As filed with the Securities and Exchange Commission on July 31, 1996.
1933 Act File No. 33-37971
1940 Act File No. 811-6223
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
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Post-Effective Amendment No: 9 [X]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 10
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LEGG MASON TAX-FREE INCOME FUND
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., NW
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on July 31 , 1996 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1996 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1996 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on May 30, 1996.
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Legg Mason Tax-Free Income Fund
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Legg Mason Maryland Tax-Free Income Trust - Primary Shares
Legg Mason Pennsylvania Tax-Free Income Trust - Primary Shares
Legg Mason Tax-Free Intermediate-Term Income Trust - Primary Shares
Part A - Prospectus
Navigator Maryland Tax-Free Income Trust
Navigator Pennsylvania Tax-Free Income Trust
Navigator Tax-Free Intermediate-Term Income Trust
Part A - Prospectus
Legg Mason Maryland Tax-Free Income Trust
Legg Mason Pennsylvania Tax-Free Income Trust
Legg Mason Tax-Free Intermediate-Term Income Trust
(Primary Shares and Navigator Shares)
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
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Legg Mason Tax-Free Income Fund:
Legg Mason Maryland Tax-Free Income Trust - Primary Shares
Legg Mason Pennsylvania Tax-Free Income Trust - Primary Shares
Legg Mason Tax-Free Intermediate-Term Income Trust - Primary Shares
Form N-1A Cross Reference Sheet
Part A Item No. Prospectus Caption
1 Cover Page
2 Prospectus Highlights;
Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Investment Techniques;
Description of the Trust and Its Shares
5 Expenses;
The Funds' Management and Investment
Adviser;
The Funds' Distributor
6 Prospectus Highlights;
Dividends and Other Distributions;
Shareholder Services;
Taxes; How Your Shareholder Account is
Maintained;Description of the Trust and Its
Shares
7 How You Can Invest In the Funds;
How Your Shareholder Account Is
Maintained;
How Net Asset Value Is Determined;
The Funds' Distributor
8 How You Can Redeem Your Primary Shares
9 Not Applicable
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Legg Mason Tax-Free Income Fund:
Navigator Maryland Tax-Free Income Trust
Navigator Pennsylvania Tax-Free Income Trust
Navigator Tax-Free Intermediate-Term Income Trust
Form N-1A Cross Reference Sheet
Part A Item No. Prospectus Caption
1 Cover Page
2 Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Investment Techniques;
Description of the Trust and Its Shares
5 Expenses;
The Funds' Management and Investment Adviser;
The Funds' Distributor
6 Dividends and Other Distributions;
Shareholder Services;
Taxes; How Your Shareholder Account is Maintained;
Description of the Trust and Its Shares
7 How To Purchase and Redeem Shares;
How Your Shareholder Accounts Are Maintained;
How Net Asset Value Is Determined;
The Funds' Distributor
8 How To Purchase and Redeem Shares
9 Not Applicable
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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
Primary Shares and Navigator Shares
Form N-1A Cross Reference Sheet
Statement of Additional
Part B Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About Investment Limitations
and Policies; Portfolio Transactions and
Brokerage
14 The Trust's Trustees and Officers
15 The Trust's Trustees and Officers
16 The Funds' Investment Adviser;
The Funds' Distributor;
The Trust's Independent Accountants;
The Trust's Custodian and Transfer and Dividend-
Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares;
Additional Purchase and Redemption Information
20 Additional Tax Information;
21 Portfolio Transactions and Brokerage;
The Funds' Distributor
22 Performance Information
23 Financial Statements
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[INSERT PROSPECTUSES HERE]
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THE 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
PRIMARY SHARES
NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1996
The Legg Mason Tax-Free Income Fund ("Trust") is an open-end investment
company which currently has three separate investment series (each a "Fund" and
collectively, the "Funds").
Legg Mason Maryland Tax-Free Income Trust ("Maryland Tax-Free Fund")
seeks 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. In attempting to achieve this objective, the Fund's 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.
Legg Mason Pennsylvania Tax-Free Income Trust ("Pennsylvania Tax-Free
Fund") seeks 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. In attempting to achieve this 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.
Legg Mason Tax-Free Intermediate-Term Income Trust ("Tax-Free
Intermediate Fund") seeks a high level of current income exempt from federal
income tax, consistent with prudent investment risk. In attempting to achieve
this 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 ("municipal
obligations") and which are investment grade.
Under normal circumstances, each Fund's investment in obligations the
interest on which is a tax preference item for purposes of the federal
alternative minimum tax ("Tax Preference Item") will be limited to a maximum of
20% of its total assets.
Shares of Navigator Maryland Tax-Free Fund, Navigator Pennsylvania
Tax-Free Fund and Navigator Tax-Free Intermediate Fund (collectively referred to
as "Navigator Shares") represent interests in the Funds that are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own monies and monies for which they act
in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust
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Company exercises discretionary investment management responsibility (such
institutional investors are referred to collectively as "Institutional Clients"
and accounts of the customers with such Clients ("Customers") are referred to
collectively as "Customer Accounts"), 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. The Navigator Class of Shares of each
Fund may not be purchased by individuals directly, but Institutional Clients may
purchase shares for Customer Accounts maintained for individuals.
The Primary Class of shares of Legg Mason Maryland Tax-Free Fund, Legg
Mason Pennsylvania Tax-Free Fund and Legg Mason Tax-Free Intermediate Fund
(collectively referred to as "Primary Shares") is offered for sale to all other
investors and may be purchased directly by individuals. The Primary Class of
shares of Legg Mason Maryland Tax-Free Fund and Legg Mason Pennsylvania Tax-Free
Fund is sold with a front-end sales charge. The front-end sales charge is waived
for all purchases of Primary Shares of the Legg Mason Tax-Free Intermediate Fund
through December 31, 1996.
Navigator Shares are sold and redeemed without any purchase or
redemption charge imposed by the Funds, although Institutional Clients may
charge their Customer Accounts for services provided in connection with the
purchase or redemption of Navigator Shares. The Funds pay management fees to
Legg Mason Fund Adviser, Inc. Primary Shares pay a 12b-1 distribution fee, but
Navigator Shares pay no distribution fees. See "The Fund's Distributor."
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other depository institution. Shares are not insured by
the FDIC, the Federal Reserve Board, or any other agency, and are subject to
investment risk, including the possible loss of the principal amount invested.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectuses for the Funds' Primary Shares and
Navigator Shares , each dated July 31, 1996, as appropriate, which have been
filed with Securities and Exchange Commission ("SEC"). Copies of the Funds'
Prospectuses are available without charge from the Funds at (410) 539-0000.
2
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Legg Mason Wood Walker
Incorporated
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111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410) 539-0000 (800) 822-5544
This Statement of Additional Information is not authorized for use
unless preceded or accompanied by a Prospectus.
