Annual Report
December 31, 1998
Legg Mason
Tax
Exempt
Trust, Inc.
[LEGG MASON FUNDS LOGO APPEARS HERE]
Investment Adviser
Legg Mason Capital Management, Inc.
Baltimore, MD
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, D.C.
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
An investment in the Fund is not insured by the Federal Deposit Insurance
Corporation or any other government agency. Although the Fund seeks to preserve
the value of your investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Incorporated
- -------------------------------------------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-016
<PAGE>
To Our Shareholders,
On December 31, 1998, the Legg Mason Tax Exempt Trust had $330 million
invested in a diversified portfolio of high-quality, short-term municipal
securities. As this letter is written, the Trust's 7-day yield is 1.74% and its
average weighted maturity is 28 days.
The Trust's income dividends continue to be exempt from federal income tax
and a portion may be exempt from state income taxes as well, depending upon your
state of residence. The Trust does not purchase investments whose income is
subject to the federal alternative minimum tax.
During 1998, attention increasingly focused on the Year 2000 issue. As you
may know, the Year 2000 issue is a computer programming problem that affects the
ability of computers to correctly process dates of January 1, 2000, and beyond.
The Fund's Year 2000 project is well underway, and is designed to ensure that
the Year 2000 date change will have no adverse impact on our ability to service
our clients. The Fund is committed to taking those steps necessary to protect
Fund investors including efforts to determine that the Year 2000 problem will
not affect such vital service functions as shareholder transaction processing
and record keeping. In addition, we are continuously monitoring the Year 2000
efforts of our vendors, and will perform tests with our critical vendors
throughout 1999. Although the Fund is taking steps to ensure that all of its
systems will function properly before, during, and after the Year 2000, the Fund
could be adversely affected by computer related problems related to the Year
2000. Contingency plans to ensure that functions critical to the Fund's
operations will continue without interruption are under development. We are on
target to complete this important project and look forward to continue extensive
testing (including industry-wide testing) with our industry peers, regulators
and vendors throughout 1999.
Many of our shareholders regularly add to their Fund holdings by
authorizing automatic, monthly transfers from their bank checking or Legg Mason
accounts. Your Legg Mason Financial Advisor will be happy to help you make these
arrangements if you would like to purchase shares in this convenient way.
We appreciate your ownership of the Trust, and hope you will let us know
whenever you have questions or suggestions.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
February 12, 1999
<PAGE>
Statement of Net Assets
Legg Mason Tax Exempt Trust, Inc.
December 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado - 0.9%
Colorado (State of) General Fund Tax and Revenue
Anticipation Series 1998 A TRANS (SP-1+, F-1+) 4% 6/25/99 $ 3,000 $ 3,006
- ------------------------------------------------------------------------------------------------------------------------
Connecticut - 2.3%
State of Connecticut Health & Educational Facilities
Authority Revenue Bonds Yale University Issue,
Series T VRDN (Aaa/VMIG1, AAA/A-1+) 3.70 to 1/7/99 7,500 7,500A
3.75%
- ------------------------------------------------------------------------------------------------------------------------
Delaware - 1.5%
University of Delaware Variable Rate Demand
Revenue Bonds Series 1998 (AA/A-1+) 4.10% 1/6/99 5,000 5,000A
- ------------------------------------------------------------------------------------------------------------------------
District of Columbia - 1.5%
District of Columbia, Multimodal Revenue Bonds
Medlantic/Helix Issue, Series 1998 C
(Aaa/VMIG1, AAA/A-1+, AAA) 3.20% 1/14/99 5,000 5,000A
- ------------------------------------------------------------------------------------------------------------------------
Florida - 3.9%
Pinellas County, Florida Health Facilities Authority
(Bayfront Medical Center, Inc. Project) Refunding
