As filed with the Securities and Exchange Commission on March 2, 1999.
1933 Act Registration File No. 2-78562
1940 Act Registration 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: 22 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 20
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)
[ ] on , 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[X] on May 1, 1999, pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1999 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
Part A Item No. Prospectus Caption
PART A. ITEM NUMBER PROSPECTUS CAPTION
1. Front and Back Cover Pages Same
2. Risk/Return Summary: Investments, Investment Objective; Risks;
Risks and Performance Performance
3. Risk/Return Summary: Fee Table Fees and Expenses of the
Fund
4. Investment Objectives, Principal Investment Objective; Risks
Investment Strategies, and Related Risks
5. Management's Discussion of Fund Not Applicable
Performance
6. Management, Organization and Capital Management
Structure
7. Shareholder Information How to Invest; How to Sell Your Shares;
Account Policies; Services for
Investors; Dividends andTaxes
8. Distribution Arrangements Management
9. Financial Highlights Information Financial Highlights
PART B. ITEM NUMBER STATEMENT OF ADDITIONAL INFORMATION
CAPTION
10. Cover Page and Table of Contents Same
11. Fund History Description of the Fund and its
Shares
12. Description of the Fund and Its
Investments and Risks Investment Strategies and Risks; Fund
Policies
13. Management of the Fund Management of the Fund
14. Control Persons and Principal Management of the Fund
Holders of Securities
15. Investment Advisory and Other Investment Advisory Agreement; The
Services Fund's Distributor
16. Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices
17. Capital Stock and Other Securities Description of the Fund and its
Shares
18. Purchase, Redemption, and Pricing Additional Purchase and Redemption
of Shares Information; Valuation of Shares
19. Taxation of the Fund Additional Tax Information
20. Underwriters The Fund's Distributor
21. Calculation of Performance Data How The Fund's Yield is Calculated
22. Financial Statements Financial Statements
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking to produce high current income exempt from federal
income tax, to preserve capital, and to maintain liquidity.
PROSPECTUS May 1, 1999
logo
How To Invest (SM)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B LE O F C O N T E N T S
A b o u t t h e f u n d:
xx Investment objective
xx Risks
xx Performance
xx Fees and expenses of the fund
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
<PAGE>
LEGG MASON TAX EXEMPT TRUST, INC.
[ICON] I N V E S T M E N T O B J E C T I V E
The fund seeks to produce high current income exempt from federal income tax, to
preserve capital, and to maintain liquidity. There is no guarantee that the fund
will achieve its objective. The fund is a money market fund that seeks to
maintain a constant net asset value of $1.00 per share.
To achieve its objective, the fund adheres to the following practices:
o it 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
o as a fundamental policy, except during defensive periods, it maintains
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. Variable and floating rate securities are
securities whose interest rates change at specified intervals so they
approximate current market rates.
o it invests the balance of its assets in municipal obligations that have
remaining maturities of 397 days or less or that are variable or
floating rate demand notes
o it maintains a dollar-weighted average maturity of 90 days or less
o it limits its investments to obligations which 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 ("NRSRO"), or one NRSRO if only rated
by one. If a security is unrated by any NRSRO, the adviser may
determine the security to be of comparable quality.
o it may invest, to a limited extent, in taxable short-term money market
instruments
Municipal obligations in which the fund may invest include, but are not limited
to:
o revenue bonds
o general obligation bonds
o industrial development bonds
o private activity bonds
o tax anticipation notes
o bond anticipation notes
o revenue anticipation notes
o securities 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
o 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
The fund does not intend to invest more than 25% of its net assets in:
o municipal obligations whose issuers are in the same state
o municipal obligations which are repayable out of revenue streams generated
from economically related projects or facilities, or
o industrial development bonds or private activity bonds issued by issuers
in the same industries. For purposes of this restriction, there is no
limitation on investments in U.S. Treasury bills or other obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
The fund may, from time to time, take temporary defensive positions that are
inconsistent with the fund's principal investment strategies. At such times, the
fund may not achieve its investment objective.
3
<PAGE>
R I S K S
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund seeks to
maintain a net asset value of $1.00 per share, it is possible to lose money by
investing in the fund.
Additional risks of investing in this fund include:
INTEREST RATE RISK -
The possibility that the market prices of the fund's investments may decline due
to an increase in interest rates.
CREDIT RISK -
The risk that any of the fund's holdings could have its credit rating downgraded
or could default. Credit ratings measure an issuer's ability to make timely
principal and interest payments. Credit ratings are the opinions of the private
companies (such as Standard & Poor's) that rate companies or their securities;
they are not guarantees.
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.
Not all obligations of the U.S. Government, its agencies and instrumentalities
are backed by the full faith and credit of the United States; some are backed
only by the credit of the issuing agency or instrumentality. 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.
Accordingly, there may be some risk of default by the issuer.
OTHER RISKS -
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.
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. The fund is not
appropriate 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." For more information, see the
"Additional Tax Information" section in the Statement of Additional Information.
YEAR 2000 -
4
<PAGE>
Like other mutual funds (and most organizations around the world), the fund
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the fund, its administrator, distributor or
adviser, and could impact municipal and other issuers in which the fund invests.
While no one knows if these problems will have any impact on the fund or on
financial markets in general, the manager and its affiliates are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
5
<PAGE>
[icon] P E R F O R M A N C E
The information below provides an indication of the risks of investing in the
fund by showing changes in the fund's performance from year to year. Annual
returns assume reinvestment of dividends. Historical performance of the fund
does not necessarily indicate what will happen in the future.