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ADDITIONAL INFORMATION ABOUT INVESTMENT
LIMITATIONS AND POLICIES
In addition to the investment objectives described in the Prospectuses,
each Fund has adopted certain fundamental investment limitations that cannot be
changed except by a vote of the shareholders of that Fund. The following are
each Fund's fundamental investment limitations set forth in their entirety. Each
Fund may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed 10% of
the value of the total assets of the Fund; provided that borrowings, including
reverse repurchase agreements, in excess of 5% of such value will be only from
banks (although not a fundamental policy subject to shareholder approval, the
Fund will not purchase securities if borrowings, including reverse repurchase
agreements, exceed 5% of its total assets);
2. Issue bonds or any other class of securities preferred over shares
of the Fund in respect of the Fund's assets or earnings, provided that the Trust
may issue separate series of shares in accordance with its Declaration of Trust;
3. Underwrite the securities of other issuers except insofar as
the Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, in disposing of a portfolio security;
4. Buy or hold any real estate other than municipal bonds secured
by real estate or interests therein;
5. Purchase or sell any commodities or commodities contracts,
except that the Fund may purchase or sell interest rate futures contracts,
options on securities indexes and options on interest rate futures contracts;
6. Purchase or sell any oil, gas or mineral exploration or
development programs;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness, the entry into repurchase agreements,
or deposits with banks and other financial institutions may be considered loans;
8. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of interest rate futures contracts and
options on interest rate futures contracts;
9. Make short sales of securities or maintain a short position, except
that the Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box" (although not a fundamental
policy, the Fund does not intend to make short sales in excess of 5% of its
assets during the coming year);
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The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares present at a shareholders' meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy.
As a non-fundamental investment limitation (which may be changed by the
vote of the Trust's Board of Trustees without shareholder approval), each Fund
will not:
1. Invest more than 10% of its net assets in illiquid securities, a
term which means securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the securities and includes, among other things, repurchase agreements
maturing in more than seven days;
2. Invest 25% or more of its total assets in the securities of issuers
in any one industry, provided that this limitation does not apply to (a)
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities or repurchase agreements thereon; (b) Pennsylvania municipal
obligations for the Pennsylvania Tax-Free Fund and Maryland municipal
obligations for the Maryland Tax-Free Fund; and (c) municipal obligations for
the Tax-Free Intermediate Fund. For the purpose of this restriction, industrial
development bonds issued by non-governmental users will not be considered
municipal obligations; or
3. Invest in oil, gas or other mineral leases or in real estate limited
partnership interests.
In addition, the Pennsylvania Tax-Free Fund will not purchase the
securities of other open-end investment companies, except in connection with a
merger, consolidation, reorganization or acquisition of assets.
If any percentage restriction is adhered to at the time of an
investment or transaction, a later increase or decrease in percentage resulting
from a change in value of portfolio securities or amount of total assets of a
Fund will not be considered a violation of any of the foregoing fundamental or
non-fundamental limitations.
Unless otherwise specified, the policies and limitations set forth in
this Statement of Additional Information are non-fundamental and can be changed
without a shareholder vote. Each Fund anticipates being as fully invested as
practicable in municipal obligations; however, there may be occasions when, as a
result of maturities of portfolio securities, or sales of a Fund's shares, or in
order to meet anticipated redemption requests, a Fund may hold cash which is not
earning income.
Municipal Obligations
The municipal obligations in which each Fund may invest include
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities, such as fire and sanitation
vehicles, telecommunications equipment and other capital assets. Rather than
holding such obligations directly, a Fund may purchase a participation interest
in a municipal lease obligation
5
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from a bank or other third party. A participation interest gives a Fund a
specified, undivided pro-rata interest in the total amount of the obligation.
Municipal lease obligations have risks distinct from those associated
with general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt. These
may include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "nonappropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
In determining the liquidity of a municipal lease obligation, the
Adviser will distinguish between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond or other investment structure using a municipal lease-purchase
agreement as its base. While the former may present special liquidity issues,
the latter are based on a well established method of securing payment of a
municipal obligation. A Fund's investment in municipal lease obligations and
participation interests therein will be treated as illiquid unless the Adviser
determines, pursuant to guidelines established by the Board of Trustees, that
the security could be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the security.
The municipal obligations in which each Fund may invest also include
zero coupon bonds and deferred interest bonds, although each Fund currently does
not intend to invest more than 5% of the value of its total assets in such
instruments during the coming year. Zero coupon and deferred interest bonds are
debt obligations which are issued at a significant discount from face value.
Like other municipal securities, the price can also reflect a premium or
discount to par reflecting the market's judgment as to the issuer's
creditworthiness, the interest rate or other similar factors. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. Such instruments benefit the issuer by mitigating its need
for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
instruments may experience greater volatility in market value than debt
obligations which make regular payments of interest. Each Fund will accrue
income on such investments for accounting purposes, which is distributable to
shareholders.
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Act, and laws that may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other
6
<PAGE>
conditions the power or ability of issuers to meet their obligations for the
payment of interest and principal on their municipal obligations may be
materially and adversely affected.
Opinions relating to the validity of municipal obligations, to the
exemption of interest thereon from federal income tax, Maryland state and local
income taxes and Pennsylvania personal income tax, and to the lack of treatment
of that interest as a Tax Preference Item, respectively, are rendered by counsel
to the issuers at the time of issuance. Neither the Funds nor the Adviser will
independently review the basis for such opinions.
The United States Supreme Court has held that Congress may subject the
interest on municipal obligations to federal income tax. It can be expected
that, as in the past, proposals will be introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Proposals also may be introduced in state
legislatures which could affect the state tax treatment of each Fund's
distributions. If any such proposals were enacted, the availability of municipal
obligations for investment by the Funds and the value of their assets could be
materially and adversely affected. In such event, each Fund would re-evaluate
its investment objective and policies and consider changes in its structure or
possible dissolution.
When-Issued Securities
Delivery of and payment for when-issued securities normally take place
15 to 45 days after the date of the commitment. Interest rates on when-issued
securities are normally fixed at the time of the commitment. Consequently,
increases in the market rate of interest between the commitment date and
settlement date may result in a market value for the security on the settlement
date that is less than its purchase price.
With regard to each such commitment, a Fund maintains in a segregated
account with the custodian, commencing on the date of such commitment, cash,
U.S. government securities or other high-quality liquid debt securities equal in
value to the purchase price for the when-issued securities due on the settlement
date. Each Fund only makes when-issued commitments with the intention of
actually acquiring the securities subject thereto, but a Fund may sell these
securities before the settlement date if market conditions warrant. When payment
is due for when-issued securities, a Fund meets its obligations from
then-available cash flow, from the sale of securities or, although it would not
normally expect to do so, from the sale of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). The purchase of when-issued securities may affect a Fund's share
price in a manner similar to the use of borrowing.
Callable Bonds
Callable bonds generally have call-protection (that is, a period of
time during which the bonds may not be called) which usually lasts for 7 to 10
years from the date of issue, after which time such bonds may be redeemed by the
issuer. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of declining interest rates, when borrowings may be
replaced at lower rates than those obtained in prior years. If interest rates
decline as the call-
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protection on callable bonds expires, there is an increased likelihood that a
number of such bonds may in fact be redeemed by the issuers.
