<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 6
Performance Information 8
Who Should Invest 8
Investment Objectives and Policies 9
Investment Techniques 13
How You Can Invest in the Funds 15
How Your Shareholder Account is Maintained 17
How You Can Redeem Your Primary Shares 18
How Net Asset Value is Determined 19
Dividends and Other Distributions 19
Taxes 20
Shareholder Services 22
The Funds' Management and Investment Adviser 23
The Funds' Distributor 24
The Funds' Custodian and Transfer Agent 25
Description of the Trust and its Shares 25
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR ITS
DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE PRINCIPAL UNDERWRITER IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
(recycle logo appears here) PRINTED ON RECYCLED PAPER
LMF-038
LEGG MASON
TAX-FREE
INCOME
FUNDS
MARYLAND TAX-FREE
PENNSYLVANIA TAX-FREE
TAX-FREE INTERMEDIATE
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
PROSPECTUS
JULY 31, 1995
--Legg Mason logo appears here--
<PAGE>
LEGG MASON TAX-FREE INCOME FUNDS -- PRIMARY SHARES
LEGG MASON TAX-FREE INCOME FUND:
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
This Prospectus sets forth concisely the information about the funds
that a prospective investor ought to know before investing. It should be
read and retained for future reference. A Statement of Additional
Information about the funds dated July 31, 1995 has been filed with the
Securities and Exchange Commission ("SEC") and, as amended or supplemented
from time to time, is incorporated herein by this reference. The Statement
of Additional Information is available without charge upon request from the
funds' distributor, Legg Mason Wood Walker, Incorporated ("Legg Mason")
(address and telephone numbers listed below).
Shares of Legg Mason Maryland Tax-Free Income Trust are registered for
sale to investors only in the States of Maryland, Delaware, Florida,
Pennsylvania, Texas, Virginia, and Wyoming. Shares of Legg Mason
Pennsylvania Tax-Free Income Trust are registered for sale to investors
only in the States of Pennsylvania, Delaware, Florida, Maryland, New York,
Ohio, and Wyoming. These Funds are not being offered for sale to investors
in any other State.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
July 31, 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
The Legg Mason Tax-Free Income Fund ("Trust") is an open-end
management investment company which currently offers three series.
THE LEGG MASON MARYLAND TAX-FREE INCOME TRUST ("Maryland Tax-Free"),
is a non-diversified, professionally managed portfolio seeking a high
level of current income exempt from federal and Maryland state and local
income taxes, consistent with prudent investment risk and preservation of
capital.
THE LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST ("Pennsylvania
Tax-Free") is a non-diversified, professionally managed portfolio seeking
a high level of current income exempt from federal income tax and
Pennsylvania personal income tax, consistent with prudent investment risk
and preservation of capital.
THE LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST ("Tax-Free
Intermediate") is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal income tax,
consistent with prudent investment risk.
In attempting to achieve Maryland Tax-Free's objective, the investment
adviser, Legg Mason Fund Adviser, Inc. ("Adviser"), invests primarily in
debt instruments issued by or on behalf of the State of Maryland, its
political subdivisions, municipalities, agencies, instrumentalities or
public authorities, the interest on which, in the opinion of counsel to
the issuer, is exempt from federal and Maryland state and local income
taxes ("Maryland municipal obligations") and which are investment grade,
I.E., securities rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") or,
if unrated by Moody's or S&P, deemed by the Adviser to be of comparable
quality. Maryland Tax-Free also may engage in hedging transactions.
In attempting to achieve Pennsylvania Tax-Free's objective, the
Adviser invests primarily in debt instruments issued by or on behalf of
the Commonwealth of Pennsylvania, its political subdivisions,
municipalities, agencies, instrumentalities or public authorities, the
interest on which, in the opinion of counsel to the issuer, is exempt from
federal income tax and Pennsylvania personal income tax ("Pennsylvania
municipal obligations") and which are investment grade, I.E. securities
rated within the four highest grades by Moody's, S&P or, if unrated by
Moody's or S&P, securities deemed by the Adviser to be of comparable
quality. Pennsylvania Tax-Free's shares are exempt from Pennsylvania
county personal property tax to the extent that it invests in Pennsylvania
municipal obligations. Pennsylvania Tax-Free also may engage in hedging
transactions.
In attempting to achieve Tax-Free Intermediate's objective, the
Adviser invests primarily in debt instruments issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income tax and which are investment
grade, I.E. securities rated within the four highest grades by Moody's,
S&P or Fitch Investors Service, Inc. ("Fitch") or, if unrated by Moody's,
S&P or Fitch ("unrated securities"), deemed by the Adviser to be of
comparable quality. Tax-Free Intermediate also may engage in hedging
transactions.
Maryland Tax-Free, Pennsylvania Tax-Free and Tax-Free Intermediate
(each separately referred to as a "Fund" and collectively referred to as
the "Funds") each offers two classes of shares -- Primary Class ("Primary
Shares") and Navigator Class ("Navigator Shares"). Primary Shares offered
in this Prospectus are available to all investors except certain
institutions (see page 6).
INVESTMENT TECHNIQUES AND RISKS :
There can be no assurance that any Fund will achieve its objective.
The value of the debt instruments held by any Fund, and thus the net asset
value of Fund shares, generally fluctuates inversely with movements in
interest rates. Under normal circumstances, Maryland Tax-Free's and
Pennsylvania Tax-Free's dollar-weighted average
2
<PAGE>
maturities are expected to be between 12 and 24 years and Tax-Free
Intermediate's dollar-weighted average maturity is expected to be between
2 and 10 years; therefore, the net asset value of the Funds' shares will
be more sensitive to interest rate movements and will fluctuate more than
a portfolio of shorter-term securities. Additionally, changes in economic
conditions in, or governmental policies of, the State of Maryland (with
respect to Maryland Tax-Free), the Commonwealth of Pennsylvania (with
respect to Pennsylvania Tax-Free) and the various states and
municipalities (with respect to Tax-Free Intermediate) could have a
significant impact on the performance of the Funds. As non-diversified
series, the Funds may be subject to greater risk with respect to their
portfolio securities than investment companies that have a broader range
of investments, because changes in the financial condition or market
assessment of a single issuer may cause greater fluctuation in a Fund's
total return and the price of a Fund's shares. Each Fund invests in
investment grade securities, I.E., those in the four highest ratings
categories of Moody's, S&P or (with respect to Tax-Free Intermediate)
Fitch or securities unrated by any of those services but deemed by the
Adviser to be of comparable quality; Moody's considers those securities
rated in its fourth highest category (I.E., Baa) to have speculative
characteristics. A Fund's participation in hedging and option strategies
also involves certain investment risks and transaction costs. See "Yield
and Risk Factors" and "Investment Techniques," pages 11-15.
DISTRIBUTOR :
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER :
Legg Mason Fund Adviser, Inc.
EXCHANGE PRIVILEGE :
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 22.
DIVIDENDS :
Declared daily and paid monthly. See "Dividends and Other
Distributions," page 19.
REINVESTMENT :
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
INITIAL PURCHASE :
$1,000 minimum, generally.
SUBSEQUENT PURCHASES :
$100 minimum, generally.
PURCHASE METHODS :
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Funds," page 15. Larger purchases may be eligible for
reduced initial sales charges, as may purchases pursuant to a Letter of
Intention as described on page 17.
PUBLIC OFFERING PRICE PER SHARE :
Net asset value plus any applicable sales charge (maximum sales charge
is 2.75% of public offering price for Maryland Tax-Free and Pennsylvania
Tax-Free; maximum sales charge is 2.00% of public offering price for
Tax-Free Intermediate). With respect to Tax-Free Intermediate, the front-
end sales charge is waived for all purchases made through January 31,
1996.
3
<PAGE>
EXPENSES
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth below are based on average net assets and annual Fund operating
expenses related to Primary Shares for the year ended March 31, 1995.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR EACH
FUND
Maximum sales charge on purchases
(as a percentage of offering price):
Maryland Tax-Free and Pennsylvania Tax-Free 2.75 %(A)
Tax-Free Intermediate 2.00 %(A)(B)
Sales charge on reinvested dividends None
Redemption or exchange fees None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES -- PRIMARY
SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
<S> <C> <C> <C>
Management
fees(C) 0.21 % 0.09% 0.16%
12b-1 fees 0.25 % 0.25% 0.25%
Other expenses 0.14 % 0.21% 0.24%
Total operating
expenses(C) 0.60 % 0.55% 0.65%
</TABLE>
(A) See "How You Can Invest In The Funds," page 15, for additional
information concerning volume reductions, sales charge waivers and
reduced sales charge purchase plans.