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
- --------------------------------------------------------------------------------
7%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6% 5.86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5% 5.30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4% 3.93
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3% 2.34 3.17 2.85 2.95 2.75
- --------------------------------------------------------------------------------
2.25
- --------------------------------------------------------------------------------
2% 1.75
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
DURING THE PAST TEN YEARS:
Quarter Ended Total Return
- ---------------------------------------------------------------------------
Best quarter: June 30, 1989 1.56%
- ---------------------------------------------------------------------------
Worst quarter: March 31, 1993 0.42%
- ---------------------------------------------------------------------------
The fund's seven day yield as of December 31, 1998 was 2.83%. For the fund's
current yield, call toll-free 1-800-822-5544.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998:
1 YEAR 2.75%
5 YEARS 2.80%
10 YEARS 3.31%
These figures include changes in principal value and reinvested dividends.
6
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in the fund. The fund pays operating expenses directly
out of its assets so they lower the fund's share price and dividends. Other
expenses include transfer agency, custody, professional and registration fees.
The fund has no sales charge but is subject to a 12b-1 service fee. The fund
charges no redemption fees.
The fees and expenses shown are for the fiscal year ended December 31, 1998 and
are calculated as a percentage of average net assets.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
Management fees 0.50%
Service (12b-1) fee 0.20%*
Other Expenses 0.12
Total Annual Fund Operating 0.82%*
Expenses
*The Board has determined to reduce the 12b-1 service fee to 0.10% indefinitely.
With this reduction, total annual fund operating expenses are 0.72%.
EXAMPLE
This example helps you compare the cost of investing in the fund with the cost
of investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5%
per year.
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------
$84 $262 $455 $1,014
------------------------------------------
7
<PAGE>
[ICON] M A N A G E M E N T
ADVISER AND ADMINISTRATOR:
Legg Mason Capital Management, Inc., 100 Light Street, Baltimore, Maryland
21202, is the investment adviser for the fund. The adviser directs the
investments of the fund in accordance with its investment objectives, policies
and limitations. The adviser acts as investment adviser to four investment
company portfolios and to private accounts for institutions and individuals with
aggregate assets of $[ ] billion as of March 31, 1999.
Legg Mason Fund Adviser, Inc. serves as the fund's 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
administrator acts as investment adviser or manager to nineteen investment
company portfolios with aggregate assets of $[ ] billion as of March 31, 1999.
For its services, the fund paid the adviser a fee equal to an annual rate of
0.50% of the fund's average daily net assets for the fiscal year ended December
31, 1998. The adviser paid the administrator a fee equal to an annual rate of
0.05% of the fund's average daily net assets.
DISTRIBUTOR OF THE FUND'S SHARES:
Legg Mason Wood Walker, Incorporated distributes the fund's shares. The fund has
adopted a plan that allows it to pay shareholder service fees for services
provided to shareholders 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 indefinitely .
Because these fees are paid out of the fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell shares of
the fund. The distributor pays these brokers up to 90% of the service fee that
it receives from the fund for those sales.
The adviser, administrator and distributor are wholly owned subsidiaries of Legg
Mason, Inc., a financial services holding company.
8
<PAGE>
[icon] H O W T O I N V E S T
To open a regular account with the fund, contact a Legg Mason financial advisor
or other entity that has entered into an agreement with the fund's distributor
to sell shares of the Legg Mason family of funds. A Legg Mason financial advisor
will explain the shareholder services available from our funds and answer any
questions you may have. The minimum initial investment for regular accounts is
$1,000 and the minimum for each purchase of additional shares is $500
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
- -----------------------------------------------------------------------------
IN PERSON Give your financial advisor a check for $500 or more payable
to the fund
MAIL Mail your check, payable to the fund, for $500 or more to
your financial advisor
TELEPHONE Call your financial advisor to transfer available cash
OR WIRE balances in your brokerage account or to transfer money from
your bank directly to Legg Mason. Wire transfer may be
subject to a service charge by your bank.
FUTURE FIRST Contact your Legg Mason financial advisor to enroll in Legg
SYSTEMATIC Mason's Future First systematic Investment Plan. Under this
INVESTMENT plan, you may arrange for automatic monthly investments in
the fund of $50 or more. The fund's transfer agent will transfer
funds monthly from your Legg Mason account or from your checking
account to purchase shares of the fund.
AUTOMATIC Arrangements may be made with some employers and financial
INVESTMENTS institutions for regular automatic monthly investments of $50
or more in shares of the fund. You may also reinvest
dividends from certain unit investment trusts in shares of
the fund.
- -----------------------------------------------------------------------------
Call your financial advisor or another entity offering the fund for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
PURCHASE ORDERS RECEIVED IN FEDERAL FUNDS FORM, BY EITHER YOUR LEGG MASON
FINANCIAL ADVISOR OR THE ENTITY OFFERING THE FUND, ON ANY DAY THAT THE NEW YORK
STOCK EXCHANGE IS OPEN WILL BE PROCESSED AS FOLLOWS:
IF THE PURCHASE ORDER SHARES WILL BE PURCHASED SUCH SHARES WILL
IS RECEIVED: AT THE BEGIN
NET ASSET VALUE NEXT TO EARN DIVIDENDS
DETERMINED ON ON THE
before 12:00 noon (E.S.T) same day same day
12:00 noon or after,
but before 4:00 p.m. (E.S.T) same day next day
after 4:00 p.m. (E.S.T.) next day next day
If you do not make payment in federal funds, your order will be processed when
payment is converted into federal funds, which is usually completed in two days,
but may take up to ten days. Most bank wires are federal funds.
9
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. Your should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
- ---------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial advisor or entity offering
the fund and request a redemption for $100 or more. Proceeds will
be credited to your brokerage account or a check will be sent
to you, at your direction, at no charge to you. Wire requests
will be subject to a fee of $18. Be sure that your financial
advisor has your Bank account information on file. Unless you
specify that you do not wish to have telephone redemption
privileges, you may be held responsible for any fraudulent
telephone order. The fund will follow reasonable procedures to
ensure the validity of any telephone redemption request, such as
requesting identifying information from callers or employing
identification numbers.