Stand-By Commitments
When a Fund exercises a stand-by commitment that it has acquired from a
dealer with respect to municipal obligations held by it, the dealer normally
pays the Fund an amount equal to (1) the Fund's acquisition cost of the
municipal obligations (excluding any accrued interest which the Fund paid on its
acquisition) less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(2) all interest accrued on the securities since the last interest payment date
or the date the securities were purchased by the Fund, whichever is later. The
Fund's right to exercise stand-by commitments is unconditional and unqualified
and exercisable by the Fund at any time prior to the underlying securities'
maturity.
A stand-by commitment is not transferable by a Fund without the
underlying securities, although the Fund could sell the underlying municipal
obligations to a third party at any time. The Fund may pay for stand-by
commitments either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to such a commitment (thus reducing the
yield to maturity otherwise available for the same securities). Each Fund
intends to enter into stand-by commitments only with those banks, brokers and
dealers that in the Adviser's opinion present minimal credit risks.
Each Fund intends to acquire stand-by commitments solely to facilitate
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not ordinarily affect
the valuation or assumed maturity of the underlying municipal obligations.
Stand-by commitments would not affect the average weighted maturity of the
assets of a Fund.
Variable Rate and Floating Rate Obligations
A variable rate obligation differs from an obligation with a fixed rate
coupon, the value of which fluctuates in inverse relation to interest rate
changes. If interest rates decline below the coupon rate, generally the value of
a fixed rate obligation increases and the obligation sells at a premium. Should
interest rates increase above the coupon rate, generally the value of a fixed
rate obligation decreases and the obligation sells at a discount. The magnitude
of such capital fluctuations is also a function of the period of time remaining
until the obligation matures. Shortterm fixed rate obligations are minimally
affected by interest rate changes; the greater the remaining period until
maturity, the greater the fluctuation in value of a fixed rate obligation is
likely to be.
Variable rate obligation coupons are not fixed for the full term of the
obligation, but are adjusted periodically based upon changes in prevailing
interest rates. As a result, the value of variable rate obligations is less
affected by changes in interest rates. The more frequently such obligations are
adjusted, the less such obligations are affected by interest rate changes during
the period between adjustments. The value of a variable rate obligation,
however, may fluctuate in response to market factors and changes in the
creditworthiness of the issuer.
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By investing in variable rate obligations, a Fund hopes to take
advantage of the normal yield curve function that usually results in higher
yields on longer-term investments. This policy also means that should interest
rates decline, the yield of the Fund will decline, and the Fund and its
shareholders will forego the opportunity for, respectively, capital appreciation
of its portfolio investments and of their shares. Should interest rates
increase, the yield of the Fund will increase, and the Fund and its shareholders
will diminish the risk of, respectively, capital depreciation of its portfolio
investments and of their shares. There is no limitation on the percentage of a
Fund's assets that may be invested in variable rate obligations. However, each
Fund will limit the value of its investments in any variable rate securities
that are illiquid and in all other illiquid securities to 10% or less of its net
assets.
Floating rate obligations also are not fixed, but are adjusted as
specified benchmark interest rates change. In other respects, their
characteristics are similar to variable rate notes, as discussed above.
Yield Factors and Ratings
Standard & Poor's ("S&P"), Moody's Investors Service, Inc. ("Moody's")
and Fitch Investors Service, Inc. ("Fitch") are private services that provide
ratings of the credit quality of obligations. A description of the ratings
assigned to obligations by Moody's, S&P and Fitch is included in Appendix A. A
Fund may consider these ratings in determining whether to purchase, sell or hold
a security. The ratings represent Moody's, S&P's and Fitch's opinions as to the
quality of the obligations which they undertake to rate. Ratings are general and
are not absolute standards of quality. Consequently, obligations with the same
maturity, interest rate and rating may have different market prices. In addition
to ratings assigned to individual bond issues, the Adviser will analyze interest
rate trends and developments that may affect individual issuers, including
factors such as liquidity, profitability and asset quality. Credit rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates.
Securities Lending
A Fund may lend portfolio securities to dealers in municipal
securities, brokers or dealers in corporate or government securities, banks or
other recognized institutional borrowers of securities, provided that cash or
equivalent collateral, equal to at least 100% of the market value of the
securities loaned, is continuously maintained by the borrower with the Fund.
During the time portfolio securities are on loan, the borrower will pay the Fund
an amount equivalent to any dividends or interest paid on such securities, and
the Fund may invest the cash collateral and earn income, or it may receive an
agreed upon amount of taxable interest income from the borrower who has
delivered equivalent collateral. These loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Funds do not have the right to vote securities on loan, but
each Fund would terminate the loan and regain the right to vote if that were
considered
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important with respect to the investment. Because interest from securities
lending is taxable, each Fund presently does not intend to loan more than 5% of
its portfolio securities at any given time.
Reverse Repurchase Agreements
A reverse repurchase agreement is a portfolio management technique in
which a Fund temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, the Fund agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment. A Fund may engage in reverse repurchase agreements as a means of
raising cash to satisfy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio instruments. A Fund may also
engage in reverse repurchase agreements in order to reinvest the proceeds in
other securities or repurchase agreements. Such a use of reverse repurchase
agreements would constitute a form of leverage.
When a Fund reinvests the proceeds of a reverse repurchase agreement in
other securities, any fluctuations in the market value of either the securities
transferred to another party or the securities in which the proceeds are
invested would affect the market value of the Fund's assets. As a result, such
transactions could increase fluctuation in the Fund's net asset value. If a Fund
reinvests the proceeds of the agreement at a rate lower than the cost of the
agreement, engaging in the agreement will lower the Fund's yield. While engaging
in reverse repurchase agreements, each Fund will maintain cash, U.S. government
securities or other high-grade, liquid debt securities in a segregated account
at its custodian bank with a value at least equal to the Fund's obligation under
the agreements.
The ability of a Fund to engage in reverse repurchase agreements is
subject to the Fund's fundamental investment limitation concerning borrowing
described above.
Repurchase Agreements
A repurchase agreement is an agreement under which U.S. government
obligations or other high-quality debt securities are acquired by a Fund from a
securities dealer or bank subject to resale at a previously agreed-upon price
and date. The resale price reflects an agreed interest rate effective for the
period the securities are held and is unrelated to the interest rate provided by
the securities. In these transactions, the securities acquired by the Fund are
held by its custodian until resold and will be supplemented by additional
collateral if necessary to maintain a total value equal to or in excess of the
value of the repurchase agreements. Repurchase agreements are usually for
periods of one week or less, but may be for longer periods. Each Fund will not
enter into repurchase agreements of more than seven days duration if more than
10% of its net assets would be invested in such agreements and other illiquid
investments. A Fund's income from repurchase agreements is taxable income.
To the extent that proceeds from the sale upon a default of the
obligation to repurchase were less than the repurchase price, a Fund might
suffer a loss. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the securities, realization upon the collateral by the Fund
could be delayed or limited, during which time the value of the Fund's
collateral might decline. However, each Fund has adopted standards for the
parties with whom it
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will enter into repurchase agreements that the Trust's Board of Trustees
believes are reasonably designed to assure that each party presents no serious
risk of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase agreement.