(B) Effective August 1, 1995 through January 31, 1996, the sales charge on
Tax-Free Intermediate will be waived for all new accounts and subsequent
investments into existing accounts. After January 31, 1996, any
exchanges of these shares will be subject to the full sales charge, if
any, since no sales charge will be paid on shares purchased during this
period.
(C) Pursuant to a voluntary expense limitation, the Adviser and Legg Mason
have agreed to waive the management and 12b-1 fees and assume certain
other expenses such that total operating expense relating to Primary
Shares (exclusive of taxes, interest, brokerage fees, and extraordinary
expenses) will not exceed annual rates of: 0.60% of average daily net
assets of Maryland Tax-Free until January 31, 1996 or until the Fund's
net assets reach $200 million, whichever occurs first; 0.55% of average
daily net assets of Pennsylvania Tax-Free until January 31, 1996 or
until the Fund's net assets reach $125 million, whichever occurs first;
and 0.65% of average daily net assets of Tax-Free Intermediate until
January 31, 1996 or until the Fund's net assets reach $100 million,
whichever occurs first. In the absence of such waivers, the expense
ratios relating to Primary Shares of the Maryland Tax-Free, Pennsylvania
Tax-Free and Tax-Free Intermediate would be 0.94%, 1.01% and 1.04%,
respectively.
EXAMPLE OF EFFECT OF FUND EXPENSES
The following examples illustrate the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. As noted in the prior table, the Funds charge no redemption fees
of any kind.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Maryland Tax-Free $33 $46 $60 $100
Pennsylvania Tax-Free $33 $45 $57 $ 95
Tax-Free Intermediate:
Assuming the maximum
initial 2% sales charge $26 $40 $55 $ 99
Assuming no initial sales
charge $ 7 $21 $36 $ 81
</TABLE>
This example assumes that the maximum initial sales charge (2.75% with
respect to Maryland Tax-Free and Pennsylvania Tax-Free; 2.00% with respect
to Tax-Free Intermediate) is deducted at the time of purchase, that the
percentage amounts listed under "Annual Fund Operating Expenses" remain
the same over the time periods shown and that all dividends and capital
gain distributions are reinvested in additional Fund shares. If the
waivers are not extended beyond January 31, 1996, the expense figures in
the examples will be higher.
The above tables and the assumption in the examples of a 5% annual
return are required by regulations of the SEC applicable to all mutual
funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT
REPRESENT, THE PROJECTED OR ACTUAL PERFORMANCE OF PRIMARY SHARES OF THE
FUNDS. THE ABOVE TABLES AND EXAMPLE SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN. The actual expenses
4
<PAGE>
attributable to Primary Shares will depend upon, among other things, the
level of average net assets, the levels of sales and redemptions of
shares, the extent to which the Adviser and Legg Mason waive their fees
and reimburse Fund expenses and the extent to which Primary Shares incur
variable expenses, such as transfer agency costs.
Because the Funds pay a 12b-1 fee with respect to Primary Shares,
long-term investors in Primary Shares may pay more in distribution
expenses than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
("NASD"). For further information concerning Fund expenses, see "The
Funds' Management and Investment Adviser," page 23.
5
<PAGE>
FINANCIAL HIGHLIGHTS
Effective August 1, 1995, the Funds will commence the sale of Navigator
Shares. Navigator Shares will be offered for sale only to institutional
clients of the Fairfield Group, Inc. ("Fairfield") for investment of their
own funds and funds for which they act in a fiduciary capacity, to clients
of Legg Mason Trust Company ("Trust Company") for which Trust Company
exercises discretionary investment management responsibility, to qualified
retirement plans managed on a discretionary basis and having net assets of
at least $200 million, and to The Legg Mason Profit Sharing Plan and Trust.
Navigator Shares pay no 12b-1 distribution fees and may pay lower transfer
agency fees. The information below is for Primary Shares and reflects the
12b-1 fees paid by that Class.
The financial highlights tables that follow have been derived from each
Fund's financial statements which have been audited by Coopers & Lybrand
L.L.P., independent accountants. Each Fund's financial statements for the
year ended March 31, 1995 and the report of Coopers & Lybrand L.L.P.
thereon are included in that Fund's annual report and are incorporated by
reference into the Statement of Additional Information. The annual report
for each Fund is available to shareholders without charge by calling your
Legg Mason or affiliated investment executive or Legg Mason's Funds
Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
MARYLAND TAX-FREE PRIMARY CLASS
Years Ended March 31, 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $15.69 $15.97 $15.03 $14.70
Net investment income(B) 0.828 0.839 0.877 0.823
Net realized and unrealized gain (loss) on investments 0.180 (0.275) 0.947 0.333
Total from investment operations 1.008 0.564 1.824 1.156
Distributions to shareholders:
Net investment income (0.828) (0.839) (0.877) (0.823)
Net realized gain on investments -- -- (0.007) (0.003)
In excess of net realized gain on investments -- (0.005) -- --
Net asset value, end of period $15.87 $15.69 $15.97 $15.03
Total return(D) 6.60% 3.51% 12.47% 8.04%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 0.54% 0.46% 0.40% 0.18%(E)
Net investment income(B) 5.32% 5.10% 5.61% 5.91%(E)
Portfolio turnover rate 9.5% 6.6% -- 5.4%(E)
Net assets, end of period (in thousands) $142,314 $145,578 $128,566 $83,052
</TABLE>
(A) FOR THE PERIOD MAY 1, 1991 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1992.
(B) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: ALL EXPENSES UNTIL OCTOBER 20,
1991; 0.25% UNTIL DECEMBER 31, 1991; 0.35% UNTIL JUNE 30, 1992; 0.40%
UNTIL DECEMBER 31, 1992; 0.45% UNTIL DECEMBER 31, 1993; 0.50% UNTIL JUNE
30, 1994; AND 0.60% THROUGH JANUARY 31, 1996.
(C) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 8.76%.
(D) EXCLUDING SALES CHARGE.
(E) ANNUALIZED.
6
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA TAX-FREE
PRIMARY CLASS
Years Ended March 31, 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $15.80 $16.03 $14.99 $14.70
Net investment income(B) 0.85 0.86 0.91 0.63
Net realized and unrealized gain (loss) on investments 0.22 (0.23) 1.04 0.29
Total from investment operations 1.07 0.63 1.95 0.92
Distributions to shareholders from net investment income (0.85) (0.86) (0.91) (0.63)
Net asset value, end of period $16.02 $15.80 $16.03 $14.99
Total return(D) 7.03% 3.81% 13.31% 6.36%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 0.49% 0.40% 0.32% 0.12%(E)
Net investment income(B) 5.42% 5.16% 5.74% 6.11%(E)
Portfolio turnover rate 2.08% -- -- --
Net assets, end of period (in thousands) $63,929 $62,904 $49,959 $28,873
</TABLE>
(A) FOR THE PERIOD AUGUST 1, 1991 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1992.
(B) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: ALL EXPENSES UNTIL NOVEMBER 30,
1991; 0.20% UNTIL MARCH 31, 1992; 0.25% UNTIL JUNE 30, 1992; 0.30% UNTIL
SEPTEMBER 30, 1992; 0.35% UNTIL JULY 31, 1993; 0.40% UNTIL DECEMBER 31,
1993; 0.45% UNTIL JUNE 30, 1994; AND 0.55% UNTIL JANUARY 31, 1996.
(C) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 9.55%.
(D) EXCLUDING SALES CHARGE.
(E) ANNUALIZED.