CHECKWRITING The fund offers a free checkwriting service. You may
write checks to anyone in amounts of $250 or more. The fund's
transfer agent will redeem sufficient shares from your account to
pay the checks. Your will continue to earn dividends on your
shares until the check clears at the transfer agent. Please do
not use your checks to close your account.
MAIL Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners
of the account. Redemption requests for shares valued at
$10,000 or more or when proceeds are to be paid to someone
other than the accountholder will require a signature
guarantee. You may obtain a signature guarantee from most
banks or securities dealers.
SECURITIES Legg Mason has special redemption procedures for investors
PURCHASES AT who wish to purchase stocks, bonds or other securities at
LEGG MASON Legg Mason. Once you've placed an order for securities,
and have not indicated any other payment method, fund shares will
be redeemed on the settlement date for the amount due. Fund
shares may also be redeemed to cover debit balances in your
brokerage account.
- ---------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial advisor or another entity.
Redemptions of shares that were recently purchased by check or acquired through
reinvestment of dividends on such shares may be delayed for up to 10 days from
the purchase date in order to allow for the check to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
10
<PAGE>
[icon] A C C O U N T P O L I C I E S
To calculate the fund's share price, the fund's assets are valued and totaled,
liabilities are subtracted, and the resulting net assets are divided by the
number of shares outstanding. The fund seeks to maintain a share price of $1.00
per share. The fund is priced twice a day, as of 12:00 noon, Eastern time, and
at the close of the New York Stock Exchange (normally 4:00 p.m., Eastern time),
on every day the exchange is open. Like most other money market funds, the fund
normally values its investments using the amortized cost method.
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
The fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or during
unusual market conditions. The fund may delay redemptions beyond seven days,
or suspend redemptions, only as permitted by the SEC.
11
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial advisor or other entity offering the fund for sale.
ACCOUNT STATEMENTS:
Legg Mason or the entity through which you invest will send you account
statements monthly unless there has been no activity in the account, in which
case you will receive a quarterly statement. Legg Mason will send you statements
quarterly if you participate in the Future First Systematic Investment Plan or
if you purchase shares through automatic investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares with a net asset value of $5,000 or
more, you may elect to make systematic withdrawals from the fund. The minimum
amount for each withdrawal is $50.
PREMIER ACCOUNT STATUS:
Legg Mason offers a Premier Asset Management Account, which combines your fund
account, a preferred customer VISA Gold debit card, a Legg Mason brokerage
account with margin borrowing availability and unlimited checks with no minimum
check amount. Other services include automatic transfer of free credit balances
in your brokerage account to your fund account and automatic redemption of fund
shares to offset debit balances in your brokerage account. Legg Mason charges an
annual fee for the Premier Account, which is currently $85 for individuals and
$100 for corporations and businesses.
EXCHANGE PRIVILEGE:
Fund shares may be exchanged for shares of any of the other Legg Mason funds,
provided these funds are eligible for sale in your state of residence. You can
request an exchange in writing or by phone. Be sure to read the current
prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. In addition, an exchange of the
fund's shares will be treated as a sale of the shares and any gain on the
transaction may be subject to tax.
The fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
12
<PAGE>
[icon] D I V I D E N D S A N D T A X E S
The fund declares dividends from its net investment income daily and pays them
monthly. Your dividends will be automatically reinvested in additional shares of
the fund. If you wish to receive dividends in cash, you must notify the fund at
least 10 days before the next dividend is to be paid. The fund does not expect
to realize any capital gain or loss; however, if the fund realizes any net
short-term capital gains, it will pay them at least once every twelve months.
Your may request that your dividends be reinvested in shares of another Legg
Mason fund.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
The fund may pay "exempt-interest" dividends to shareholders if, 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. 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.
Fund distributions of any net short-term capital gains are taxable to most
investors (other than certain tax-exempt investors) whether received in cash or
reinvested in additional shares of the fund. Generally, those distributions will
be taxable as ordinary income.
Dividends derived from interest on municipal obligations may not be exempt from
income taxation under state or local law. A tax statement is sent to each
investor at the end of each year detailing the tax status of your distributions.
The fund will withhold 31% of all taxable dividends payable to individuals and
certain other non-corporate shareholders who do not provide the fund with a
valid taxpayer identification number or who are otherwise subject to backup
withholding.
Because each investor's tax situation is different, please consult your tax
advisor about federal, state and local tax considerations.
13
<PAGE>
[icon] F I N A N C I AL H I G H L I G H T S
The financial highlights table is intended to help you understand the fund's
financial performance for the past 5 years. Total return represents the rate
that an investor would have earned (or lost) on an investment in the fund,
assuming reinvestment of all dividends and distributions. This information has
been audited by the fund's independent accountants, PricewaterhouseCoopers LLP,
whose report, along with the fund's financial statements, is incorporated by
reference into the Statement of Additional Information (see back cover) and is
included in the annual report. The annual report is available upon request by
calling toll-free 1-800-822-5544.
- ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------
THE FOLLOWING INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE SHARE OF THE
FUND:
Net asset value,
beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .0271 .0292 .0282 .0313 .0223
DISTRIBUTIONS:
Dividends from net
investment income (.0271) (.0292) (.0282) (.0313) (.0223)
Net asset value,
end of year $1.00 $1.00 $1.00 $1.00 $1.00
Total return 2.75% 2.95% 2.85% 3.17% 2.25%
RATIOS/SUPPLEMENTAL
DATA:
Ratio of total expenses
to average net assets(a) .72% .73% .64% .66% --
Ratio of net expenses
to average net assets(b) .71% .72% .64% .65% .65%
Ratio of net investment
income to average net
assets 2.71% 2.92% 2.82% 3.14% 2.23%
Net assets, end of year
(in thousands) $330,134 $307,371 $278,492 $224,656 $222,490
- ---------------------------------------------------------------------------
(a) This ratio reflects total expenses before compensating balance credits.