Interest Rate Futures Contracts
Interest rate futures contracts, which are traded on commodity futures
exchanges, provide for the sale by one party and the purchase by another party
of a specified type and amount of financial instruments (or an index of
financial instruments) at a specified future date. Interest rate futures
contracts currently exist covering such financial instruments as U.S. Treasury
bonds, notes and bills, Government National Mortgage Association certificates,
bank certificates of deposit and 90-day commercial paper. An interest rate
futures contract may be held until the underlying instrument is delivered and
paid for on the delivery date, but most contracts are closed out before then by
taking an offsetting position on a futures exchange.
A Fund may purchase an interest rate futures contract (that is, enter
into a futures contract to purchase an underlying financial instrument) when it
intends to purchase fixed income securities but has not yet done so. This
strategy is sometimes called an anticipatory hedge. This strategy is intended to
minimize the effects of an increase in the price of the securities the Fund
intends to purchase (but may also reduce the effects of a decrease in price),
because the value of the futures contract would be expected to rise and fall in
the same direction as the price of the securities the Fund intends to purchase.
The Fund could purchase the intended securities either by holding the contract
until delivery and receiving the financial instrument underlying the futures
contract, or by purchasing the securities directly and closing out the futures
contract position. If the Fund no longer wished to purchase the securities, it
would close out the futures contract before delivery.
A Fund may sell a futures contract (that is, enter into a futures
contract to sell an underlying financial instrument) to offset price changes of
securities it already owns. This strategy is intended to minimize any price
changes in the securities the Fund owns (whether increases or decreases) caused
by interest rate changes, because the value of the futures contract would be
expected to move in the opposite direction from the value of the securities
owned by the Fund. The Funds do not expect ordinarily to hold futures contracts
they have sold until delivery or to use securities they own to satisfy delivery
requirements. Instead, each Fund expects to close out such contracts before the
delivery date.
The prices of interest rate futures contracts depend primarily on the
value of the instruments on which they are based, the price changes of which, in
turn, primarily reflect changes in current interest rates. Because there are a
limited number of types of interest rate futures contracts, it is likely that
the standardized futures contracts available to a Fund will not exactly match
the securities the Fund wishes to hedge or intends to purchase, and consequently
will not provide a perfect hedge against all price fluctuation. Because fixed
income instruments all respond similarly to changes in interest rates, however,
a futures contract, the underlying instrument of which differs from the
securities the Fund wishes to hedge or intends to purchase, may still provide
protection against changes in interest rate levels. To compensate for
differences in historical volatility between positions a Fund wishes to hedge
and the standardized futures contracts available to it, the Fund may purchase or
sell futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase.
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Futures Trading
If a Fund does not wish to hold a futures contract position until the
underlying instrument is delivered and paid for on the delivery date, it may
attempt to close out the contract by entering into an offsetting position on a
futures exchange that provides a secondary market for the contract. A futures
contract is closed out by entering into an opposite position in an identical
futures contract (for example, by purchasing a contract on the same instrument
and with the same delivery date as a contract the Fund had sold) at the current
price as determined on the futures exchange. A Fund's gain or loss on closing
out a futures contract depends on the difference between the price at which the
Fund entered into the contract and the price at which the contract is closed
out. Transaction costs in opening and closing futures contracts must also be
taken into account. There can be no assurance that a Fund will be able to offset
a futures position at the time it wishes to, or at a price that is advantageous.
If a Fund were unable to enter into an offsetting position in a futures
contract, it might have to continue to hold the contract until the delivery
date, in which case it would continue to bear the risk of price fluctuation in
the contract until the underlying instrument was delivered and paid for.
At the time a Fund enters into an interest rate futures contract, it is
required to deposit with its custodian, in the name of the futures broker (known
as a futures commission merchant, or "FCM"), a percentage of the contract's
value. This amount, which is known as initial margin, generally equals 5% or
less of the value of the futures contract. Initial margin is in the nature of a
good faith deposit or performance bond, and is returned to the Fund when the
futures position is terminated, after all contractual obligations have been
satisfied. Futures margin does not represent a borrowing by a Fund, unlike
margin extended by a securities broker, and depositing initial margin in
connection with futures positions does not constitute purchasing securities on
margin for the purposes of a Fund's investment limitations. Initial margin may
be maintained either in cash or other liquid, high-quality debt securities such
as U.S. government securities.
As the contract's value fluctuates, payments known as variation margin
or maintenance margin are made to or received from the FCM. If the contract's
value moves against the Fund (i.e., the Fund's futures position declines in
value), the Fund may be required to make payments to the FCM, and, conversely,
the Fund may be entitled to receive payments from the FCM if the value of its
futures position increases. This process is known as marking-to- market and
takes place on a daily basis.
In addition to initial margin deposits, the Fund will instruct its
custodian to segregate additional cash and liquid, high-grade debt securities to
cover its obligations under futures contracts it has purchased. The value of the
assets held in the segregated account will be equal to the daily market value of
all outstanding futures contracts purchased by the Fund, less the amount
deposited as initial margin. When the Fund has sold futures contracts to hedge
securities it owns, it will not sell those securities (or lend to another party)
while the contracts are outstanding, unless it substitutes other similar
securities for the securities sold or lent. The Fund will not sell futures
contracts with a value exceeding the value of securities it owns, except that
the Fund may do so to the extent necessary to adjust for differences in
historical volatility between the securities owned and the contracts used as a
hedge.
Risks of Interest Rate Future Contracts
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By purchasing an interest rate futures contract,a Fund in effect
becomes exposed to price fluctuations resulting from changes in interest rates,
and by selling a futures contract a Fund neutralizes those fluctuations. If
interest rates fall, the Fund would expect to profit from an increase in the
value of the instrument underlying a futures contract it had purchased, and if
interest rates rise, the Fund would expect to offset the resulting decline in
the value of the securities it owns by profits in a futures contract it has
sold. If interest rates move in the direction opposite that which was
contemplated at the time of purchase, however, the Fund's positions in futures
contracts could have a negative effect on the Fund's net asset value. If
interest rates rise when the Fund has purchased futures contracts, the Fund
could suffer a loss in its futures positions. Similarly, if interest rates fall,
losses in a futures contract a Fund has sold could negate gains on securities
the Fund owns, or could result in a net loss to the Fund. In this sense,
successful use of interest rate futures contracts by a Fund will depend on the
Adviser's ability to hedge the Fund in the correct way at the appropriate time.
Other than the risk that interest rates will not move as expected, the
primary risk in employing interest rate futures contracts is that the market
value of the futures contracts may not move in concert with the value of the
securities the Fund wishes to hedge or intends to purchase. This may result from
differences between the instrument underlying the futures contracts and the
securities the Fund wishes to hedge or intends to purchase, as would be the
case, for example, if the Fund hedged U.S. Treasury bonds by selling futures
contracts on U.S. Treasury notes.
Even if the securities which are the objects of a hedge are identical
to those underlying the futures contract, there may not be perfect price
correlation between the two. Although the value of interest rate futures
contracts is primarily determined by the price of the underlying financial
instruments, the value of interest rate futures contracts is also affected by
other factors, such as current and anticipated short-term and long-term interest
rates, the time remaining until expiration of the futures contract, and
conditions in the futures markets, which may not affect the current market price
of the underlying financial instruments in the same way. In addition, futures
exchanges establish daily price limits for interest rate futures contracts, and
may halt trading in the contracts if their prices move upward and downward more
than a specified daily limit on a given day. This could distort the relationship
between the price of the underlying instrument and the futures contract, and
could prevent prompt liquidation of unfavorable futures positions. The value of
a futures contract may also move differently from the price of the underlying
financial instrument because of inherent differences between the futures and
securities markets, including variations in speculative demand for futures
contracts and for debt securities, the differing margin requirements for futures
contracts and debt securities, and possible differences in liquidity between the
two markets.