<TABLE>
<CAPTION>
TAX-FREE INTERMEDIATE
PRIMARY CLASS
Years Ended March 31, 1995 1994 1993(A)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $14.96 $15.06 $14.70
Net investment income(B) 0.72 0.70 0.28
Net realized and unrealized gain (loss) on investments 0.10 (0.09) 0.36
Total from investment operations 0.82 0.61 0.64
Distributions to shareholders from:
Net investment income (0.72) (0.70) (0.28)
Net realized gain on investments -- (0.01) --
Net asset value, end of period $15.06 $14.96 $15.06
Total return(D) 5.65% 3.99% 4.35%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 0.34% 0.30% 0.20%(E)
Net investment income(B) 4.83% 4.44% 4.71%(E)
Portfolio turnover rate 24.8% 6.63% --
Net assets, end of period (in thousands) $48,837 $54,032 $37,138
</TABLE>
(A) FOR THE PERIOD NOVEMBER 9, 1992 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1993.
(B) NET OF FEES WAIVED AND EXPENSES REIMBURSED BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.20% OF AVERAGE DAILY NET
ASSETS UNTIL MARCH 31, 1993; 0.30% UNTIL JUNE 30, 1994; AND 0.65% UNTIL
JANUARY 31, 1996.
(C) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 11.10%.
(D) EXCLUDING SALES CHARGE.
(E) ANNUALIZED.
7
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class
of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and capital gain
distributions. CUMULATIVE TOTAL RETURN shows the fund's performance over a
specific period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
The Funds' total returns reflect deduction of the maximum initial sales
charge at the time of purchase. Average annual returns, which differ from
actual year-by-year results, tend to smooth out variations in a fund's
return.
Total returns of Primary Shares as of March 31, 1995 were as follows:
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
<S> <C> <C> <C>
One Year +3.70% +4.07% +3.50%
Life of Class +30.34(A) +30.16(B) +12.34(C)
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
<S> <C> <C> <C>
One Year +3.70% +4.07% +3.50%
Life of Class +7.00(A) +7.45(B) +4.99(C)
</TABLE>
(A) Inception of Maryland Tax-Free -- May 1, 1991.
(B) Inception of Pennsylvania Tax-Free -- August 1, 1991.
(C) Inception of Tax-Free Intermediate -- November 9, 1992.
Each Fund also may advertise its yield or tax equivalent yield. Yield
reflects investment income net of expenses over a 30-day (or one-month)
period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share at the end of the period. Tax equivalent
yield shows the taxable yield an investor would have to earn before taxes
to equal the Fund's tax-exempt yield. A tax equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus a stated
federal, state and local income tax rate. The effective yield, although
calculated similarly, will be slightly higher than the yield because it
assumes that income earned from the investment is reinvested (i.e., the
compounding effect of reinvestment). Yield computations differ from other
accounting methods and therefore may differ from dividends actually paid
or reported net income.
Total return and yield information reflect past performance and are
not predictions or guarantees of future results. Yields and total returns
of Primary Shares of the Funds would be lower if the Adviser and Legg
Mason had not waived a portion of the fees and reimbursed certain expenses
during the fiscal years 1992 through 1995. Investment return and share
price will fluctuate, and the value of your shares, when redeemed, may be
worth more or less than their original cost. As of the date of this
Prospectus, Navigator Shares have no performance record. Further
information about each Fund's performance is contained in that Fund's
annual report to shareholders, which may be obtained without charge by
calling your Legg Mason or affiliated investment executive or Legg Mason's
Funds Marketing Department at 800-822-5544.
WHO SHOULD INVEST
Maryland Tax-Free is designed for longer-term investors who are able
to benefit from income exempt from federal and Maryland state and local
income taxes. Pennsylvania Tax-Free is designed for longer-term investors
who are able to benefit from income exempt from federal income tax and
Pennsylvania personal income tax. Tax-Free Intermediate is designed for
intermediate-term investors who are able to benefit from income exempt
from federal income tax. The value of Primary Shares can generally be
expected to fluctuate inversely with changes in interest rates and,
because of the potential negative impact of rising interest rates and
other risks, the Funds would not be appropriate for investors whose
primary goal is stability of principal. Each Fund is not intended to be a
balanced investment program. Each Fund is not an appropriate investment
for "substantial users" of certain facilities financed by industrial
development or private activity bonds or related persons thereof. See
"Taxes -- Federal Income Tax," page 20.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Trust's Board
of Trustees without a shareholder vote. There can be no assurance that any
Fund will achieve its investment objective.
MARYLAND TAX-FREE'S investment objective is to earn a high level of
current income exempt from federal and Maryland state and local income
taxes, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the State of
Maryland, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal and Maryland
state and local income taxes. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Maryland municipal obligations, exclusive of any such obligations the
interest on which is a tax preference item for purposes of the federal
alternative minimum tax ("Tax Preference Item"). See "Temporary
Investments," page 11.
PENNSYLVANIA TAX-FREE'S investment objective is to earn a high level
of current income exempt from federal income tax and Pennsylvania personal
income tax, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the Commonwealth
of Pennsylvania, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax and
Pennsylvania personal income tax. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Pennsylvania municipal obligations, exclusive of Tax Preference Items. See
"Temporary Investments" page 11.
TAX-FREE INTERMEDIATE'S investment objective is to earn a high level
of current income exempt from federal income tax, consistent with prudent
investment risk. The Fund seeks to achieve its investment objective by
investing primarily in debt instruments issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia
and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income tax ("municipal
obligations"), while maintaining an average dollar-weighted maturity of
between 2 and 10 years. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
municipal obligations exclusive of Tax Preference Items. See "Temporary
Investments" page 11.
Maryland Tax-Free and Pennsylvania Tax-Free each invest in securities
that, in the opinion of the Adviser, present acceptable credit risks and
that, at the time of purchase, are rated:
"Baa" or higher by Moody's or "BBB" or higher by S&P in the case of
bonds;
"P1" or higher by Moody's or "A1" or higher by S&P in the case of
commercial paper;
"MIG-1" or higher by Moody's or "SP-1" or higher by S&P in the case of
notes; and
"VMIG-1" or higher by Moody's in the case of variable rate demand
notes.
Tax-Free Intermediate invests in securities that, in the opinion of
the Adviser, present acceptable credit risks and that, at the time of
purchase, are rated:
"Baa" or higher by Moody's, "BBB" or higher by S&P or Fitch in the
case of bonds;
"MIG-1" or higher by Moody's, "SP-1" or higher by S&P or "F-1" or
higher by Fitch in the case of notes;
"P1" or higher by Moody's, "A1" or higher by S&P or "F-1" or higher by
Fitch in the case of commercial paper; and
"VMIG-1" or higher by Moody's in the case of variable rate demand
notes.
Each Fund also invests in securities unrated by any of the above
services which are deemed by the Adviser to be of comparable quality.
The bond ratings noted above are considered "investment grade" by the
respective rating agencies. A rating of a municipal obligation represents
9
<PAGE>
the rating agency's opinion regarding its quality and is not a guarantee
of quality. Moody's considers that bonds rated in its fourth highest
category (I.E., Baa) have speculative characteristics; changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for the issuers of such securities to make principal and interest
payments than is the case for higher rated bonds. In the event the rating
on an issue held in a Fund's portfolio is changed by Moody's, S&P or (with
respect to Tax-Free Intermediate) Fitch, such change will be considered by
the Adviser in its evaluation of the overall investment merits of that
security. If, as a result of any downgradings by Moody's, S&P or (with
respect to Tax-Free Intermediate) Fitch, or, for unrated securities, any
determinations by the Adviser that securities are no longer of comparable
quality to investment grade securities, more than 5% of a Fund's total
assets are represented by securities rated below investment grade or the
equivalent, the Adviser will, as soon as practicable consistent with
achieving an orderly disposition of the securities, sell such holdings
until they represent 5% or less of the Fund's total assets. A discussion
of the ratings outlined above is included in the Statement of Additional
Information.
In addition to the agency ratings, there are other criteria which will
be used by the Adviser in selecting securities for a portfolio.
Consideration will be given to the maturity and duration of each bond as
well as its effect on the overall average maturity and duration of the
portfolio. Analysis of the current and historical yield spreads is done to
determine the relative value in any bond considered for purchase. The
coupon level and call features also figure in the decision on the relative
merits of an investment. Consideration is also given to the type of
bond -- whether it is a general obligation or a revenue bond. In addition
to this examination of bond characteristics, significant effort is devoted
to analysis of the creditworthiness of the bond issuer at the time of
purchase and on an ongoing basis.
