed by LMFA.
3. Representations of LMCM and LMFA. LMCM represents and warrants that
it is registered as an investment adviser under the Investment Advisers Act of
1940, as amended ("Advisers Act"). LMFA and LMCM each represent and warrant that
they are under the same control and management, and that substitution of LMCM as
a party to the Investment Advisory and Management Agreement in place of LMFA
shall not result in an "assignment" of the Investment Advisory and Management
Agreement as that term is defined in the 1940 Act or the Advisers Act.
<PAGE>
4. Consents. The Corporation hereby consents to this assumption by LMCM
of the interest, rights and responsibilities of LMFA under the Investment
Advisory and Management Agreement and agrees, subject to the terms and
conditions of said Agreement, to look solely to LMCM for the performance of the
duties and obligations under said Agreement after the effective date described
above.
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Attest: Legg Mason Tax Exempt Trust, Inc.
/s/ Kathi D. Bair /s/ Marie K. Karpinski
By: ________________________ By: ______________________________
Vice President and Treasurer
______________________________
Title
Attest: Legg Mason Fund Adviser, Inc.
/s/ Kathi D. Bair /s/ Marie K. Karpinski
By: ________________________ By: ______________________________
Vice President and Treasurer
______________________________
Title
Attest: Legg Mason Capital Management, Inc.
/s/ Rebecca S. Plovan /s/ Philip E. Sachs
By: ________________________ By: ______________________________
Chairman and CEO
______________________________
Title
2
EXHIBIT 5(C)
ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of January, 1998 by and between Legg Mason
Capital Management, Inc. ("Adviser"), a Maryland corporation, and Legg Mason
Fund Adviser, Inc. ("Administrator"), a Maryland corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, the Adviser is the investment adviser of Legg Mason Tax Exempt
Trust, Inc. (the "Corporation" or "Fund"), an open-end, diversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Adviser wishes to retain the Administrator to provide it
with certain administrative services in connection with the Adviser's management
of the Corporation; and
WHEREAS, the Administrator is willing 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. Appointment. The Adviser hereby appoints the Administrator as
administrator for the Corporation for the period and on the terms set forth in
this Agreement. The Administrator accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Adviser has furnished the Administrator
with copies properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of Maryland and
all amendments thereto;
(b) The Corporation's Bylaws and all amendments thereto;
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of the Adviser as the investment adviser and the
Administrator as administrator, and approving the Investment Advisory and
Management Agreement between the Adviser and the Corporation dated January 1,
1998 (the "Advisory Agreement") and this Agreement;
(d) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act as filed with the
Securities and Exchange Commission, including all exhibits thereto, relating to
shares of common stock of the Fund, par value $.001 per share and all amendments
thereto;
(e) The Fund's most recent prospectus; and
(f) The Fund's most recent statement of additional
information.
The Adviser will furnish the Administrator from time to time with copies of all
amendments of or supplements to the foregoing.
3. Administrative Services. The Administrator, at its expense, shall
supply the Board of Directors and officers of the Corporation with all
statistical information and reports
- 1 -
<PAGE>
reasonably required by them and reasonably available to the Administrator and
shall furnish the Fund with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Fund.
The Administrator shall oversee the maintenance of all books and records with
respect to the Fund's securities transactions and the keeping of the Fund's
books of accounts in accordance with all applicable federal and state laws and
regulations. In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Administrator hereby agrees that any records which it maintains for the
Fund are the property of the Fund, and further agrees to surrender promptly to
the Fund or its agents any of such records upon the Fund's request. The
Administrator further agrees to arrange for the preservation of the records
required to be maintained by Rule 31a-1 under the 1940 Act for the periods
prescribed by Rule 31a-2 under the 1940 Act.
4. Services Not Exclusive. The Administrator's services hereunder are
not deemed to be exclusive, and the Administrator shall be free to render
similar services to others. It is understood that persons employed by the
Administrator to assist in the performance of its duties hereunder might not
devote their full time to such service. Nothing herein contained shall be deemed
to limit or restrict the right of the Administrator or any affiliate of the
Administrator to engage in and devote time and attention to other businesses or
to render services of whatever kind or nature.