Revenue Bonds Series 1989 VRDN
(Aaa/VMIG1, AAA/A-1) 3.40% 1/6/99 2,700 2,700A
Putnam County Development Authority PCR Bonds
(Seminole Electric Cooperative, Inc.) Series 1984
H-1 and H-2 VRDN (Aa3, AA-/A-1+, AA-/F-1+) 4.05% 1/6/99 10,135 10,135A
- ------------------------------------------------------------------------------------------------------------------------
12,835
- ------------------------------------------------------------------------------------------------------------------------
Georgia - 3.1%
Burke (County of) Georgia Development Authority
Pollution Control Revenue Bonds (Oglethorpe
Power Corp. Vogtle Project) Series 1998 2/18/99 to
(Aaa/P1, AAA/A-1+) 3.10 to 3/11/99 10,325 10,325A
3.15%
- ------------------------------------------------------------------------------------------------------------------------
Idaho - 1.2%
Idaho (State of) TANS Series 1998 (MIG1, SP-1+, F1+) 4.50% 6/30/99 4,000 4,017
- ------------------------------------------------------------------------------------------------------------------------
Illinois - 0.7%
Illinois Development Authority (Amoco) Series
1994 VRDN (Aa1/VMIG1, AAA/A-1+) 5.05% 1/4/99 2,300 2,300A
- ------------------------------------------------------------------------------------------------------------------------
Indiana - 5.9%
Hammond (City of) Indiana Pollution Control Revenue
Refunding Bonds (Amoco Oil Company) Series 1994
VRDN (Aa1/VMIG1, AAA/A-1+) 5.05% 1/4/99 1,200 1,200A
Mount Vernon (City of) PCR (General Electric
Company Project) Series 1989 A VRDN 1/8/99 to
(Aaa/P1, AAA/A-1+) 3.10 to 1/14/99 13,150 13,150A
3.15%
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indiana -- Continued
Rockport (City of) PCRRefunding Bonds (American
Electric Power Generating Company Project)
Series 1995 A VRDN (AAA/A-1+c) 5.10% 1/4/99 $ 2,200 $ 2,200A
Sullivan (City of) Floating/fixed rate PCR (Hoosier
Energy Rural Electric Cooperative, Inc. Project)
Series L3 and L6 VRDN (A1/P1, AA-/A-1+, 1/29/99 to
AA-/F-1+) 3.20 to 2/19/99 3,000 3,000A
3.40%
- ------------------------------------------------------------------------------------------------------------------------
19,550
- ------------------------------------------------------------------------------------------------------------------------
Kentucky - 6.5%
Jefferson (County of) PCR Bonds (Louisville Gas &
Electric Company Project) Series 1993 A VRDN 2/5/99 to
(Aa2/VMIG1, A+/A-1) 3 to 4/7/99 6,600 6,600A
3.15%
Kentucky Economic Development Finance Authority
Hospital Revenue Bonds, Series 1997 (Baptist
Healthcare System Obligated Group) VRDN
(AA-/A-1+, AA-/F-1+) 4% 1/6/99 14,835 14,835A
- ------------------------------------------------------------------------------------------------------------------------
21,435
- ------------------------------------------------------------------------------------------------------------------------
Louisiana - 2.1%
Ascension (Parish of) PCR Refunding (Shell Oil
Company Project) Series 1993 VRDN (AAA/A-1+) 5% 1/4/99 5,800 5,800A
Parish of East Baton Rouge, State of Louisiana PCR
Refunding Bond (Exxon Project) 1993 Series VRDN
(Aaa/P1, AAA/A-1+) 5% 1/4/99 1,000 1,000A
- ------------------------------------------------------------------------------------------------------------------------
6,800
- ------------------------------------------------------------------------------------------------------------------------
Maryland - 17.1%
Anne Arundel County, Maryland General Obligation Bonds,
Series B Consolidated Water & Sewer Series 1998
(Aa2, AA+, AA+) 4.50% 2/1/99 3,800 3,802
Baltimore County, Maryland PCR Revenue Refunding
Bonds (Baltimore Gas & Electric) Series 1985 VRDN 2/1/99 to
(A1/VMIG1, A/A-1) 3% 3/9/99 8,500 8,500A
Baltimore County, Maryland Revenue Bonds
(The Sheppard and Enoch Pratt Hospital Facility)
Series 1992 VRDN (Aa3/VMIG1) 4.10% 1/6/99 2,600 2,600A
Baltimore County Metropolitan District BANS 1/8/99 to
Series 1995 TECP (P1, A-1+, F-1+) 2.95 to 2/4/99 5,000 5,000
3.10%
Carroll County, Maryland Refunding County
Commissioners Consolidated Public Improvement
(Aa3, AA, AA) 3.50% 10/1/99 1,400 1,405
Charles County Maryland (#Aaa, AA, AA) 6.375% 12/1/99 1,580 1,658
Howard County Consolidated Public Improvement 2/17/99 to
BANS Series B TECP (P1, A-1+, F-1+) 3 to 2/25/99 9,000 9,000
3.15%
</TABLE>
3
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax Exempt Trust, Inc.