Each Fund is permitted to invest in municipal securities of any
maturity. The maturities of a Fund's portfolio securities will reflect the
Adviser's judgment concerning current and future market conditions as well
as other factors, such as the Fund's liquidity needs. Under normal
circumstances, the dollar-weighted average maturities of Maryland
Tax-Free's and Pennsylvania Tax-Free's portfolios are expected to be
between 12 and 24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be between 2 and 10
years.
Each Fund does not expect its portfolio turn-
over rate to exceed 90% per year.
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities. Interest on certain
tax-exempt PABs will constitute a Tax Preference Item. Accordingly, under
normal circumstances, each Fund's investment in obligations, the interest
on which is such an item, including PABs, will be limited to a maximum of
20% of its total assets.
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 payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and
10
<PAGE>
significant loss to a Fund. Certificates of Participation are
participations in municipal lease obligations or installment sales
contracts. Each certificate represents a proportionate interest in or
right to the lease purchase payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of the IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
TEMPORARY INVESTMENTS
During unusual market conditions, including if, in the Adviser's
opinion, there are insufficient suitable Maryland municipal obligations
(with respect to Maryland Tax-Free), Pennsylvania municipal obligations
(with respect to Pennsylvania Tax-Free) or municipal obligations (with
respect to Tax-Free Intermediate) available that pay interest that is not
a Tax Preference Item, a Fund temporarily may invest more than 20% of its
total assets in municipal obligations the interest on which is exempt from
federal income tax but is such an item (with respect to Tax-Free
Intermediate and/or is subject to Maryland state and local income taxes
(with respect to Maryland Tax-Free) and/or is subject to Pennsylvania
personal income tax (with respect to Pennsylvania Tax-Free). Each Fund
expects that under normal circumstances it will maintain needed liquidity
through the purchase of short-term municipal securities. However, for
liquidity purposes, or pending the investment of the proceeds of the sale
of shares, a Fund temporarily may invest in taxable short-term investments
consisting of: obligations of the U.S. Government, its agencies and
instrumentalities; certificates of deposit and bankers' acceptances of
U.S. domestic banks with assets of one billion dollars or more; commercial
paper or other corporate notes of high quality; and any of such items
subject to short-term repurchase agreements. Each Fund may invest without
limit in such instruments for temporary, defensive purposes, when in the
Adviser's opinion, no suitable municipal securities are available. No more
than 10% of a Fund's net assets will be invested in repurchase agreements
maturing in more than seven days and other illiquid securities. Interest
earned from such taxable investments will be taxable to investors as
ordinary income when distributed to them.
As a fundamental policy, each Fund may borrow money solely for
temporary purposes from banks or by engaging in reverse repurchase
agreements in an amount up to 10% of the value of its total assets;
however, borrowings by a Fund in excess of 5% of the value of a Fund's
total assets may be made only from banks.
YIELD AND RISK FACTORS
Yield
The yield of a municipal obligation is dependent on a variety of
factors, including general municipal securities market conditions, general
fixed-income market conditions, the financial condition of the issuer, the
size of the particular offering, the maturity of the obligation, the
credit quality and rating of the issue and expectations regarding changes
in income tax rates.
Interest Rate Risk
If general market interest rates increase, the prices of municipal
obligations ordinarily will decrease. In a market of decreasing interest
rates, the opposite generally will be true. Although longer-term bonds
generally offer higher yields than shorter-term bonds, their prices are
more sensitive to changes in interest rates than bonds with shorter
maturities. Under normal circumstances, the dollar-weighted average
maturities of Maryland Tax-Free's and Pennsylvania Tax-Free's portfolios
are expected to be 12-24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be 2-10 years. Therefore,
the value of a Fund's portfolio securities, and hence of that Fund's
shares, will be more sensitive to changes in interest rates and will
11
<PAGE>
fluctuate more than the value of a portfolio of shorter-term municipal
obligations.
For Maryland Tax-Free:
Changes in economic conditions in or governmental policies of the
state of Maryland could have a significant impact on the performance of
the Fund. For example, services (including mining), wholesale and retail
trade, government, and manufacturing (primarily printing and publishing,
food and kindred products, instruments and related products, electronic
equipment, industrial machinery and transportation equipment) are the
leading areas of employment in the State of Maryland. In contrast to the
nation as a whole, more people in Maryland are employed in government than
in manufacturing. The relatively high concentration of governmental
employment in Maryland makes the state potentially vulnerable to any
decreases in federal, including military, and state governmental spending.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The outlook for those sectors is
subject to question given disclosures indicating continuing financial
weakness in major banking and insurance companies having their corporate
headquarters in Maryland and the general regional decline in real estate
activity and values.
The Fund may invest in certain municipal obligations with unique
risks. These include, but are not limited to, securities issued by
hospitals and other health care providers. The hospital industry
throughout the nation has been subjected to pressure to reduce expenses
and to limit lengths of stay. That pressure may adversely affect the
financial health of some hospitals.
An expanded discussion of certain investment considerations relating
to debt obligations of Maryland and its political subdivisions is
contained in the Statement of Additional Information.
For Pennsylvania Tax-Free:
Changes in economic conditions in, or governmental policies of, the
Commonwealth of Pennsylvania could have a significant impact on the
performance of the Fund. For example, Pennsylvania's continued dependence
on manufacturing, mining and steel has made Pennsylvania vulnerable to
cyclical industry fluctuations, foreign imports and environmental
concerns. However, growth in the service and trade sectors has helped
diversify Pennsylvania's economy and reduce its unemployment rate below
the national average. Changes in local economic conditions or local
governmental policies within Pennsylvania, which can vary substantially by
region, could also have a significant impact on the performance of
municipal obligations held by the Fund. The City of Philadelphia, for
example, recently experienced severe financial problems which impaired its
ability to borrow money and adversely affected the ratings of its
obligations and their marketabilty. While the Fund may invest in
obligations that are secured by obligors other than Pennsylvania or its
political subdivisions (such as hospitals, universities, corporate
obligors and corporate credit and liquidity providers) and obligations
limited to specific revenue pledges (such as sewer authority bonds), the
creditworthiness of these obligors may be partly dependent on the
creditworthiness of Pennsylvania or its municipal authorities.
An expanded discussion of certain investment considerations relating
to debt obligations of Pennsylvania and its political subdivisions is
contained in the Statement of Additional Information.
Concentration
Each Fund may invest 25% or more of its total assets in a particular
segment of the municipal securities market, such as hospital revenue
bonds, housing agency bonds, IDBs or airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project. In
such circumstances, economic, business, political or other changes
affecting one issue of bonds (such as proposed legislation affecting
healthcare or the financing of a project, shortages or price increases of
needed materials, or declining markets or needs for the projects) would
most likely affect other bonds in the same segment, thereby potentially
increasing market risk. As a result, each Fund is subject to greater risk
than other funds that do not follow this practice.
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<PAGE>
Non-Diversification
Each Fund has registered as a "non-diversified" investment company.
Therefore, the percentage of Fund assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
each Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"). To
qualify as a RIC, a Fund generally must meet the following diversification
requirements at the close of each quarter of its taxable year: (1) at
least 50% of the value of its total assets must consist of cash,
securities of the U.S. Government and other RICs and holdings of other
securities, which, with respect to any one issuer, do not have a value
greater than 5% of the value of the Fund's total assets; and (2) no more
than 25% of the value of its total assets may be invested in the
securities of a single issuer. For these purposes, the term "issuer" does
not include the U.S. Government or other RICs. To the extent that a Fund's
assets are invested in the obligations of a limited number of issuers, the
value of that Fund's shares will be more susceptible to any single
economic, political or regulatory occurrence affecting one or more of
those issuers than the shares of a diversified investment company would
be.
Other Risks
Current efforts to restructure the federal budget and the relationship
between the federal government and state and local governments may impact
the financing of some issuers of municipal securities. Some states and
localities are experiencing substantial deficits and may find it difficult
for political or economic reasons to increase taxes. Some local
jurisdictions have invested heavily in derivative instruments and may now
hold portfolios of uncertain valuation. Each of these factors may affect
the ability of an issuer of municipal securities to meet its obligations.
Efforts by Congress to restructure the federal income tax system could
adversely affect the value of municipal securities.
INVESTMENT TECHNIQUES
Each Fund may employ the investment techniques described below, among
others. Use of certain of these techniques may give rise to taxable
income.