Previously, the credits were included in this ratio.
(b) This ratio reflects expenses net of compensating balance credits.
14
<PAGE>
L e g g M a s o n T a x E x e m p t T r u s t, I n c.
The following additional information about the fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) the prospectus. The SAI provides additional details about
the fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about the fund's
investments is available in the fund's annual and semiannual reports to
shareholders. These reports provide detailed information about the fund's
portfolio holdings and operating results.
TO REQUEST THE SAI OR ANY REPORTS TO SHAREHOLDERS, OR TO OBTAIN MORE
INFORMATION:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the fund, including the SAI, can be reviewed and copied at the
SEC's public reference room in Washington, DC. (phone 1-800-SEC-0330). Reports
and other information about the fund are available on the SEC's Internet site at
http://www.sec.gov. Investors may also write to: SEC, Public Reference Section,
Washington, DC 20549-6009. A fee will be charged for making copies.
LMF-015 SEC file number: 811-3526
<PAGE>
THE LEGG MASON TAX EXEMPT TRUST, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the fund's Prospectus dated May 1, 1999, which has been
filed with the Securities and Exchange Commission ("SEC"). The fund's annual
report is incorporated by reference into this Statement of Additional
Information. A copy of either the Prospectus or the annual report is available
without charge by writing to or calling the fund's distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
LEGG MASON WOOD WALKER,
INCORPORATED
- --------------------------------------------------------------------------------
100 Light Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
1
<PAGE>
Table of Contents
Page
----
Investment Strategies and Risks 3
Fund Policies 6
Management of the Fund 7
Investment Advisory Agreement 10
The Fund's Distributor 11
Additional Tax Information 12
Additional Purchase and Redemption Information 13
Valuation of Shares 16
How the Fund's Yield Is Calculated 17
Portfolio Transactions and Brokerage 19
Description of the Fund and its Shares 20
The Fund's Custodian and Transfer and Dividend
Disbursing Agent 20
The Fund's Legal Counsel 20
The Corporation's Independent Accountants 20
Financial Statements 20
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.
- --------------------------------------------------------------------------------
2
<PAGE>
Investment Strategies and Risks
-------------------------------
The fund is an open-end, diversified management investment company. The fund
seeks to produce high current income exempt from federal income tax, to preserve
capital, and to maintain liquidity. 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 tax preference item for purposes of
the Federal Alternative Minimum Tax ("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
The fund may enter into commitments to purchase new issues of municipal
bonds on a when-issued basis. Delivery of and payment for these securities
normally take place 7 to 45 days after the date of the commitment. Interest
rates on when-issued securities are normally fixed
3
<PAGE>
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). Commitments to purchase when-issued securities will not exceed, in
the aggregate, 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 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
4
<PAGE>
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.
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.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which Municipal obligations,
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 respect to the seller of
the security, realization upon the collateral by the fund could be
5
<PAGE>
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.
Fund Policies
The fund has adopted certain fundamental policies that can be changed only
by the vote of a majority of the outstanding voting securities of the fund.
Under the Investment Company Act of 1940 ("1940 Act"), a "vote of a majority of
the outstanding voting securities" of the fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the fund or (2) 67% or
more of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. As a
matter of fundamental policy, the fund may not:
1. Borrow money, except for temporary purposes in an aggregate amount not
to exceed 10% of the value of the total assets of the fund; provided that
borrowings in excess of 5% of such value will be only from banks, and the fund
will not purchase portfolio securities while its borrowings exceed 5% (interest
paid on borrowed money would reduce income to the fund);
2. Underwrite the securities of other issuers, except insofar as the fund
may be deemed an underwriter under the Securities Act of 1933, as amended, in
disposing of a portfolio security;
3. Purchase common stocks, preferred stocks, warrants, or other equity
securities;
4. Buy or hold any real estate other than municipal bonds secured by real
estate or interests therein;
5. Buy or hold any commodity or commodity futures contracts, or any oil,
gas or mineral exploration or development program;
6. Make loans, except loans of portfolio securities and except to the
extent the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness, the entry into repurchase agreements,
or deposits with banks and other financial institutions may be considered loans;
7. Mortgage or pledge any of the fund's assets, except to the extent, up
to a maximum of 10% of the value of its total assets, necessary to secure
borrowings permitted by paragraph 1;
8. Buy securities on "margin" or make "short" sales of securities;
9. Write or purchase put or call options, except to the extent that
securities subject to stand-by commitments may be purchased as set forth under
"Additional Information About Investment Objectives, Limitations, and Policies,"
in this Statement of Additional Information;
10. Buy securities which have legal or contractual restrictions on resale,
if the purchase causes more than 10% of the fund's assets to be invested in
illiquid securities and repurchase agreements maturing in more than seven days;
11. Buy securities issued by any other investment company, except in
connection with a
6
<PAGE>
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.
Management of the Fund
The fund's officers are responsible for the operation of the fund under
the direction of the Board of Directors. The officers and directors of the fund,
their dates of birth 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 fund 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. Formerly: Director of Legg Mason Fund
Adviser, Inc., and Western Asset Management Company (each a registered
investment adviser); Officer and/or Director of various other affiliates of Legg
Mason, Inc.
EDMUND J. CASHMAN, JR.*, [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.;
7
<PAGE>
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/Trustee of all
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.
ARNOLD L. LEHMAN, [07/18/44] Director; 200 Eastern Parkway, Brooklyn, New
York. Director of the Brooklyn Museum of Art; Director/Trustee of all Legg Mason
funds. Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN, [08/29/44] Director; 400 Seventh St., NW, Washington, DC.
Chief Executive Officer of the Marrow Foundation; Director/Trustee of all 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/Trustee of all 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 the Legg Mason funds;
employee of Legg Mason.