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maryland -- Continued
Maryland Health & Higher Educational Facilities
Authority (Johns Hopkins University) 1/8/99 to
Series C TECP (P1, A1+) 3 to 2/9/99 $10,900 $10,900
3.15%
Maryland Health & Higher Educational Facilities
Authority (Pooled Loan Program Issue)
Series 1985 A and B VRDN (Aa2/VMIG1) 3.95 to 1/6/99 9,700 9,700A
4.15%
Maryland State Department Transportation
Consolidated Refunding (Aa2, AA, AA) 3.80% 6/15/99 1,070 1,073
Maryland Transportation Authority
Transportation Facilities Project Revenue Bonds;
Series 1991 (A1, A+) 6% 7/1/99 900 913
Montgomery County, Maryland GO Bonds
Consolidated Public Improvement,
Series 1989 B (#Aaa, AAA) 6.80% 11/1/99 2,000 2,089
- ------------------------------------------------------------------------------------------------------------------------
56,640
- ------------------------------------------------------------------------------------------------------------------------
Massachusetts - 2.4%
Massachusetts Health & Educational Facilities
Authority Revenue Bonds Harvard University
Issue Series L VRDN 2/12/99 to
(Aaa/VMIG1, AAA/A-1+) 3.10 to 2/19/99 7,850 7,850A
3.15%
- ------------------------------------------------------------------------------------------------------------------------
Michigan - 1.7%
Michigan State Housing Development Authority
Rental Housing Revenue Bonds, Series 1997
B VRDN (Aaa/VMIG1, AAA/A-1+) 4.20% 1/6/99 5,600 5,600A
- ------------------------------------------------------------------------------------------------------------------------
Minnesota - 1.7%
Rochester (City of) Health Care Facilities Revenue
Bonds (Mayo Foundation / Mayo Medical Center)
Series 1992 C VRDN (AA+/A-1+) 3% 4/8/99 5,500 5,500A
- ------------------------------------------------------------------------------------------------------------------------
Mississippi - 0.8%
Jackson County Port Facility Refunding Bonds
(Chevron USA, Inc. Project) Series 1993
VRDN (Aa2/P-1) 5.10% 1/4/99 2,600 2,600A
- ------------------------------------------------------------------------------------------------------------------------
Nebraska - 1.6% 1/29/99 to
Omaha Public Power District TECP (P1, A-1+) 3% 2/16/99 5,250 5,250
- ------------------------------------------------------------------------------------------------------------------------
North Carolina - 3.1%
Winston-Salem (City of) Water & Sewer Revenue
Bonds VRDN Series 1994 (Aa/VMIG1, AA/A-1+) 3.95% 1/6/99 7,400 7,400A
Winston-Salem (City of) Water & Sewer Revenue 2/4/99 to
Bonds VRDN (Aa/VMIG1, AA/A-1+) 3% 2/5/99 2,700 2,700A