Put Options on Interest Rate Futures Contracts
Purchasing a put option on an interest rate futures contract gives a
Fund the right to assume a seller's position in the contract at a specified
exercise price at any time up to the option's expiration date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium), as determined on the commodity futures exchange where the
option is traded.
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A Fund may purchase put options on interest rate futures contracts to
hedge against a decline in the market value of securities the Fund owns. Because
a put option is based on a contract to sell a financial instrument at a certain
price, its value will tend to move in the opposite direction from the price of
the financial instrument underlying the futures contract; that is, the put
option's value will tend to rise when prices fall, and fall when prices rise. By
purchasing a put option on an interest rate futures contract, the Fund would
attempt to offset potential depreciation of securities it owns by appreciation
of the put option. This strategy is similar to selling the underlying futures
contract directly.
A Fund's position in a put option on an interest rate futures contract
may be terminated either by exercising the option (and assuming a seller's
position in the underlying futures contract at the option's exercise price) or
by closing out the option at the current price as determined on the futures
exchange. If the put option is not exercised or closed out before its expiration
date, the entire premium paid would be lost by the Fund. A Fund could profit
from exercising a put option if the current market value of the underlying
futures contract were less than the sum of the exercise price of the put option
and the premium paid for the option because the Fund would, in effect, be
selling the futures contract at a price higher than the current market price. A
Fund could also profit from closing out a put option if the current market price
of the option is greater than the premium the Fund paid for the option.
Transaction costs must also be taken into account in these calculations. A Fund
may close out an option it had purchased by selling an identical option (that
is, an option on the same futures contract, with the same exercise price and
expiration date) in a closing transaction on a futures exchange that provides a
secondary market for the option. A Fund is not required to make futures margin
payments when it purchases an option on an interest rate futures contract.
Compared to the purchase or sale of an interest rate futures contract,
the purchase of a put option on an interest rate futures contract involves a
smaller potential risk to the Fund, because the maximum amount at risk is the
premium paid for the option (plus related transaction costs). If prices of debt
securities remain stable, however, purchasing a put option may involve a greater
probability of loss than selling a futures contract, even though the amount of
the potential loss is limited. The Adviser will consider the different risk and
reward characteristics of options and futures contracts when selecting hedging
instruments.
Risks of Transactions in Options on Interest Rate Futures Contracts
Options on interest rate futures contracts are subject to risks similar
to those described above with respect to interest rate futures contracts. These
risks include the risk that the Adviser may not hedge a Fund in the correct way
at the appropriate time, the risk of imperfect price correlation between the
option and the securities being hedged, and the risk that there may not be an
active secondary market for the option. There is also a risk of imperfect price
correlation between the option and the underlying futures contract.
Although the Adviser will purchase and write only those options for
which there appears to be a liquid secondary market, there can be no assurance
that such a market will exist for any particular option at any particular time.
If there were no liquid secondary market for a particular option, a Fund might
have to exercise an option it had purchased in order to realize any profit, and
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might continue to be obligated under an option it had written until the option
expired or was exercised.
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Regulatory Notification of Futures and Options Strategies
The Trust has filed on behalf of the Funds a notice of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
Commodity Futures Trading Commission ("CFTC") and the National Futures
Association, which regulate trading in the futures markets. Under regulations
adopted by the CFTC, futures contracts and related options may be used by a Fund
(a) for hedging purposes, without quantitative limits, and (b) for other
purposes to the extent that the amount of margin deposit on all such non-hedging
futures contracts owned by the Fund, together with the amount of premiums paid
by the Fund on all such non-hedging options held on futures contracts, does not
exceed 5% of the market value of the Fund's net assets. Each Fund will not
purchase futures contracts or related options if as a result more than 25% of
the Fund's total assets would be so invested. These limits on the Fund's
investments in futures contracts are not fundamental and may be changed by the
Board of Trustees as regulatory agencies permit. Each Fund will not modify these
limits to increase its permissible futures and related options activities
without supplying additional information in a supplement to a current Prospectus
or Statement of Additional Information that has been distributed or made
available to the Fund's shareholders.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and certain of
its affiliates. Navigator Shares are currently offered for sale only to
Institutional Clients, to clients of 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 may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
Primary Shares are available to all other investors.
Future First Systematic Investment Plan
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future First
Systematic Investment Plan. Under this plan you may arrange for automatic
monthly investments in Primary Shares 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. Each month the transfer agent will
send a check to your bank for collection, and the proceeds of the check will be
used to buy Primary Shares of the Fund you selected at the per share net asset
value determined on the day the check is sent to your bank. An account statement
will be sent to you quarterly. You may terminate the Future First Systematic
Investment Plan at any time without charge or penalty. Forms to enroll in the
Future First Systematic Investment Plan are available from any Legg Mason or
affiliated office.
Purchases by Check
In making purchases of shares by check, you should be aware that checks
drawn on a member bank of the Federal Reserve System will normally be converted
to federal funds and used to purchase shares within two business days of receipt
by Legg Mason Wood Walker, Incorporated
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("Legg Mason") or its affiliate. Legg Mason is closed on the days that the New
York Stock Exchange ("Exchange") is closed, which are listed under "Valuation of
Fund Shares". Checks drawn on banks that are not members of the Federal Reserve
System may take up to nine business days to be converted.
Letter of Intention -- (Primary Shares)
Through a Letter of Intention ("LOI") you may pay the lower sales
charge on the dollar amount of Primary 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. 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 providing that you bring the prior purchase(s) to the attention of your
Legg Mason or affiliated investment executive at the time the LOI is filed. The
minimum investment under an LOI is $50,000. Signing an LOI does not obligate you
to purchase the full amount indicated, but you must complete the intended
purchase to obtain the reduced sales charge. The front-end sales charge is
waived for all purchases of Primary Shares of the Tax-Free Intermediate Fund
made through December 31, 1996.
If the total amount of shares purchased at the end of the eleventh
month does not equal the amount stated in the LOI, you will be notified in
writing by Legg Mason of the amount purchased to date, the amount required to
complete the LOI and the expiration date. 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 purchases actually made. The first purchase under an
LOI must be at least 2.5% of the intended LOI purchases for the Maryland and
Pennsylvania Tax-Free Funds and 1% for the Tax-Free Intermediate Fund. Shares
with a value equal to 2.5% for the Maryland and Pennsylvania Tax-Free Funds and
1% for the Tax-Free Intermediate Fund, 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.
Right of Accumulation -- (Primary Shares)
Under the Right of Accumulation, the current value of your existing
Primary Shares in Legg Mason funds sold with an initial sales charge may be
combined with the amount of your 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 current purchase, Primary Shares held or
purchased by the investor's spouse, and/or children under the age of 21, may be
included. In order to receive a reduced sales charge for the current purchase,
you must remind your Legg Mason or affiliated investment executive of your share
balance in Legg Mason funds sold with initial sales charges at the time of the
current purchase.