When-Issued Securities
Each Fund may enter into commitments to purchase municipal obligations
or other securities on a when-issued basis. A Fund may purchase
when-issued securities because such securities are often the most
efficiently priced and have the best liquidity in the bond market. As with
the purchase of any security, when a Fund purchases securities on a
when-issued basis, it assumes the risks of ownership at the time of
purchase, not at the time of receipt. However, the Fund does not have to
pay for the obligations until they are delivered to it, normally 15 to 45
days later. To meet that payment obligation, the Fund will set aside cash
or marketable high-quality debt securities equal to the payment that will
be due. Depending on market conditions, a Fund's when-issued purchases
could cause its share value to be more volatile, because they may increase
the amount by which the Fund's total assets, including the value of the
when-issued securities held by it, exceed the Fund's net assets. Each Fund
does not expect that its commitment to purchase when-issued securities
will at any time exceed, in the aggregate, 25% of total assets.
Callable Bonds
Callable municipal bonds are municipal bonds which carry a provision
permitting the issuer to redeem the bonds prior to their maturity dates at
a specified price which typically reflects a premium over the bonds'
original issue price. If the proceeds of a bond owned by a Fund called
under circumstances favorable to the issuer are reinvested, the result may
be a lower overall yield on such proceeds upon reinvestment because of
lower prevailing interest rates. If the purchase price of such bonds
included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the
Funds, depending on the price at which such bonds were redeemed.
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<PAGE>
Each callable bond is "marked-to-market" daily based on the bond's
call date so that the call of some or all of a Fund's callable bonds is
not expected to have a material impact on that Fund's net asset value. In
light of the previously described pricing policies and because each Fund
follows certain amortization procedures required by the Internal Revenue
Service, each Fund does not expect to suffer any material adverse impact
in connection with a call of bonds purchased at a premium. Notwithstanding
such policies, however, as with any investment strategy, there is no
guarantee that a call may not have a more substantial impact than
anticipated.
Stand-By Commitments
Each Fund may acquire "stand-by commitments" with respect to its
investments in municipal obligations. A stand-by commitment is a put (that
is, the right to sell the underlying security within a specified period of
time at a specified exercise price) that may be sold, transferred or
assigned only with the underlying security. Under a stand-by commitment, a
broker, dealer or bank agrees to purchase, at the Fund's option, specified
municipal obligations at a specified price. The total amount paid for
outstanding stand-by commitments held by a Fund will not exceed 25% of
that Fund's total assets calculated immediately after each stand-by
commitment is acquired.
Securities Lending, Zero Coupon and Deferred Interest Bonds
Each Fund may engage in securities lending and may invest in zero
coupon and deferred interest bonds. However, each Fund does not currently
intend to loan securities with a value exceeding 5% of its total assets or
to invest more than 5% of its total assets in zero coupon and deferred
interest bonds. Any income from securities lending would be taxable when
distributed to shareholders. For further information concerning securities
lending, zero coupon and deferred interest bonds, see the Statement of
Additional Information.
Variable Rate and Floating Rate Obligations
Each Fund may invest in variable rate municipal obligations and notes.
Variable rate obligations have a yield that is adjusted periodically based
upon market conditions.
Each Fund may also invest in floating rate and variable rate demand
notes. Demand notes provide that the holder may demand payment of the note
at its par value plus accrued interest. The notes may be supported by an
unconditional bank letter of credit guaranteeing payment of the principal
or both the principal and accrued interest. Floating rate demand notes
have an interest rate related to a known lending rate, such as the prime
rate, and are automatically adjusted when such rate changes. With respect
to Maryland Tax-Free and Pennsylvania Tax-Free, such securities often
react to changes in market interest rates in a manner similar to
shorter-term securities that mature at the time of the next interest rate
reset for the variable or floating rate instrument. With respect to
Tax-Free Intermediate, in calculating its dollar-weighted average
maturity, the Fund may determine the maturity of a variable or floating
rate note according to the interest rate reset date, or the date principal
can be recovered on demand, rather than the date of ultimate maturity.
Futures and Option Strategies
To protect against the effect of adverse changes in interest rates,
each Fund may purchase and sell interest rate futures contracts and
options on securities indexes, and may purchase put options on interest
rate futures contracts and debt securities (practices known as "hedging").
A Fund may purchase put options on interest rate futures contracts or sell
interest rate futures contracts (that is, enter into a futures contract to
sell the underlying security) to attempt to reduce the risk of
fluctuations in its share value. A Fund may purchase an interest rate
futures contract (that is, enter into a futures contract to purchase the
underlying security) to attempt to establish more definitely the return on
securities the Fund intends to purchase. The Funds may not use these
instruments for speculation or leverage. In addition, a Fund's ability to
use these strategies may be limited by market conditions, regulatory
limits and tax considerations.
Each Fund may seek to enhance its income by writing (selling) covered
call options and covered put options. A Fund may write puts and calls only
on a covered basis, which means, in the case of calls, that the Fund will
own the underlying instrument while the call is outstanding and, in
14
<PAGE>
the case of puts, that the Fund will have cash, U.S. government securities
or other high-grade, liquid debt instruments in a segregated account in an
amount not less than the exercise price while the put is outstanding. Any
gains from futures and options transactions would be taxable.
The success of a Fund's strategies in reducing risks depends on many
factors, the most significant of which is the Adviser's ability to predict
market interest rate changes correctly, which differs from its ability to
select portfolio securities. In addition, a hedge could be unsuccessful if
the changes in the value of its futures contract or option positions do
not correlate to the changes in the value of the Fund's investments. It is
also possible that a Fund may be unable to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or
that a Fund may need to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions. Because the markets
for futures and options are not always liquid, a Fund may be unable to
close out or liquidate its hedged position and may be locked in during a
market decline. The Adviser attempts to minimize the possible negative
effects of these factors through careful selection and monitoring of each
Fund's futures and options positions. The Adviser is of the opinion that a
Fund's investments in futures transactions will not have a material
adverse effect on that Fund's liquidity or ability to honor redemptions.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the portfolios.
While utilization of options, future contracts and similar instruments may
be advantageous to a Fund, if the Adviser is not successful in employing
such instruments in managing a Fund's investments or in predicting
interest rate changes, that Fund's performance will be worse than if the
Fund did not use such instruments. In addition, a Fund will pay
commissions and other costs in connection with such investments, which may
increase that Fund's expenses and reduce its yield. A more complete
discussion of the possible risks involved in transactions in options and
futures contracts is contained in the Statement of Additional Information.
Each Fund's current policy is to limit options and futures
transactions to those described above. Each Fund currently does not intend
to (i) purchase put and call options having a value in excess of 5% of its
total assets or (ii) write options on portfolio securities having
aggregate exercise prices exceeding 25% of its net assets. Normally,
options will be written, if at all, on those portfolio securities which
the Adviser does not expect to have significant short-term capital
appreciation.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental limitations that, like its
investment objective, can be changed only by the vote of a majority of the
outstanding voting securities of that Fund. For these purposes, a "vote of
a majority of the outstanding voting securities" of a 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 in person or by proxy. These investment limitations are set
forth under "Additional Information About Investment Limitations and
Policies" in the Statement of Additional Information. Other Fund policies,
unless described as fundamental, can be changed by the Board of Trustees.
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason (Legg Mason is a wholly owned subsidiary of Legg Mason,
Inc., a financial services holding company). Your Legg Mason or affiliated
investment executive will be pleased to explain the shareholder services
available from the Funds and answer any questions you may have.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds, is $1,000, and the minimum investment for each purchase of
additional shares is $100. However, for those investing through a Fund's
Future
15
<PAGE>
First Systematic Investment Plan, payroll deduction plans and plans
involving automatic payment of funds from financial institutions or
automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. Each Fund may change
these minimum amount requirements at its discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. THROUGH YOUR LEGG MASON OR AFFILIATED INVESTMENT EXECUTIVE
Shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to open an
account for you, explain to you the shareholder services available from
the Funds, and answer any questions you may have. After you have
established a Legg Mason or affiliated account, you can order shares from
your investment executive in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Funds of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to prepare a check each month drawn
on your checking account. There is no minimum initial investment. Please
contact any Legg Mason or affiliated investment executive for further
information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated investment executive.