- ------------------------------------------------------------------------------------------------------------------------
10,100
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio - 0.6%
County of Cuyahoga, Ohio Hospital Revenue
Refunding Bonds (The Cleveland Clinic Foundation)
Series 1997 A VRDN (Aaa/VMIG1, AAA/A-1+) 4.10% 1/6/99 $ 1,935 $ 1,935A
- ------------------------------------------------------------------------------------------------------------------------
Pennsylvania - 5.8%
Allegheny County Hospital Development
Authority (Presbyterian Hospital) Series B and B2
VRDN (Aaa/VMIG1, AAA/A-1) 4.10% 1/7/99 6,700 6,700A
Delaware County, Pennsylvania Industrial
Development Authority Refunding Resources
Recovery Facility Series G (Aaa/P1, AAA/A-1+) 4% 1/6/99 5,800 5,800A
Lackawanna County, Pennsylvania IDA
(National Book Company, Inc. Project)
VRDN (A/A-1) 3.875% 1/4/99 1,300 1,300A
Pennsylvania Higher Educational Facilities
Authority Carnegie Mellon University
Series 1995 A, B and D VRDN (AA-/A-1+) 5% 1/4/99 2,900 2,900A
Pennsylvania State Turnpike Commission Revenue
Turnpike Revenue Series K (#Aaa, AAA) 7.50% 12/1/99 1,000 1,059
South Fork Municipal Authority Adjustable Rate
Hospital Revenue Bonds, (Conemaugh Health
Systems Project) Series A 1998 VRDN (AAA/A-1+) 4.90% 1/4/99 1,500 1,500A
- ------------------------------------------------------------------------------------------------------------------------
19,259
- ------------------------------------------------------------------------------------------------------------------------
South Carolina - 0.7%
Berkeley (County of), South Carolina (Amoco
Chemical Company Project) Pollution Control
Revenue Refunding Bonds, Series 1994 VRDN
(Aa1/VMIG1, AAA/A-1+) 5.05% 1/4/99 2,200 2,200A
- ------------------------------------------------------------------------------------------------------------------------
Texas - 12.9%
Board of Regents of the University of Texas
System Revenue Financing System, 3.10 to 1/20/99 to
Series A (P1, A-1+) 3.20% 2/18/99 11,000 11,000
Capital Industrial Development Corporation
PCR Bonds (Motorola, Inc. Project) Series 1984
VRDN (AA-/A-1+) 3.85% 1/6/99 3,100 3,100A
Harris County, General Obligation Notes
Series A TECP (P1, A1+, F-1+) 3.30% 2/26/99 3,460 3,460
Harris County, Texas Health Facilities Development
Corp. Hospital Revenue Bonds (The Methodist
Hospital) Series 1994 VRDN (AA/A-1+) 5% 1/4/99 2,700 2,700A
Harris County, Texas Health Facilities Development
Corp. Hospital Revenue Bonds (The Methodist
Hospital) Series 1997 VRDN
(Aaa/VMIG1, AAA/A-1+) 3.90% 1/6/99 11,000 11,000A
5
</TABLE>
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax Exempt Trust, Inc.