SHANE HUGHES *, [4/24/68] Assistant Secretary; employee of Legg Mason since
May 1997. Formerly: Senior Associate of C. W. Amos and Co. (a regional public
accounting firm)
MARIE K. KARPINSKI *, [01/01/49] Vice President and Treasurer; Treasurer of
Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of the Legg Mason
funds; Vice President of Legg Mason.
Officers and directors of the fund who are "interested persons" of the
Corporation, as defined in the 1940 Act, receive no salary or fees from the
fund. 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, 1999, 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 14.55% of the
Corporation's outstanding shares as of February 16, 1999.
8
<PAGE>
The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Lehman, Rodgers and Dr. McGovern, each of whom is a
disinterested director as that term is defined in the 1940 Act.
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1998. None of the Legg Mason funds has any retirement plan for its
directors.
- ---------------------------- ------------------------ =========================
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FUND AND FUND COMPLEX
NAME OF PERSON AND POSITION FROM FUND* PAID TO DIRECTORS**
- ---------------------------- ------------------------ =========================
John F. Curley, Jr. -
Chairman of the Board and None None
Director
- ---------------------------- ------------------------ =========================
Edmund J. Cashman, Jr.
President and Director None None
- ---------------------------- ------------------------ =========================
Richard G. Gilmore -
Director $2,480 $35,100
- ---------------------------- ------------------------ =========================
Charles F. Haugh -
Director A $1,819 $25,800
- ---------------------------- ------------------------ =========================
Arnold L. Lehman -
Director $2,154 $30,600
- ---------------------------- ------------------------ =========================
Jill E. McGovern -
Director $2,480 $35,100
- ---------------------------- ------------------------ =========================
T. A. Rodgers -
Director $2,480 $35,100
- ---------------------------- ------------------------ =========================
A Mr. Haugh retired as a director in September 1998.
* Represents fees paid to each director during the fiscal year ended December
31, 1998.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1998. There are eleven open-end
investment companies in the Legg Mason Complex (with a total of twenty
funds).
Investment Advisory Agreement
Legg Mason Capital Management, Inc., located at 100 Light Street,
Baltimore, Maryland 21202, is a wholly owned subsidiary of Legg Mason, Inc. 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 fund's Board of Directors, including a majority of the
directors who are not "interested persons" of the fund or the Adviser, on
November 13, 1998. 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
9
<PAGE>
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. 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.
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 year ended December 31, 1998, the fund paid the Adviser fees of
$1,670,147. For the years ended December 31, 1997 and 1996, the fund paid LMFA
fees of $1,582,075, and $1,373,646, 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 any 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 fund, 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
10
<PAGE>
Investment Company Institute.
The Fund's Distributor
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland 21202, 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/or 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
indefinitely. The 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 years ended December
31, 1998, and 1997 the fund paid Legg Mason $334,029 and $309,363 for 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 13, 1998. 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 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, 1998, Legg Mason incurred the following expenses
with respect to the fund:
----------------------------------------------------------
Compensation to financial advisors $ 229,000
----------------------------------------------------------
149,000
Printing and mailing of
prospectuses to prospective
shareholders
----------------------------------------------------------
Advertising $69,000
11
<PAGE>
----------------------------------------------------------
Other $537,000
----------------------------------------------------------
Total $984,000
----------------------------------------------------------
The amounts in "Other" reflect the allocation of certain items of
overhead, using assumption believed by Legg Mason to be reasonable.
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 failed
to qualify for treatment as a RIC for any taxable year, (i) it would be taxed at
corporate rates on the full amount of its taxable income for that year without
being able to deduct the distributions it makes to its shareholders and (ii) the
shareholders would treat all those distributions, including distributions that
otherwise would be "exempt-interest dividends" as described in the Prospectus,
as taxable dividends (that is, ordinary income) to the extent of the fund's
earnings & profits. In addition, the fund could be required to recognize
unrealized gains, pay substantial taxes and interest, and make substantial
distributions before requalifying for RIC treatment.
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 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
12
<PAGE>
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.
Additional Purchase And Redemption Information
Shares are sold at their net asset value without a sales charge on days
the New York Stock Exchange ("Exchange") is open for business. The procedure for
purchasing shares of the fund is explained in the Prospectus under "How to
Invest".
CONVERSION TO FEDERAL FUNDS
It is the fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. This conversion must be
made before shares are purchased. Legg Mason or Boston Financial Data Services
("BFDS") acts as the shareholders' agent in depositing checks and converting
them to federal funds, normally within two to nine business days of receipt of
checks.
A cash deposit made after the daily cashiering deadline of the Legg Mason
office in which the deposit is made will be credited to your Legg Mason
brokerage account ("Brokerage Account") on the next business day following the
day of deposit, and the resulting free credit balance will be invested on the
second business day following the day of receipt.
REDEMPTION BY WIRE
The fund redeems shares at the next computed net asset value after Legg
Mason receives the redemption request. Redemption procedures are explained in
the Prospectus under "How to Sell Your Shares". When payment for shares is in
the form of federal funds, the 10-day potential delay described in the
Prospectus does not apply.
REDEMPTION IN KIND
The fund reserves the right, under certain conditions, to honor any
request for a redemption, or combination of requests from the same shareholder
in any 90-day period, totaling $250,000 or 1% of the net assets of the fund,
whichever is less, by making payment in whole or in part in securities valued in
the same way as they would be valued for purposes of computing the fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
the market price of those securities will be subject to fluctuation until they
are sold. The fund does not redeem in kind under normal circumstances, but would
do so where the Adviser determines that it would be in the best interests of the
shareholders as a whole.
FUTURE FIRST SYSTEMATIC INVESTMENT PLAN AND TRANSFER OF FUNDS FROM FINANCIAL
INSTITUTIONS
When you purchase shares through the Future First Systematic Investment
Plan, BFDS, the fund's transfer agent, will transfer funds from your Legg Mason
account or from your checking account to be used
13
<PAGE>
to buy shares of the fund. Legg Mason, the fund's distributor, will send an
account statement quarterly. The transfer also will be reflected on your Legg
Mason account statement or your regular checking account statement. You may
terminate the Future First Systematic Investment Plan at any time without charge
or penalty.