Shares are purchased at the net asset value next determined after your
Legg Mason or affiliated investment executive has transmitted your order
to the applicable Fund, plus any applicable sales charge, which will vary
with the amount purchased, as shown below. Effective August 1, 1995
through January 31, 1996, Tax-Free Intermediate's sales charge will be
waived for all new accounts and subsequent investments into existing
accounts. After January 31, 1996, any exchanges of these shares will be
subject to the full sales charge, if any, since no sales charge will be
paid on shares purchased during this period.
<TABLE>
<CAPTION>
SALES CHARGE SCHEDULE FOR TAX-FREE INTERMEDIATE
<S> <C> <C>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of Net Amount
Public Offering Invested (Net
Amount of Purchase Price Asset Value)
<CAPTION>
<S> <C> <C>
Less than $50,000 2.00% 2.04%
$50,000 to $99,999 1.75 1.78
$100,000 to $249,999 1.50 1.52
$250,000 to $499,999 1.25 1.27
$500,000 to $999,999 1.00 1.01
$1,000,000 and over 0.75 0.76
</TABLE>
<TABLE>
<CAPTION>
SALES CHARGE SCHEDULE FOR MARYLAND TAX-FREE
AND PENNSYLVANIA TAX-FREE
<S> <C> <C>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of Net Amount
Public Offering Invested (Net
Amount of Purchase Price Asset Value
<CAPTION>
<S> <C> <C>
Less than $50,000 2.75% 2.83%
$50,000 to $99,999 2.50 2.56
$100,000 to $249,999 2.00 2.04
$250,000 to $499,999 1.50 1.52
$500,000 to $999,999 1.25 1.27
$1,000,000 to
$2,999,999 1.00 1.01
$3,000,000 to
$4,999,999 0.50 0.50
$5,000,000 and over 0.25 0.25
</TABLE>
Shares of any Fund may be obtained without a sales charge by
exchanging shares of another Fund for which an equal or higher sales
charge was paid, or by exchanging shares of other Legg Mason funds which
were originally obtained through exchange of Fund shares on which an equal
or higher sales charge was paid. If the sales charges previously paid were
less than sales
16
<PAGE>
charges on the Fund into which you are exchanging, an additional sales
charge equal to the difference is due. In addition, Fund shares may be
purchased without a sales charge by employees, directors and officers of
Legg Mason or its affiliates, directors or trustees and officers of any of
the Legg Mason funds, the spouses and children under 21 years of age of
any of the foregoing persons and by advisory clients of investment
advisers affiliated with Legg Mason.
Shareholders who have redeemed shares on which a sales charge was paid
may reinstate their Fund account without a sales charge up to the dollar
amount redeemed by purchasing shares within 90 days of the redemption
("reinstatement privilege"). Shareholders may exercise their reinstatement
privilege by notifying their investment executive of such desire and
placing an order for the amount to be purchased within 90 days after the
date of redemption. The reinstatement will be made at the net asset value
next determined after the Notice of Reinstatement and order have been
received by Legg Mason's Funds Processing.
Primary Shares may be purchased at reduced sales charges through
either of the two Legg Mason reduced sales charge plans. These are (1) a
Letter of Intention ("LOI") and (2) a Right of Accumulation, as described
below.
Through an LOI, you may pay a lower sales charge if the dollar amount
of shares currently being purchased plus the dollar amount of any
purchases you intend to make during the next thirteen months of shares of
this and other Legg Mason funds sold with an initial sales charge equals
$50,000 or more. To take advantage of an LOI, you should indicate the
total amount you intend to purchase over the thirteen-month period on the
form available from your Legg Mason or affiliated investment executive.
Holdings acquired up to 90 days before the LOI is filed will be counted
toward completion of the LOI, and will be entitled to a retroactive
downward adjustment of the initial sales charge.
If the Funds' transfer agent, BFDS, does not receive a completed LOI
within 20 business days after settlement of the first LOI purchase or if
the total purchases indicated on the LOI are not made within the
thirteen-month period, your account will be charged with the difference
between the reduced LOI sales charge and the sales charge applicable to
the purchase actually made. Shares with a value equal to 2 1/2% of the
intended LOI purchases will be held in escrow during the thirteen-month
period (registered in your name) to assure such necessary payment. These
escrowed shares may not be exchanged for shares of other Legg Mason funds.
If you redeem your account during this period, the applicable Fund will
withhold from the escrow amount sufficient shares to pay any unpaid sales
charge.
Under the Right of Accumulation, the current value of an investor's
existing shares in Legg Mason funds sold with an initial sales charge may
be combined with the amount of the investor's current purchase in
determining the sales charge for the current purchase. In determining both
the current value of existing shares and the amount of the investor's
current purchase, shares held or purchased by the investor's spouse,
and/or children under the age of 21, may be included. Legg Mason may
require supporting documentation in connection with purchases made under
the Right of Accumulation.
Orders received by your Legg Mason or affiliated investment executive
before the close of business of the New York Stock Exchange ("Exchange")
(normally 4:00 p.m. Eastern time) ("close of the Exchange") on any day the
Exchange is open will be executed at the net asset value, plus any
applicable sales charge, determined as of the close of the Exchange on
that day. Orders received by your Legg Mason or affiliated investment
executive after the close of the Exchange or on days the Exchange is
closed will be executed at the net asset value, plus any applicable sales
charge, determined as of the close of the Exchange on the next day the
Exchange is open. See "How Net Asset Value is Determined," page 19.
Payment must be made within three business days to Legg Mason. Each Fund
reserves the right to reject any order for its shares or to suspend the
offering of shares for a period of time.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited
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directly to your account at the time of purchase or receipt. No
certificates are issued unless you specifically request them in writing.
Shareholders who elect to receive certificates can redeem their shares
only by mail. Certificates will be issued in full shares only. No
certificates will be issued for shares of any Fund prior to 15 business
days after purchase of such shares by check unless that Fund can be
reasonably assured during that period that payment for the purchase of
such shares has been collected. Shares may not be held in, or transferred
to, an account with any brokerage firm other than Legg Mason or its
affiliates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated investment executive an order for
redemption of your shares. Please have the following information ready
when you call: the name of the Fund, the number of shares to be redeemed
and your shareholder account number. Second, you may send a written
request for redemption to: [insert complete Fund name], c/o Legg Mason
Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated investment executive before the close of
the Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Funds, for redemption at the net asset value
per share determined as of the close of the Exchange on that day. Requests
for redemption received by your Legg Mason or affiliated investment
executive after the close of the Exchange will be executed at the net
asset value determined as of the close of the Exchange on its next trading
day. A redemption request received by your Legg Mason or affiliated
investment executive may be treated as a request for repurchase and, if it
is accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason brokerage
account two business days after trade date. However, each Fund reserves
the right to take up to seven days to make payment upon redemption if, in
the judgment of the Adviser, the respective Fund could be adversely
affected by immediate payment. (The Statement of Additional Information
describes several other circumstances in which the date of payment may be
postponed or the right of redemption suspended.) The proceeds of your
redemption or repurchase may be more or less than your original cost. If
the shares to be redeemed or repurchased were paid for by check (including
certified or cashier's checks) within 15 business days of the redemption
or repurchase request, the proceeds may not be disbursed unless the Fund
can be reasonably assured that the check has been collected.
A redemption request will be considered to be received in "good order"
only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed, the complete Fund name and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Legg Mason or
affiliated investment executive.