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas -- Continued
Harris County, Texas Health Facilities Development
Corp. Medical Facilities Revenue Bonds
(Baylor College of Medicine Project) Series 1997
VRDN (AA+/A-1+) 4.15% 1/6/99 $ 2,000 $ 2,000A
Southwest Higher Education Authority Inc. Higher
Education Revenue Bonds (SMU University Project)
Refunding Series 1985 VRDN (Aa2/VMIG1) 5.10% 1/4/99 9,200 9,200A
- ------------------------------------------------------------------------------------------------------------------------
42,460
- ------------------------------------------------------------------------------------------------------------------------
Utah - 2.7%
State of Utah General Obligation Highway
Commercial Paper Notes Series 1997 A 2/12/99 to
TECP (P1, A-1+, F-1+) 2.90 to 4/1/99 9,000 9,000
3.15%
- ------------------------------------------------------------------------------------------------------------------------
Virginia - 1.2%
Commonwealth of Virginia Public Facilities Bonds
1993 Series B (Aaa, AAA, AAA) 4.30% 12/1/99 4,000 4,045
- ------------------------------------------------------------------------------------------------------------------------
Washington - 7.2%
Snohomish County, Washington Series A (Aaa, AAA) 4.50% 12/1/99 1,000 1,012
Washington (State of) Adjustable Rate GO Series 1996 B
VRDN (Aa1/VMIG1, AA+/A-1+) 4.05% 1/6/99 13,500 13,500A
Washington State Housing Finance Committee
Series 1988 B VRDN (AAA/A-1+) 4% 1/6/99 9,200 9,200A
- ------------------------------------------------------------------------------------------------------------------------
23,712
- ------------------------------------------------------------------------------------------------------------------------
Wisconsin - 7.6%
Carlton (Town of) PCR Refunding Bonds
Series 1991 B, C and D (Wisconsin Power and
Light Company Projects) VRDN
(Aa2/P1, AA/A-1+) 5.15% 1/4/99 8,575 8,575A
Wisconsin (State of) Operating Notes 1/22/99 to
Series 1997 A and B TECP (P1, A-1+, F-1+) 2.95 to 2/23/99 16,660 16,660
3.35%
- ------------------------------------------------------------------------------------------------------------------------
25,235
- ------------------------------------------------------------------------------------------------------------------------
Wyoming - 0.4%
Lincoln County PCR Bonds (Exxon Project) Series A
VRDN (Aaa/P1, AAA/A-1+) 5.05% 1/4/99 100 100A
Sublette County, Wyoming Pollution Control Revenue
(Exxon Project) VRDN (Aaa/P1, AAA/A-1+) 5.05% 1/4/99 1,200 1,200A
- ------------------------------------------------------------------------------------------------------------------------
1,300
- ------------------------------------------------------------------------------------------------------------------------
Total Investments at amortized cost and value - 97.1% $320,454B
Other Assets Less Liabilities - 2.9% 9,680
- ------------------------------------------------------------------------------------------------------------------------
Net assets applicable to 330,156 shares outstanding $330,134
- ------------------------------------------------------------------------------------------------------------------------
Net asset value per share $1.00
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
A The rate shown is the rate as of December 31, 1998 and the maturity
shown is the longer of the next interest adjustment date or the date the
principal amount owed can be recovered through demand.
B Also represents cost for federal income tax purposes. See notes to
financial statements.
See notes to financial statements.
6
<PAGE>
Legg Mason Tax Exempt Trust, Inc.
(Unaudited)
Investment Abbreviations:
BANS Bond Anticipation Notes
GO General Obligation
IDA Industrial Development Authority
PCR Pollution Control Revenue
TANS Tax Anticipation Notes
TECP Tax-Exempt Commercial Paper
TRANS Tax and Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
Municipal Note, Commercial Paper and Bond Ratings:
Municipal Notes
MIG1 and MIG2: Moody's Investors Service, Inc. ratings for state and
municipal notes and other short-term obligations are designated Moody's
Investment Grade (MIG). Notes bearing the designation MIG1 are judged to
be of the best quality and notes bearing the designation MIG2 are judged
to be of high quality (VMIG1 and VMIG2 are ratings for variable rate
obligations).
SP-1 and SP-2: The two highest municipal note ratings assigned by
Standard & Poor's. A plus (+) sign may be added to the SP-1 rating to
indicate that an issue possesses very strong credit characteristics.
F-1 and F-2: The two highest municipal note ratings assigned by Fitch
IBCA, Inc. A plus (+) sign may be added to an F-1 rating to denote any
exceptionally strong credit feature.
Commercial Paper
P1 and P2: Prime 1 and Prime 2 are the two highest commercial paper
ratings assigned by Moody's Investors Service, Inc.
A-1 and A-2: The two highest commercial paper ratings assigned by
Standard & Poor's. A plus (+) sign designates issues possessing very
strong credit characteristics.