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Reinstatement Privilege --(Primary Shares)
As described in the Prospectus, shareholders who redeem any of their
Primary Shares may reinstate those shares without a sales charge by notifying
their Legg Mason or affiliated 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 per share next
computed after the Notice of Reinstatement and order are received by Legg
Mason's Funds Processing department. The amount of a purchase under this
reinstatement privilege cannot exceed the amount of the redemption proceeds.
Gain on a redemption is taxable regardless of whether the reinstatement
privilege is exercised; however, a loss arising out of a redemption will not be
deductible to the extent the reinstatement privilege is exercised within 30 days
after redemption, and an adjustment will be made to the shareholder's tax basis
for shares acquired pursuant to the reinstatement privilege.
Redemption Services
Each Fund reserves the right to modify or terminate the wire or
telephone redemption services described in its Prospectus at any time.
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, except (a) for any
periods during which the Exchange is closed (other than for customary weekend
and holiday closings), (b) when trading in markets a Fund normally utilizes is
restricted or an emergency, as defined by rules and regulations of the SEC,
exists, making disposal of the Fund's investments or determination of its net
asset value not reasonably practicable, or (c) for such other periods as the
SEC, by order, may permit for protection of a Fund's shareholders. In the case
of any such suspension, you may either withdraw your request for redemption or
receive payment based upon the net asset value next determined after the
suspension is lifted.
Each Fund reserves the right under certain conditions to honor any
request for redemption, or combination of requests from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part by securities valued in
the same way as they would be valued for purposes of computing each Fund's net
asset value per share. Any such redemption payments shall be made with portfolio
securities that are readily marketable. If payment is made in securities, a
shareholder generally will incur brokerage expenses in converting those
securities into cash and will be subject to fluctuation in the market price of
those securities until they are sold. The Funds do not redeem in kind under
normal circumstances, but would do so where the Adviser determines that it would
be in the best interests of the shareholders as a whole. Although each Fund may
elect to redeem any shareholder account with a current value of less than $500,
a Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
SPECIAL FACTORS AFFECTING MARYLAND AND PENNSYLVANIA TAX-FREE FUNDS
Overview
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The following only highlights some of the more significant financial
trends and problems and is based on information drawn from official statements
and prospectuses relating to securities offerings of the states of the United
States, the State of Maryland and the Commonwealth of Pennsylvania, their
agencies and instrumentalities, as available on the date of this Statement of
Additional Information. The Funds assume no obligation to update this
information.
State and Local Income Tax
The exemption of certain interest income for federal income tax
purposes does not necessarily result in exemption thereof under the income or
other tax laws of any state or local taxing authority. A shareholder may be
exempt from state and local taxes on dividends attributable to interest income
derived from obligations of the state and municipalities or other localities of
the state in which he or she is a resident, but generally will be taxed on
dividends attributable to interest income derived from obligations of other
jurisdictions. Shareholders receive notification annually of the portion of each
Fund's tax-exempt income attributable to each state. Shareholders should consult
their tax advisers about the tax status in their own states and localities of
distributions from each Fund.
Because the Maryland Tax-Free Fund and the Pennsylvania Tax-Free Fund
each concentrates its investments in a specific state, there are risks
associated with investment in each such Fund which would not exist if those
Funds' investments were more widely diversified. These risks include the
possible enactment of new legislation in the applicable state which could affect
Maryland or Pennsylvania municipal obligations, economic factors which could
affect these obligations and varying levels of supply and demand for Maryland or
Pennsylvania municipal obligations.
Maryland Tax-Free Fund
State Debt The Maryland Constitution prohibits the contracting of State
general obligation debt unless it is authorized by a law levying an annual tax
or taxes sufficient to pay the debt service within 15 years and prohibiting the
repeal of the tax or taxes or their use for another purpose until the debt is
paid. As a uniform practice, each separate enabling act which authorizes the
issuance of general obligation bonds for a given object or purpose has
specifically levied and directed the collection of an ad valorem property tax on
all taxable property in the State. The Board of Public Works is directed by law
to fix by May 1 of each year the precise rate of such tax necessary to produce
revenue sufficient for debt service requirements of the next fiscal year, which
begins July 1. However, the taxes levied need not be collected if or to the
extent that funds sufficient for debt service requirements in the next fiscal
year have been appropriated in the annual State budget. Accordingly, the Board,
in annually fixing the rate of property tax after the end of the regular
legislative session in April, takes account of appropriations of general funds
for debt service.
There is no general debt limit imposed by the Maryland Constitution or
public general laws, but a special committee created by statute annually submits
to the Governor an estimate of the maximum amount of new general obligation debt
that prudently may be authorized. Although the committee's responsibilities are
advisory only, the Governor is required to give due consideration to the
committee's findings in preparing a preliminary allocation of new general debt
authorization for the ensuing fiscal year. The continuation of the credit
ratings on State debt is dependent upon
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several economic and political factors, including the ability to continue to
fund a substantial portion of the debt service on general obligation debt from
general fund revenues in the annual State budget or to raise the rate of State
property tax levies, and the ability to maintain the amount of authorized debt
within the range of affordability.
Consolidated Transportation Bonds are limited obligations issued by the
Maryland Department of Transportation, the principal of which must be paid
within 15 years from the date of issue, for highway, port, transit, rail or
aviation facilities or any combination of such facilities. Debt service on
Consolidated Transportation Bonds is payable from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and the corporate
income tax as are credited to the Maryland Department of Transportation, plus
all departmental operating revenues and receipts. Holders of such bonds are not
entitled to look to other sources for payment.
The Maryland Transportation Authority operates certain highway, bridge
and tunnel toll facilities in the State. The tolls and other revenues received
from these facilities are pledged as security for revenue bonds of the Authority
issued under, and secured by, a trust agreement between the Authority and a
corporate trustee. On November 9, 1994, the Maryland Transportation Authority
issued $162.6 million of special obligation revenue bonds to fund projects at
the Baltimore/Washington International Airport secured by revenues from the
passenger facility charges received by the Maryland Aviation Administration and
from the general account balance of the Transportation Authority. As of March
31, 1996, $397.6 million of the Transportation Authority's revenue bonds were
outstanding.
Certain other instrumentalities of the State government are authorized
to borrow money under legislation which expressly provides that the loan
obligations shall not be deemed to constitute a debt or a pledge of the faith
and credit of the State. The Community Development Administration of the
Department of Housing and Community Development, higher educational institutions
(including St. Mary's College of Maryland, the University of Maryland System,
and Morgan State University), the Maryland Transportation Authority, the
Maryland Water Quality Financing Administration, and the Maryland Environmental
Service have issued and have outstanding bonds of this type. The principal of
and interest on bonds issued by these bodies are payable solely from various
sources, principally fees generated from use of the facilities or enterprises
financed by the bonds.
The Port of Baltimore is one of the larger foreign trade ports in the
United States and in the world and a significant factor in Maryland's economy.