None of the Funds will be responsible for the authenticity of
redemption instructions received by telephone, provided it follows
reasonable procedures to identify the caller. Each Fund may request
identifying information from callers or
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employ identification numbers. Each Fund may be liable for losses due to
unauthorized or fraudulent instructions if it does not follow reasonable
procedures. Telephone redemption privileges are available automatically to
all shareholders unless certificates have been issued. Shareholders who do
not wish to have telephone redemption privileges should call their Legg
Mason or affiliated investment executive for further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, no Fund will redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in your account, you will be notified
that your account is below $500 and will be allowed 60 days in which to
make an additional investment in order to avoid having your account
closed.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily, as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Securities owned by each Fund for which
market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued based upon appraisals received from an independent pricing
service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities
received from recognized dealers in those securities. Other securities are
valued at fair value as determined by, or under the supervision of, the
Board of Trustees of the Trust. Pursuant to guidelines established by the
Board of Trustees, the fair value of debt securities with remaining
maturities of 60 days or less shall be their amortized cost, unless
conditions otherwise indicate.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income of each Fund are declared daily
and paid monthly. Shareholders begin to earn dividends on their Primary
Shares as of the settlement date, which is normally the third business day
after their orders are placed with their Legg Mason or affiliated
investment executive. Dividends from net short-term capital gain, if any,
and distributions of substantially all net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any,
generally are declared and paid after the end of the taxable year in which
the gain is realized. A second distribution of net capital gain may be
necessary in some years to avoid imposition of the excise tax described
under the heading "Additional Tax Information" in the Statement of
Additional Information. Dividends and capital gain distributions, if any,
on shares held by shareholders maintaining a Systematic Withdrawal Plan
generally are reinvested in Primary Shares on the payment dates. Other
shareholders may elect to:
1. Receive both dividends and capital gain distributions in Primary
Shares of the distributing Fund;
2. Receive dividends in cash and capital gain distributions in Primary
Shares of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
capital gain distributions in cash; or
4. Receive both dividends and capital gain distributions in cash.
In certain cases, you may reinvest your dividends and capital gain
distributions in the corresponding class of shares of another Legg Mason
fund. Please contact your Legg Mason or affiliated investment executive
for additional information about this option.
If no election is made, both dividends and capital gain distributions
will be credited to your account in Primary Shares at the net asset value
of the shares determined as of the close of the Exchange on the
reinvestment date. Shares received pursuant to any of the first three
(reinvestment) elections above also will be credited to your account at
that net asset value. If you elect to
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receive dividends and/or capital gain distributions in cash, you will be
sent a check or will have your Legg Mason account credited after the
payment date. You may elect at any time to change your option by notifying
the applicable Fund in writing at: [insert complete Fund name], c/o Legg
Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
Your election must be received at least 10 days before the record date in
order to be effective for dividends and capital gain distributions paid to
shareholders as of that date.
TAXES
FEDERAL INCOME TAX
Each Fund intends to continue to qualify for treatment as a RIC under
the Code. If a Fund so qualifies and, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
certain obligations the interest on which is excludable from gross income
under Section 103(a) of the Code, that Fund may pay "exempt-interest"
dividends to its shareholders. Those dividends constitute the portion of
the aggregate dividends (excluding capital gain distributions), as
designated by the Fund, equal to the excess of the excludable interest
over certain amounts disallowed as deductions. Exempt-interest dividends
are excludable from a shareholder's gross income; however, the amount of
such dividends must be reported on the recipient's federal income tax
return.
If and to the extent a Fund receives interest on certain PABs, a
proportionate part of the exempt-interest dividends paid by the Fund will
be treated as a Tax Preference Item. In addition, exempt-interest
dividends received by a corporate shareholder may be indirectly subject to
the federal alternative minimum tax without regard to whether the Fund's
tax-exempt interest is attributable to PABs.
To the extent dividends are derived from taxable income from temporary
investments, from net short-term capital gain or from the use of certain
investment techniques described in "Investment Objectives and Policies,"
page 9, they are taxable to shareholders as ordinary income (whether paid
in cash or reinvested in Fund shares). No portion of those dividends will
qualify for the corporate dividends-received deduction. Distributions
derived from net capital gain, if any, are taxable to shareholders as
long-term capital gain regardless of the length of time they have held
their Fund Shares (and irrespective of whether those distributions are
paid in cash or reinvested in Fund shares).
Interest on indebtedness incurred or continued by a shareholder in
order to purchase or carry Fund shares generally is not deductible.
Persons who are "substantial users" (or related persons) of facilities
financed by IDBs or PABs should consult their tax advisers before
purchasing shares of a Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, a "substantial user" includes a non-exempt person
who regularly uses in trade or business a part of a facility financed from
the proceeds of IDBs or PABs.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed shares
(which normally includes any sales charge paid). An exchange of Fund
shares for shares of any other Legg Mason fund generally will have similar
tax consequences. However, special tax rules apply if (1) a shareholder
disposes of Fund shares through a redemption or exchange within 90 days
after the shareholder acquired the shares and (2) the shareholder
subsequently acquires shares of the Funds or of another Legg Mason fund
without the imposition of a sales charge that otherwise would have been
imposed except for the reinstatement privilege or exchange privilege. See
"How You Can Invest in the Funds," page 15, and "Shareholder Services --
Exchange Privilege," page 22. In these cases, any sales charge that was
imposed on the purchase of those shares will not be taken into account in
determining the amount of gain or loss on the redemption or
exchange -- the tax effect of that charge will instead be deferred by
being treated as having been incurred in connection with the newly
acquired shares. In addition, if Fund shares are purchased within 30 days
before or after redeeming Fund shares at a loss, all or part of that loss
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will not be deductible and instead will increase the basis of the newly
purchased shares.
FOR MARYLAND TAX-FREE:
MARYLAND TAXES
Dividends paid by Maryland Tax-Free to Maryland residents attributable
to interest received or capital gains recognized by the Fund on Maryland
municipal obligations are exempt from Maryland state and local income
taxes. Distributions attributable to interest received or capital gains
recognized by the Fund on certain U.S. government obligations also are
exempt from Maryland state and local income taxes. Distributions
attributable to the Fund's other income or gains generally are subject to
these taxes.
Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for purposes of either
Maryland state or local income tax. Fund shares held by an individual are
not subject to the Maryland personal property tax. Fund shares held by a
corporation also are not subject to the Maryland personal property tax.
Subject to a three year phase-in period, dividends paid by the Fund with
respect to Maryland municipal obligations and profits realized on the sale
or exchange of such obligations are not subject to the Maryland Franchise
Tax imposed on "financial institutions" and measured by net earnings.
In the case of individuals, Maryland imposes an income tax on Tax
Preference Items. Interest paid on certain PABs is a Tax Preference Item.
Accordingly, if the Fund holds such bonds, 50% of the interest thereon in
excess of a threshold amount is taxable by Maryland.
FOR PENNSYLVANIA TAX-FREE:
PENNSYLVANIA TAXES
Individual shareholders of Pennsylvania Tax-Free who are otherwise
subject to the Pennsylvania personal income tax will not be subject to
that tax on distributions by the Fund that are attributable to interest on
Pennsylvania municipal obligations. Distributions attributable to most
other sources, including gains, will not be exempt from Pennsylvania
personal income tax.
Shares that are held by individual shareholders who are Pennsylvania
residents will be exempt from the Pennsylvania county personal property
tax to the extent that the Fund's portfolio consists of Pennsylvania
municipal obligations on the annual assessment date. Nonresidents of
Pennsylvania are not subject to this tax. Corporations are not subject to
any of these personal property taxes. For shareholders who are residents
of the City of Philadelphia, distributions of interest derived from
Pennsylvania municipal obligations are not taxable for purposes of the
Philadelphia School District investment net income tax, provided that the
Fund reports to its shareholders the percentage of Pennsylvania municipal
obligations held by it for the year. The Fund will report such percentage
to its shareholders.
Distributions of interest, but not gains, realized on Pennsylvania
municipal obligations are not subject to the Pennsylvania corporate net
income tax. The Pennsylvania Department of Revenue also takes the position
that shares of funds similar to the Fund are not considered exempt assets
of a corporation for the purposes of determining its capital stock value
subject to Pennsylvania capital stock and franchise taxes.
GENERAL
Shareholders receive information after the close of each year
concerning the tax status of all dividends and capital gain distributions
for their Fund(s). Each Fund is required to withhold 31% of all taxable
dividends, capital gain distributions and redemption proceeds payable to
any individuals and certain other noncorporate shareholders who do not
provide the Fund with a certified taxpayer identification number. Each
Fund also is required to withhold 31% of all taxable dividends and capital
gain distributions payable to such shareholders who otherwise are subject
to backup withholding. Dividends derived from interest on Maryland
municipal obligations may not be exempt from taxation under the laws of
states other than Maryland. Dividends derived from interest on
Pennsylvania municipal obligations may not be exempt from taxation under
the laws of states other than Pennsylvania.