You may also buy additional shares of the fund through a plan permitting
transfers of funds from a financial institution. Certain financial institutions
may allow you, on a pre-authorized basis, to have $50 or more automatically
transferred monthly for investment in shares of the fund to:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
Attn: Legg Mason Funds
If the investor's check is not honored by the institution on which it is
drawn, the investor may be subject to extra charges in order to cover collection
costs. These charges may be deducted from the investor's account.
SYSTEMATIC WITHDRAWAL PLAN
You may also elect to make systematic withdrawals from your fund account
of a minimum of $50 on a monthly basis if you own shares with a net asset value
of $5,000 or more. The amounts paid to you each month are obtained by redeeming
sufficient shares from your account to provide the withdrawal amount that you
have specified.
You may change the monthly amount to be paid to you without charge not
more than once a year by notifying Legg Mason or the affiliate with which you
have an account. Redemptions will be made at the net asset value determined as
of the close of the Exchange on the first day of each month. If the Exchange is
not open for business on that day, the shares will be redeemed at the net asset
value determined as of the close of the Exchange on the preceding business day.
The check for the withdrawal payment will usually be mailed to you on the next
business day following redemption. If you elect to participate in the Systematic
Withdrawal Plan, dividends and distributions on all shares in your fund account
must be automatically reinvested in fund shares. You may terminate the
Systematic Withdrawal Plan at any time without charge or penalty. The fund, its
transfer agent, Legg Mason and its affiliates also reserve the right to modify
or terminate the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend. If the periodic withdrawals exceed reinvested dividends and
distributions, the amount of your original investment will be correspondingly
reduced.
LEGG MASON PREMIER ASSET MANAGEMENT ACCOUNT/VISA ACCOUNT
Shareholders of the fund who have cash or negotiable securities (including
fund shares) valued at $20,000 or more in accounts with Legg Mason may subscribe
to Legg Mason's Premier Asset Management Account ("Premier"). This program
provides a direct link between a shareholder's fund account and his or her
Brokerage Account. Premier provides shareholders with a convenient method to
invest in the fund through their Brokerage Accounts, which includes automatic
daily investment of free credit balances of $100 or more and automatic weekly
investment of free credit balances of less than $100.
Premier is a comprehensive financial service which combines a
shareholder's fund account, a preferred customer VISA Gold debit card, a Legg
Mason Brokerage Account and unlimited checkwriting with no minimum check amount.
Premier is offered as an exclusive preferred customer service for shareholders
of certain Legg Mason funds.
The VISA Gold debit card may be used to purchase merchandise or services
from merchants
14
<PAGE>
honoring VISA or to obtain cash advances (which a bank may limit to $5,000 or
less, per account per day) from any bank honoring VISA.
Checks, VISA charges and cash advances are posted to the shareholder's
margin account and create automatic same day redemptions if shares are available
in the fund. If fund shares have been exhausted, the debits will remain in the
margin account, reducing the cash available. The shareholder will receive one
consolidated monthly statement which details all fund transactions, securities
activity, check writing activity and VISA Gold purchases and cash advances.
BancOne Columbus ("BancOne"), 757 Carolyn Avenue, Columbus, Ohio 43271, is
the fund's agent for processing payment of VISA Gold debit card charges and
clearance of checks written on the Premier Account. Shareholders are subject to
BancOne's rules and regulations governing VISA accounts, including the right of
BancOne not to honor VISA drafts in amounts exceeding the authorization limit of
the shareholder's account at the time the VISA draft is presented for payment.
The authorization limit is determined daily by taking the shareholder's fund
account balance and subtracting (1) all shares purchased within 15 days by other
than federal funds wired; (2) all shares for which certificates have been
issued; and (3) any previously authorized VISA transaction.
PREFERRED CUSTOMER CARD SERVICES Unlike some other investment programs
which offer the VISA card privilege, Premier also includes travel/accident
insurance at no added cost when shareholders purchase travel tickets with their
Premier VISA Gold debit card. Coverage is provided through VISA and extends up
to $250,000.
If a VISA Gold debit card is lost or stolen, the shareholder should report
the loss immediately by contacting Legg Mason directly between the hours of 8:30
a.m. and 5:00 p.m., or BancOne (collect) after hours at 1-614-248-4242. Those
shareholders who subscribe to the Premier VISA account privilege may be liable
for the unauthorized use of their VISA Gold debit card in amounts up to $50.
Legg Mason is responsible for all Premier VISA Gold debit card inquiries
as well as billing and account resolutions. Simply call Legg Mason Premier
Client Services directly between 8:30 a.m. and 5:00 p.m., Eastern time, at
1-800-253-0454 or 1-410-528-2066 with your account inquiries.
AUTOMATIC PURCHASES OF FUND SHARES For shareholders participating in the
Premier program who sell shares held in their Brokerage Account, any free credit
balances of $100 or more in a single account resulting from any such sale will
automatically be invested in shares of the fund on the same business day the
proceeds of sale are credited to the Brokerage Account. Free credit balances of
less than $100 will be invested in fund shares weekly.
Free credit balances arising from sales of Brokerage Account shares for
cash (i.e., same-day settlement), redemption of debt securities, dividend and
interest payments and cash deposits will be invested automatically in fund
shares on the next business day following the day the transaction is credited to
the Brokerage Account.
Fund shares will receive the next dividend declared following purchase
(normally 12:00 noon, Eastern time, on the following business day). A purchase
order will not become effective until cash in the form of federal funds is
received by the fund.