Total cargo tonnage at the Port declined from 30,682,730 in 1982 to 26,176,378
in 1994. The Port handles both high value general cargo, including containers
and automobiles, as well as bulk cargo such as coal and grain. The value of the
tonnage handled increased from $14.2 billion in 1982 to $19.3 billion in 1994.
The ability of the Port to sustain and improve its volume and value of cargos is
dependent, in part, upon national and worldwide economic conditions.
The Maryland Stadium Authority is responsible for financing and
directing the acquisition and construction of one or more new professional
sports facilities in Maryland. Currently, the Authority operates Oriole Park at
Camden Yards, which opened in 1992. In connection with the construction of that
facility, the Authority issued $155 million in notes and bonds. Those notes and
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bonds, are lease-backed revenue obligations, the payment of which is secured by,
among other things, an assignment of revenues received under a lease of Oriole
Park at Camden Yards from the Stadium Authority to the State. Annual net debt
service on the Authoritie's obligations is $14 million.
The Stadium Authority also has been assigned responsibility for
constructing expansions of the Convention Centers in Baltimore and Ocean City.
The Baltimore Convention Center expansion is expected to cost $ 163 million and
is being financed through a combination of funding from Baltimore City bonds
($50 million), Stadium Authority revenue bonds ($55 million), and State general
obligation bonds ($58 million). The Ocean City Convention Center expansion is
expected to cost $35 million and is being financed through a combination of
funding from Ocean City and the Stadium Authority.
In October 1995, the Stadium Authority and the Baltimore Ravens
(formerly known as the Cleveland Browns) executed a Memorandum of Agreement
which commits the Ravens to occupy a to be constructed football stadium in
Baltimore City. The Agreement was approved by the Board of Public Works and
constitutes a "long-term lease with a National Football League team" as required
by statute for the issuance of Stadium Authority bonds. The Stadium Authority
sold $87.565 million in lease-backed revenue bonds on May 1, 1996. The proceeds
from the bonds, along with cash available from State lottery proceeds,
investment earnings, and other sources will be used to pay project design and
construction expenses of approximately $200 million. The bonds are solely
secured by an assignment of revenues received under a lease of the project from
the Stadium Authority to the State.
The State has financed and expects to continue to finance the
construction and acquisition of various facilities through conditional purchase,
sale-leaseback, and similar transactions. All of the lease payments under these
arrangements are subject to annual appropriation by the Maryland General
Assembly. In the event that appropriations are not made, the State may not be
held contractually liable for the payments.
LOCAL SUBDIVISION DEBT The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by ad valorem taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general obligation
debt and to the levy and collection of the ad valorem taxes as and when such
taxes become necessary in order to provide sufficient funds to meet the debt
service requirements. The amount of debt which may be authorized may in some
cases be limited by the requirement that it not exceed a stated percentage of
the assessable base upon which such taxes are levied.
OTHER RISK FACTORS The manufacturing sector of Maryland's economy,
which historically has been a significant element of the State's economic
health, has experienced severe financial pressures and an overall contraction in
recent years. This is due in part to the reduction in defense-related contracts
and grants, which has had an adverse impact that is substantial and is believed
to be disproportionately large compared with the impact on most other states.
The State has endeavored to promote economic growth in other areas, such as
financial services, health care
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and high technology. Whether the State can successfully make the transition from
an economy reliant on heavy industries to one based on service and
science-oriented businesses is uncertain. Moreover, future economic difficulties
in the service sector and high technology industries being promoted by Maryland
could have an adverse impact on the finances of the State and its subdivisions,
and could adversely affect the market value of the Bonds in the Maryland Trust
or the ability of the respective obligors to make payments of interest and
principal due on such Bonds.
The State and its subdivisions, and their respective officers and
employees, are defendants in numerous legal proceedings, including alleged tort
and breaches of contract and other alleged violations of laws. Although adverse
decisions in these matters could require extraordinary appropriations not
budgeted for, in the opinion of the Attorney General of Maryland, the legal
proceedings are not likely to have a material adverse effect on the State's
financial position.
Pennsylvania Tax-Free Fund
STATE DEBT Pennsylvania may incur debt to rehabilitate areas affected
by disaster, debt approved by the electorate, debt for certain capital projects
(such as highways, public improvements, transportation assistance, flood
control, redevelopment assistance, site development and industrial development)
and tax anticipation debt payable in the fiscal year of issuance. Pennsylvania
had outstanding general obligation debt of $5,045.4 million at June 30, 1995.
Pennsylvania is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the succeeding
fiscal year's budget. At May 15, 1996, all outstanding general obligation bonds
of Pennsylvania were rated AA- by S&P and A1 by Moody's (see Appendix A). There
can be no assurance that the current ratings will remain in effect in the
future. The Pennsylvania TaxFree Fund assumes no obligation to update this
rating information. Over the five-year period ending June 30, 2001 ,
Pennsylvania has projected that it will issue bonds totaling $1,982.0 million
and retire bonded debt in the principal amount of $1,799.8 million.
Certain agencies created by Pennsylvania have statutory authorization
to incur debt for which Pennsylvania appropriations to pay debt service thereon
is not required. As of December 31, 1995, total combined debt outstanding for
these agencies was $7,101.7 million. The debt of these agencies is supported by
assets of, or revenues derived from, the various projects financed and is not an
obligation of Pennsylvania. Some of these agencies, however, are indirectly
dependent on Pennsylvania appropriations. The only obligations of agencies in
Pennsylvania that bear a moral obligation of Pennsylvania are those issued by
the Pennsylvania Housing Finance Agency ("PHFA"), a state-created agency which
provides housing for lower and moderate income families, and The Hospitals and
Higher Education Facilities Authority of Philadelphia ("Hospital Authority"), an
agency created by the City of Philadelphia to acquire and prepare various sites
for use as intermediate care facilities for the mentally retarded.
Local Government Debt Numerous local government units in Pennsylvania
issue general obligations (i.e., backed by taxing power) debt, including
counties, cities, boroughs, townships and school districts. School district
obligations are supported indirectly by Pennsylvania. The issuance
22
<PAGE>
of non-electoral general obligation debt is limited by constitutional and
statutory provisions. Electoral debt, i.e., that approved by the voters, is
unlimited. In addition, local government units and municipal and other
authorities may issue revenue obligations that are supported by the revenues
generated from particular projects or enterprises. Examples include municipal
authorities (frequently operating water and sewer systems), municipal
authorities formed to issue obligations benefiting hospitals and educational
institutions, and industrial development authorities, whose obligations benefit
industrial or commercial occupants. In some cases, sewer or water revenue
obligations are guaranteed by taxing bodies and have the credit characteristics
of general obligation debt.
LITIGATION Pennsylvania is currently involved in certain litigation
where adverse decisions could have an adverse impact on its ability to pay debt
service. In Baby Neal v. Commonwealth of Pennsylvania, the American Civil
Liberties Union filed a lawsuit against the Commonwealth seeking an order that
would require the Commonwealth to provide additional funding for child welfare
services. County of Allegheny v. Commonwealth of Pennsylvania involves
litigation regarding the state constitutionality of the statutory scheme for
county funding of the judicial system. In Pennsylvania Association of Rural and
Small Schools v. Casey, the constitutionality of Pennsylvania's system for
funding local school districts has been challenged. No estimates for the amount
of these claims are available.