The foregoing is only a summary of some of the important federal
income tax, Maryland
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income tax, Pennsylvania and certain local income tax considerations
generally affecting the respective Funds and their shareholders; see the
Statement of Additional Information for a further discussion. In addition
to those considerations, which are applicable to any investment in the
Funds, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective shareholders are urged to
consult their tax advisers with respect to the effects of this investment
on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital
gains and purchases made through the Future First Systematic Investment
Plan or through automatic investments). An account statement will be sent
to you monthly unless there has been no activity in the account or you are
purchasing shares only through the Future First Systematic Investment Plan
or through automatic investments, in which case an account statement will
be sent quarterly. Reports will be sent by each Fund to its shareholders
at least semiannually showing its portfolio and other information; the
annual report for each Fund will contain financial statements audited by
its independent accountants.
Shareholder inquiries should be addressed to "[insert complete fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476."
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Legg Mason
or affiliated investment executive for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking high current income exempt from federal
income tax, preservation of capital, and liquidity.
Legg Mason U.S. Government Money Market Portfolio
A money market fund seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
Legg Mason Special Investment Trust, Inc.
A mutual fund seeking capital appreciation by investing principally in
issuers with market capitalizations of less than $2.5 billion.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total investment return consistent with
reasonable risk.
Legg Mason American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Legg Mason Global Equity Trust
A mutual fund seeking maximum long-term total return, by investing in
common stocks of companies located in at least three different countries.
Legg Mason U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
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obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, primarily
through investment in a diversified portfolio of investment grade debt
securities.
Legg Mason High Yield Portfolio
A mutual fund seeking primarily a high level of current income and
secondarily, capital appreciation, by investing principally in
lower-rated, fixed-income securities.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Legg Mason Maryland Tax-Free Income Trust(A)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Legg Mason Pennsylvania Tax-Free Income Trust(A)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust(A,B)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal tax, consistent with prudent investment risk.
(A) Shares of these funds are sold with an initial sales charge.
(B) Effective August 1, 1995 through January 31, 1996, the sales charge
will be waived for all new accounts and subsequent investments into
existing accounts. After January 31, 1996, any exchanges of these
shares will be subject to the full sales charge, if any, since no sales
charge will be paid on shares purchased during this period.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus an
additional sales charge if the sales charge previously paid was less than
the sales charge applicable to the fund into which you are exchanging,
determined on the same business day as redemption of the Fund shares you
wish to redeem. Exchanges from the other Legg Mason funds sold without an
initial sales charge will be at net asset value plus the applicable sales
charge (unless the investment in the fund was transferred from a Legg
Mason fund sold with the same or higher sales charge). There is no charge
for the exchange privilege, but each Fund reserves the right to terminate
or limit the exchange privilege of any shareholder who makes more than
four exchanges from that Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Legg Mason
or affiliated investment executive. To effect an exchange by telephone,
please call your Legg Mason or affiliated investment executive with the
information described in "How You Can Redeem Your Primary Shares," page
18. The other factors relating to telephone redemptions described in that
section apply also to telephone exchanges. Please read the prospectus for
the other fund(s) carefully before you invest by exchange. Each Fund
reserves the right to modify or terminate its exchange privilege upon 60
days' notice to shareholders. There is no assurance the money market funds
will be able to maintain a $1.00 share price. None of the funds is insured
or guaranteed by the U.S. Government.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISER
BOARD OF TRUSTEES
The business and affairs of each Fund are managed under the direction
of the Board of Trustees of the Trust.
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ADVISER
Pursuant to separate advisory agreements with each Fund (each an
"Advisory Agreement"), which were approved by the Trust's Board of
Trustees, the Adviser, a wholly owned subsidiary of Legg Mason, Inc.,
serves as each Fund's investment adviser. The Adviser administers and acts
as the portfolio manager for each Fund and is responsible for the actual
investment management of the Funds, including the responsibility for
making investment decisions and placing orders to buy, sell or hold a
particular security. Each Fund pays the Adviser, pursuant to the Advisory
Agreement, a management fee equal to an annual rate of 0.55% of the Fund's
average daily net assets attributable to Primary Shares. Each Fund pays
all its other expenses which are not assumed by the Adviser.
Pursuant to a voluntary expense limitation, the Adviser and Legg Mason
have agreed to waive the management and 12b-1 fees and assume certain
other expenses relating to Primary Shares (exclusive of taxes, interest,
brokerage fees and extraordinary expenses) in excess of: 0.60%
(annualized) of average daily net assets of Maryland Tax-Free until
January 31, 1996 or until the Fund's net assets reach $200 million,
whichever occurs first; 0.55% (annualized) of average daily net assets of
Pennsylvania Tax-Free until January 31, 1996 or until the Fund's net
assets reach $125 million, whichever occurs first; and 0.65% (annualized)
of average daily net assets of Tax-Free Intermediate until January 31,
1996 or until the Fund's net assets reach $100 million, whichever occurs
first. During the fiscal year ended March 31, 1995, the Maryland
Tax-Free's, Pennsylvania Tax-Free's and Tax-Free Intermediate's expenses
as a percentage of average net assets were 0.54%, 0.49% and 0.34%,
respectively.
The Adviser acts as investment adviser, manager or consultant to
sixteen investment company portfolios which had aggregate assets under
management of more than $4.4 billion as of May 31, 1995. The Adviser's
address is 111 South Calvert Street, Baltimore, Maryland 21202.
Victoria M. Schwatka has been primarily responsible for the day-to-day
management of the Funds since their inception. Ms. Schwatka is a portfolio
manager and Senior Vice-President of Legg Mason's Fixed Income Group. Ms.
Schwatka has been employed by Legg Mason since June, 1986.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of the Funds' shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares of the Funds, including any compensation to its
investment executives, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at the Fund's
expense, and for any supplementary sales literature and advertising costs.
Legg Mason receives the sales charge imposed on the purchase of Primary
Shares.
The Trust's Board of Trustees 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 its ongoing services to
investors in Primary Shares and its activities and expenses related to the
sale and distribution of Primary Shares, Legg Mason receives from each
Fund annual service and distribution fees payable from the assets
attributable to Primary Shares, each equal to an annual rate of 0.125% of
that Fund's average daily net assets. These fees are calculated daily and
paid monthly. The fees received by Legg Mason during any year may be more
or less than its cost of providing distribution and shareholder services
for Primary Shares.
Legg Mason receives a fee from BFDS for assisting it with its transfer
agent and shareholder servicing functions; for the year ended March 31,
1995, Legg Mason received from BFDS $19,111, $9,300 and $6,059 for
performing such services in connection with Maryland Tax-Free,
Pennsylvania Tax-Free and Tax-Free Intermediate, respectively.
NASD rules limit the amount of annual distribution fees that may be
paid by mutual funds and impose a ceiling on the cumulative distribution
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fees received. Each Fund's Plan complies with those rules.
The Chairman, President and Treasurer of the Trust are employed by
Legg Mason.
THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of the
Funds. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, is the transfer agent for Fund shares and dividend-disbursing agent
for the Funds.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated November 21, 1990. The Declaration of Trust
authorizes the Trust to issue an unlimited number of shares and to create
additional series, each of which may issue separate classes of shares.
Three series of the Trust currently are being offered.
Each series of the Trust currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses. Salespersons and others
entitled to receive compensation for selling or servicing Fund shares may
receive more with respect to one Class than another.
The initial and subsequent investment minimums for Navigator Shares
are $50,000 and $100, respectively. Investments in Navigator Shares may be
made through investment executives of Fairfield Group, Inc., Horsham,
Pennsylvania, or Legg Mason.
Each Fund pays no Rule 12b-1 fees with respect to Navigator Shares.
The per share net asset value of Navigator Shares, and dividends and
distributions (if any) paid to Navigator shareholders, are generally
expected to be higher than those of Primary Shares of the Funds, because
of the lower expenses attributable to Navigator Shares. The per share net
asset value of the Classes of Shares will tend to converge, however,
immediately after the payment of ordinary income dividends. Navigator
Shares of a Fund may be exchanged for the corresponding class of shares of
certain other Legg Mason funds. Investments by exchange into the other
Legg Mason funds are made at the per share net asset value, determined on
the same business day as redemption of the Navigator Shares the investors
wish to redeem.
The Board of Trustees of the Trust does not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Board will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
trustees, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Trust 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 their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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