5. Expenses. During the term of this Agreement, the Administrator will
pay all expenses incurred by it in connection with its activities under this
Agreement.
6. Compensation. For the services which the Administrator will render
to the Adviser and the Fund under this Agreement, the Adviser will pay the
Administrator a fee, computed daily and paid monthly, at an annual rate equal to
0.05% of the Fund's average daily net assets. Fees due to the Administrator
hereunder shall be paid promptly to the Administrator by the Adviser following
its receipt of fees from the Fund. If this Agreement is terminated as of any
date not the last day of a calendar month, a final fee shall be paid promptly
after the date of termination and shall be based on the percentage of days of
the month during which the contract was still in effect.
7. Limitation of Liability. The Administrator will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Adviser
or by the Fund in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
8. Definitions. As used in this Agreement, the term "securities" shall
have the meaning ascribed to it in the Articles of Incorporation of the
Corporation; and the terms "assignment" and "interested person" 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.
9. Duration and Termination. This Agreement will become effective
January 1, 1998, provided that it shall have been approved by the Corporation's
Board of Directors, including a majority of those Directors who are not
interested persons of the Adviser or the
<PAGE>
Administrator and, unless sooner terminated as provided for herein, shall
continue in effect until January 1, 2000, and from year to year thereafter,
provided such continuation is approved at least annually by the Board of
Directors, including a majority of those Directors who are not interested
persons of the Adviser or the Administrator. This Agreement is terminable
without penalty, by the Adviser or by the Administrator, on not less than 60
days' notice to the other party and will be terminated immediately upon any
termination of the Advisory Agreement with respect to the Fund or upon the
mutual written consent of the Administrator and the Adviser. Termination of this
Agreement with respect to the Fund shall in no way affect continued performance
with regard to any other portfolio of the Corporation. This Agreement will
automatically and immediately terminate in the event of its assignment.
10. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
11. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.
12. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
LEGG MASON CAPITAL MANAGEMENT, INC.
Attest:
/s/ Rebecca S. Plovan /s/ Philip E. Sachs
By:___________________________ By:________________________________
LEGG MASON FUND ADVISER, INC.
Attest:
/s/ Kathi D. Bair /s/ Marie K. Karpinski
By:___________________________ By:________________________________
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Legg Mason Tax Exempt Trust, Inc.:
We consent to the incorporation by reference in Post-Effective
Amendment No. 21 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
January 30, 1998 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, 1997, 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 "The
Corporation's Independent Accountants" in the Statement of Additional
Information.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 30, 1998
Exhibit 16
LEGG MASON TAX EXEMPT TRUST YIELD CALCULATIONS:
1. 7 day yield at 12/31/97 annualized:
[7 days dividends ended 12/31/97 / 7 x 365] =
-------------------------------------------
$1.00 (NAV)
(.0006175134 / 7 x 365) = 3.22%
-----------------------
1.00
2. Effective yield:
365
---
7
[base period return + 1] -1 =
365
---
7
(.0006175134 + 1) -1 = 3.27%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704560
<NAME> LEGG MASON TAX EXEMPT TRUST, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 312,670
<INVESTMENTS-AT-VALUE> 312,670
<RECEIVABLES> 4,196
<ASSETS-OTHER> 175
<OTHER-ITEMS-ASSETS> 23
<TOTAL-ASSETS> 317,064
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,693
<TOTAL-LIABILITIES> 6,693
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 307,393
<SHARES-COMMON-PRIOR> 278,520
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 307,371
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,525
<OTHER-INCOME> 0
<EXPENSES-NET> 2,273
<NET-INVESTMENT-INCOME> 9,252
<REALIZED-GAINS-CURRENT> 6
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9,258
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,252)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,016,283
<NUMBER-OF-SHARES-REDEEMED> (996,428)
<SHARES-REINVESTED> 9,018
<NET-CHANGE-IN-ASSETS> 28,879
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,296
<AVERAGE-NET-ASSETS> 316,415
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