F-1 and F-2: The two highest commercial paper ratings assigned by
Fitch IBCA, Inc. A plus (+) sign may be added to an F-1 rating to denote
any exceptionally strong credit feature.
Municipal Bonds
Aaa, Aa, A and Baa: Investment grade bond ratings assigned by Moody's
Investors Service, Inc. A numeric modifier (1, 2 and 3) may be added to
the ratings to indicate high, medium and low relative credit strength,
respectively, within a particular rating category. The letter "c" added to
a rating indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in
the tender option documents. A pound sign (#) denotes a prerefunded
security. The maturity date shown is the prerefunded date.
AAA, AA, A and BBB: Investment grade bond ratings assigned by
Standard & Poor's. A plus (+) or minus (-) sign may be added to the
ratings to indicate relative credit strength within a particular rating
category.
AAA, AA, A and BBB: Investment grade bond ratings assigned by Fitch
IBCA, Inc. A plus (+) or minus (-) sign may be added to a rating to denote
relative status within major rating categories.
The Moody's, Standard & Poor's or Fitch IBCA ratings indicated are
believed to be the most recent ratings available at December 31, 1998.
These ratings are not audited by the Fund's independent accountants.
Maturity Schedule of the Portfolio:
December 31, 1998
- ------------------------------------------------------
Percentage of
Maturity Period Amount/Par Portfolio
- ------------------------------------------------------
(000) (cum)
1-7 days $163,480 51.1% 51.1%
8-30 days 39,300 12.3 63.4
31-45 days 38,843 12.1 75.5
46-90 days 48,152 15.0 90.5
Over 90 days 30,350 9.5 100.0
-------- -----
$320,125 100.0%
======== =====
Average Weighted Maturity: 38 days
7
<PAGE>
Statement of Operations
Legg Mason Tax Exempt Trust, Inc.
For the Year Ended December 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Interest $11,433
Expenses:
Management fee $1,670
Distribution and service fees 334
Transfer agent and shareholder servicing expense 119
Custodian fees 86
Registration fees 79
Legal and audit fees 54
Reports to shareholders 22
Directors' fees 11
Other expenses 36
- ------------------------------------------------------------------------------------------------------------------------
2,411
- ------------------------------------------------------------------------------------------------------------------------
Less compensating balance credits (30)
- ------------------------------------------------------------------------------------------------------------------------
Total expenses, net of compensating balance credits 2,381
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income $ 9,052
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Statement of Changes in Net Assets
Legg Mason Tax Exempt Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Net Assets:
Net investment income $ 9,052 $ 9,252
Net realized gain on investments -- 6
- ------------------------------------------------------------------------------------------------------------------------
Increase in net assets resulting from operations 9,052 9,258
Distributions to shareholders from net investment income (9,052) (9,252)
Change in net assets from Fund share transactions 22,763 28,873
- ------------------------------------------------------------------------------------------------------------------------
Change in net assets 22,763 28,879
Net Assets:
Beginning of year 307,371 278,492
- ------------------------------------------------------------------------------------------------------------------------
End of year $330,134 $307,371
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
8
<PAGE>
Financial Highlights
Legg Mason Tax Exempt Trust, Inc.
Contained below is per share operating performance data for a share
of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data. This information has been derived
from information provided in the financial statements.
<TABLE>
<CAPTION>
For the Years Ended December 31,
- --------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------
Net investment income .0271 .0292 .0282 .0313 .0223
Dividends to shareholders 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:
Ratios to average net assets:
Total expenses A .72% .73% .64% .66% --
Net expenses B .71% .72% .64% .65% .65%
Net investment income 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
- --------------------------------------------------------------------------------------------------------
</TABLE>
A This ratio reflects total expenses before compensating balance credits.
Previously, the credits were included in the ratio.
B This ratio reflects expenses net of compensating balance credits.
See notes to financial statements.