HOW TO OPEN A PREMIER ACCOUNT To subscribe to Premier services, clients
must contact Legg Mason to execute both a Premier Agreement with Legg Mason and
a VISA Account Application and Agreement with BancOne. Legg Mason charges a fee
for the Premier service, which is currently $85 per year for individuals and
$100 per year for businesses and corporations. Legg Mason reserves the right to
alter or waive the conditions upon which a Premier account may be opened. Both
Legg Mason and BancOne reserve the right to terminate or modify any
shareholder's Premier services at their discretion.
15
<PAGE>
You may request Premier Account status by filling out the Premier Asset
Management Account Agreement and Check Application which can be obtained from
your financial advisor. You will receive your VISA Gold debit card (if
applicable) from BancOne. The Premier VISA Gold debit card may be used at over 8
million locations, including 23,000 ATMs, in 24 countries around the world.
Premier checks will be sent to you directly. There is no limit on the number of
checks you may write against your Premier account.
Shareholders should be aware that the various features of the Premier
program are intended to provide easy access to assets in their accounts and that
the Premier account is not a bank account. Additional information about the
Premier program is available by calling your financial advisor or Legg Mason's
Premier Client Services.
OTHER INFORMATION REGARDING REDEMPTION
The fund reserves the right to modify or terminate the check, wire,
telephone or VISA Gold card redemption services described in the Prospectus and
this Statement of Additional Information at any time.
You may request the fund's checkwriting service by sending a written
request to Legg Mason. State Street Bank and Trust Company ("State Street"), the
fund's custodian, will supply you with checks which can be drawn on an account
of the fund maintained with State Street. When honoring a check presented for
payment, the fund will cause State Street to redeem exactly enough full and
fractional shares from your account to cover the amount of the check.
Canceled checks will be returned to you.
Check redemption is subject to State Street's rules and regulations
governing checking accounts. Checks should not be used to close a fund account
because when the check is written you will not know the exact total value of the
account, including accrued dividends, on the day the check clears. Persons who
obtained certificates for their shares may not use the checkwriting service.
The date of payment for a redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended except (1) for any
periods during which the Exchange is closed, (2) when trading in markets the
fund normally utilizes is restricted, or an emergency, as defined by rules and
regulations of the SEC, exists, making disposal of the fund's investments or
determination of its net asset value not reasonably practicable, or (3) for such
other periods as the SEC by regulation or order may permit for protection of the
fund's shareholders. In the case of any such suspension, you may either withdraw
your request for redemption or receive payment based upon the net asset value
next determined after the suspension is lifted.
Although the fund may elect to redeem any shareholder account with a
current value of less than $500, the fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
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.
16
<PAGE>
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 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.
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,
17
<PAGE>
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, 1998 were 4.68% and 4.75%, respectively.
OTHER INFORMATION
The fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to predict or indicate future results. The return on an investment in
the fund will fluctuate. In Performance Advertisements, the fund may compare its
taxable or tax-free yield with data published by Lipper Analytical Services,
Inc. for money funds ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
IBC/Donoghue's Money Market Fund Report ("Donoghue"), Wiesenberger Investment
Companies Service ("Wiesenberger") or Investment Company Data Inc. ("ICD"), or
with the performance of recognized stock and other indexes, including (but not
limited to) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"),
the Dow Jones Industrial Average ("Dow Jones") and the Consumer Price Index as
published by the U.S. Department of Commerce. The fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA, Donoghue,
Wiesenberger or ICD. Performance Advertisements also may refer to discussions of
the fund and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, THE NEW YORK TIMES and
FORTUNE.
The fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on an investment in the fund are
reinvested in additional fund shares, any future income or capital appreciation
of the fund will increase the value, not only of the original fund investment,
but also of the additional fund shares received through reinvestment. As a
result, the value of the fund investment will increase more quickly than if
dividends or other distributions were paid in cash.
The fund may also compare its performance with the performance of bank
certificates of deposit ("CDs") as measured by the CDA Investment Technologies,
Inc., Certificate of Deposit Index and the Bank Rate Monitor National Index. In
comparing the fund's performance to CD performance, investors should keep in
mind that bank CDs are insured in whole or in part by an agency of the U.S.
Government and offer fixed principal and fixed or variable rates of interest,
and that bank CD yields may vary depending on the financial institution offering
the CD and prevailing interest rates. Fund shares are not insured or guaranteed
by the U.S. Government or any agency thereof and returns on such shares will
fluctuate. While the fund seeks to maintain a stable net asset value of $1.00
per share, there can be no assurance that it will be able to do so.
Fund advertisements may reference the history of the distributor and its
affiliates, and the education and experience of the portfolio manager. The fund
may also include in advertising 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
18
<PAGE>
earning power or asset value of their issuers. Securities may be undervalued
because of many factors, including market decline, poor economic conditions,
tax-loss selling, or actual or anticipated unfavorable developments affecting
the issuer of the security.
In advertising, the fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. The fund may use other recognized
sources as they become available.
The fund may use data prepared by Ibbotson Associates of Chicago, Illinois
("Ibbotson") to compare the returns of various capital markets and to show the
value of a hypothetical investment in a capital market. Ibbotson relies on
different indices to calculate the performance of common stocks, corporate and
government bonds and Treasury bills.
The fund may illustrate and compare the historical volatility of different
portfolio compositions where the performance of stocks is represented by the
performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
The fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors meet their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisors for private accounts and mutual
funds with assets of more than $[ ]billion as of March 31, 1999.
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
19
<PAGE>
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.
Description of the Fund and Its Shares
The fund is a diversified, open-end management investment company which
was incorporated in Maryland on July 26, 1982. The fund 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 fund 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.
The Fund's Custodian and
Transfer and Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105
serves as custodian of the fund's assets. 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 Fund's Legal Counsel
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C., 20036-1800, serves as counsel to the Corporation.
The Fund's Independent Accountants
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, MD 21201, is
the fund's independent accountants.