9
<PAGE>
Notes to Financial Statements
Legg Mason Tax Exempt Trust, Inc.
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Tax Exempt Trust, Inc. ("Fund"), is registered under
the Investment Company Act of 1940, as amended, as an open-end,
diversified investment company.
Security Valuation
Portfolio securities are valued under the amortized cost method,
which approximates current market value. Under this method, securities are
valued at cost when purchased and, thereafter, a constant proportionate
amortization of any discount or premium is recorded until maturity of the
security.
Investment Income and Dividends to Shareholders
Income and expenses are recorded on the accrual basis. Dividends are
declared daily and paid monthly. Net investment income for dividend
purposes consists of interest accrued plus original issue discount earned,
less amortization of market premium and accrued expenses. At December 31,
1998, dividends payable of $25 were accrued. Distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles; accordingly, periodic reclassifications
are made within the Fund's capital accounts to reflect income and gains
available for distribution under income tax regulations.
Security Transactions
Security transactions are accounted for on the trade date and the
cost of investments sold is determined by use of the specific
identification method for both financial reporting and income tax
purposes. At December 31, 1998, $265 was receivable for investments sold
but not yet settled, and $15 was payable for securities purchased but not
yet settled.
Compensating Balance Credits
The Fund has an arrangement with its custodian bank whereby a portion
of the custodian's fees are paid indirectly by credits earned on the
Fund's cash on deposit with the bank. This deposit arrangement is an
alternative to purchasing overnight investments.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders. The Fund has
unused capital loss carryforwards for federal income tax purposes of $12
which expire in 2001 and $8 in 2002.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Fund Share Transactions:
The Fund is authorized to issue 2,000,000 shares of common stock with
a par value of $.001 per share. At December 31, 1998, paid in capital
aggregated $330,156. Since the Fund has sold and redeemed shares at a
constant net asset value of $1.00 per share, the number of shares
represented by such sales and redemptions is the same as the amounts shown
below for such transactions:
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Shares sold $1,131,990 $1,016,283
Shares reinvested 8,756 9,018
Shares repurchased (1,117,983) (996,428)
- --------------------------------------------------------------------------------
Net change $ 22,763 $ 28,873
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
3. Transactions with Affiliates:
The Fund has an investment advisory and management agreement with
Legg Mason Capital Management, Inc. ("Adviser"). Pursuant to its
agreement, the Adviser provides the Fund with investment advisory and
management services for which the Fund pays a fee, computed daily and
payable monthly, at an annual rate of 0.50% of the Fund's average daily
net assets. Advisory fees of $151 were payable to the Adviser at December
31, 1998.
Legg Mason Fund Adviser, Inc. ("LMFA") serves as administrator to the
Fund pursuant to a Sub-Administration agreement with the Adviser. The
Adviser (not the fund) pays LMFA a fee, computed daily and payable
monthly, at an annual rate of 0.05% of the Fund's average daily net
assets.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the
New York Stock Exchange, serves as distributor of the Fund. The Fund pays
Legg Mason a 12b-1 service fee at an annual rate equal to 0.10% of its
average daily net assets for services provided to shareholders. Legg Mason
has agreed that it will not request payment of more than 0.10% annually
from the Fund until April 30, 1999. If this voluntary limit is not
extended beyond April 30, 1999, the Fund may pay Legg Mason a 12b-1
service fee in an amount not to exceed an annual rate of 0.20% of the
Fund's average daily net assets. Service fees of $30 were payable to Legg
Mason at December 31, 1998.
Legg Mason also has an agreement with the Fund's transfer agent to
assist with certain of its duties. For this assistance, Legg Mason was
paid $39 by the transfer agent for the year ended December 31, 1998.
The Adviser, LMFA and Legg Mason are wholly owned subsidiaries of
Legg Mason, Inc.
-------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of Legg Mason Tax Exempt Trust, Inc.:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Legg Mason Tax Exempt Trust, Inc. (hereafter referred to as the "Fund") at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998, by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
February 5, 1999