Financial Statements
The fund's Statement of Net Assets as of December 31, 1998; the Statement
of Operations for the year ended December 31, 1998; the Statement of Changes in
Net Assets for the years ended December 31, 1998 and 1997; 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, 1998, 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 commercial 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+. Commercial 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 23. 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) Specimen Security - not applicable
(4) Investment Advisory and Management Agreement (1)
(5) (a) Underwriting Agreement (1)
(b) Underwriting Agreement (1)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (1)
(8) (a) Transfer Agent and Service Agreement (1)
(9) Opinion and Consent of Counsel (1)
(10) Consent of Independent Accountants -- filed herewith
(11) Financial statements omitted from Item 22 -- none
(12) Not Applicable
(13) (a) Amended Plan pursuant to Rule 12b-1 (1)
(14) Financial Data Schedule - filed herewith
(15) 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 24. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
None
Item 25. 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: "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 provided and allowed by Md.
Corp. and Assns. Code ss.2-418, as amended from time to time, or any other
applicable provision of law. Notwithstanding anything herein to the contrary, no
director, officer, investment adviser or principal underwriter of the
Corporation shall be indemnified in violation of Section 17(i) of the Investment
Company Act of 1940, as amended. The directors of the corporation may provide
such liability insurance to the persons named herein as is
<PAGE>
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.
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 26. 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 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 serves as investment adviser
or manager for nineteen open-end investment companies. Information as to the
officers and directors of LMFA is included in its Form ADV filed on June 24,
1998 with the Securities and Exchange Commission (registration number 801-16958)
and is incorporated herein by reference.
Item 27. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
<PAGE>
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.
Legg Mason Focus Trust, Inc.
Legg Mason Light Street Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
(b) The following table sets forth information concerning each director and
officer of the Registrant's principal underwriter, Legg Mason Wood
Walker, Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman Chairman of the
of the Board Board and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive President and
Vice President and Director
Director
Richard J. Himelfarb Senior Executive Vice None
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
<PAGE>
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin 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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 29. Management Services
None
Item 30. Undertakings
Not applicable.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund, Legg Mason Tax Exempt Trust, Inc., 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 1st day of March, 1999.
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
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ John F. Curley Chairman of the Board March 1, 1999
- -------------------------- and Director
John F. Curley, Jr.*
/s/ Edmund J. Cashman Jr. President and Director March 1, 1999
- --------------------------
Edmund J. Cashman, Jr.
/s/ Richard G. Gilmore Director March 1, 1999
- --------------------------
Richard G. Gilmore*
/s/ Arnold L. Lehman Director March 1, 1999
- --------------------------
Arnold L. Lehman*
/s/ Jill E. McGovern Director March 1, 1999
- --------------------------
Jill E. McGovern*
/s/ T.A. Rodgers Director March 1, 1999
- --------------------------
T.A. Rodgers*
/s/ Marie K. Karpinsk Vice President March 1, 1999
- -------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 8, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of the following investment companies:
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT
TRUST, INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, KATHI D. BAIR, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and
lawful attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, any Registration
Statements on Form N-1A, all Pre-Effective Amendments to any Registration
Statements of the Funds, any and all subsequent Post-Effective Amendments to
said Registration Statements, any supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933 and the Investment Company Act of 1940, all
related requirements of the Securities and Exchange Commission and all
requirements of appropriate states and territories. I hereby ratify and confirm
all that said attorney-in-fact or their substitutes may do or cause to be done
by virtue hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
/s/ Richard G. Gilmore May 8, 1998
- ---------------------------
Richard G. Gilmore
/s/ T. A. Rodgers May 8, 1998
- --------------------------
T. A. Rodgers
/s/ Charles F. Haugh May 8, 1998
- ---------------------------
Charles F. Haugh
/s/ Arnold L. Lehman May 8, 1998
- ---------------------------
Arnold L. Lehman
/s/ Jill E. McGovern May 8, 1998
- ---------------------------
Jill E. McGovern
/s/ Edward A. Taber, III May 8, 1998
- ---------------------------
Edward A. Taber, III
/s/ Edmund J. Cashman, Jr. May 8, 1998
- ---------------------------
Edmund J. Cashman, Jr.
/s/ John F. Curley, Jr. May 8, 1998
- ---------------------------
John F. Curley, Jr.
/s/ Raymond A. Mason May 8, 1998
- ---------------------------
Raymond A. Mason
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 22 (File No. 2-78562) under the Securities Act of 1933 and Post-Effective
Amendment No. 20 (File No. 811-3526) under the Investment Company Act of 1940 to
the Registration Statement on Form N-1A of Legg Mason Tax Exempt Trust, Inc. of
our report dated February 5, 1999 on our audit of the financial statements and
financial highlights as of December 31, 1998 and for the respective years then
ended, which report is included in the Annual Report to Shareholders.
We also consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "The Fund's Independent Accountants" in the
Statement of Additional Information.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
March 1, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704560
<NAME> LEGG MASON TAX EXEMPT TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 320,454
<INVESTMENTS-AT-VALUE> 320,454
<RECEIVABLES> 8,726
<ASSETS-OTHER> 17
<OTHER-ITEMS-ASSETS> 1,296
<TOTAL-ASSETS> 330,493
<PAYABLE-FOR-SECURITIES> 15
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 344
<TOTAL-LIABILITIES> 359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 330,156
<SHARES-COMMON-PRIOR> 307,393
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 330,134
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,433
<OTHER-INCOME> 0
<EXPENSES-NET> 2,381
<NET-INVESTMENT-INCOME> 9,052
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9,052
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,052)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,131,990
<NUMBER-OF-SHARES-REDEEMED> 1,117,983
<SHARES-REINVESTED> 8,756
<NET-CHANGE-IN-ASSETS> 22,763
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (21)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,670
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,411
<AVERAGE-NET-ASSETS> 334,029
<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> .71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