OTHER FACTORS Pennsylvania historically has been identified as a heavy
industry state, although that reputation has changed with the decline of the
coal, steel and railroad industries and the resulting diversification of
Pennsylvania's industrial composition. The major new sources of growth are in
the service sector, including trade, medical and health services, educational
and financial institutions. Manufacturing has fallen behind both the services
sector and the trade sector as the largest single source of employment in
Pennsylvania. Between 1986 and 1995 , employment in Pennsylvania has grown each
year at a rate slightly in excess of the growth in employment in the
mid-Atlantic region, but less than that of the U.S. as a whole, during the same
period. Pennsylvania's average unemployment rate for the years 1991 through 1995
remained slightly above the nation's annual average unemployment rate. The
unadjusted unemployment rate for Pennsylvania for April, 1996 was 5.6% and for
the United States for April, 1996 was 5.4%. . The population of Pennsylvania,
12.072 million people in 1995, according to the U.S. Bureau of the Census,
represents a slight increase from the 1986 estimate of 11.784 million . Per
capita income in Pennsylvania was $22,196 for calendar year 1994, , slightly
above the per capita income of the United States of $20,817. Pennsylvania's
General Fund, which receives all tax receipts and most other revenues and
through which debt service on all general obligations of Pennsylvania are made,
closed fiscal years ended June 30, 1993, June 30, 1994 and June 30, 1995 with
fund balances of $698.945 million, $892.940 million and $688.304 million,
respectively.
ADDITIONAL TAX INFORMATION
23
<PAGE>
The following is a general summary of certain federal tax
considerations affecting each Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state or local taxes that may be applicable to them.
General
For federal tax purposes, each Fund is treated as a separate
corporation. In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"), a Fund must distribute annually to its shareholders at least 90% of
the sum of its net interest income excludable from gross income under section
103(a) of the Code plus its investment company taxable income (generally,
taxable net investment income plus net short-term capital gain, if any)
("Distribution Requirement") and must meet several additional requirements. With
respect to each Fund, these requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities, or other income (including gains from options
and futures contracts) derived with respect to its business of investing in
securities ("Income Requirement"); (2) the Fund must derive less than 30% of its
gross income each taxable year from the sale or other disposition of securities,
options or futures contracts held for less than three months ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in the securities (other
than U.S. government securities or the securities of other RICs) of any one
issuer.
Dividends paid by a Fund will qualify as "exempt-interest dividends"
(as defined in each Prospectus), and thus will be excludable from gross income
by its shareholders, if the Fund satisfies the additional requirement that, at
the close of each quarter of the Fund's taxable year, at least 50% of the value
of its total assets consists of securities the interest on which is excludable
from gross income under section 103(a) of the Code; each Fund intends to
continue to satisfy this requirement. The portion of each dividend excludable
from a Fund's shareholder's gross income may not exceed the Fund's net
tax-exempt income.
To the extent a Fund invests in instruments that generate taxable
income, distributions of the interest earned thereon will be taxable to the
Fund's shareholders as ordinary income to the extent of its earnings and
profits. Moreover, if a Fund realizes capital gains as a result of market
transactions, any distributions of those gains will be taxable to its
shareholders.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of the amount of any
exempt-interest dividends received with respect to those shares, and any portion
of the loss that is not disallowed will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received with respect thereto.
Up to 85% of social security and railroad settlement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources
24
<PAGE>
such as a Fund) plus 50% of their benefits exceeds certain base amounts.
Exempt-interest dividends from a Fund still are tax-exempt to the extent
described in each Prospectus; they are only included in the calculation of
whether a recipient's income exceeds the established amounts.
A Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary (taxable) income for that year and capital
gain net income for the one-year period ending on October 31 of that year, plus
certain other amounts. For this and other purposes, dividends and capital gain
distributions declared by a Fund in December of any year and payable to
shareholders of record on a date in that month will be deemed to have been paid
by the Fund and received by the shareholders on December 31 if the distributions
are paid by the Fund during the following January. Accordingly, those
distributions will be reportable by shareholders for the year in which that
December 31 falls.
A Fund may purchase zero coupon or other municipal obligations issued
with original issue discount. As a holder of those securities, a Fund must
include in its gross income for purposes of the Income Requirement and the
Short-Short Limitation the original issue discount that accrues thereon during
the taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Because each Fund annually must distribute
substantially all of its income, including accrued original issue discount (even
if that discount is tax-exempt) , to satisfy the Distribution Requirement, it
may be required in a particular year to distribute as a dividend an amount that
is greater than the total amount of cash it actually receives. Those
distributions will be made from the Fund's cash assets or from the proceeds of
sales of portfolio securities, if necessary. The Fund may realize capital gains
or losses from those dispositions, which would increase or decrease its
investment company taxable income and/or net capital gain (the excess of net
long-term capital gain over net short-term capital loss). In addition, any such
gains may be realized on the disposition of securities held for less than three
months. Because of the Short-Short Limitation, any such gains would reduce the
Fund's ability to sell other securities (and options or futures) held for less
than three months that it might wish to sell in the ordinary course of its
portfolio management.
Shortly after the end of each year, each Fund mails to each shareholder
a statement setting forth the federal income tax status of all distributions
made during the year. Shareholders may be subject to state and local taxes on
distributions from a Fund, except for Maryland and Pennsylvania residents to the
extent described in the Prospectuses for the Maryland and Pennsylvania Tax-Free
Funds. Shareholders should consult their tax advisers regarding specific
questions relating to federal, state and local taxes.
Hedging Instruments
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the character and timing of recognition of the
gains and losses a Fund realizes in connection therewith. Gains from in options
and futures contracts derived by a Fund with respect to its business of
investing in securities will be taxable and will qualify as permissible income
under the Income Requirement. However, income from the disposition of options
and futures contracts will be subject to the Short-Short Limitation if they are
held for less than three months.
25
<PAGE>
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily for each class as
of the close of the Exchange, on every day that the Exchange is open, by
dividing the value of the total assets attributable to that class, less
liabilities attributable to that class, by the number of shares of that class
outstanding. Pricing will not be done on days when the Exchange is closed. The
Exchange currently observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas. When market quotations are readily available, portfolio securities
are valued based upon market quotations, provided such quotations adequately
reflect, in the Adviser's judgment, the fair value of the security. For
valuation purposes, the market quotation shall be the mean of the most recent
bid and asked prices quoted by the dealers. Where such market quotations are not
readily available, 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. The methods
used by the pricing service and the quality of the valuations so established are
reviewed by the Adviser under the general supervision of the Trust's Board of
Trustees. The amortized cost method of valuation is used with respect to
obligations with 60 days or less remaining to maturity unless the Adviser
determines that this does not represent fair value. All other assets are valued
at fair value as determined in good faith by or under the direction of the
Trust's Board of Trustees. Premiums received on the sale of put and call options
are included in each Fund's net asset value, and the current market value of
options sold by a Fund will be subtracted from its net assets.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in each Fund at that Fund's
respective commencement of operations (Primary Shares). Each table assumes that
all dividends and capital gain distributions are reinvested in the respective
Fund. Each table includes the effect of all charges and fees applicable to
Primary Shares the respective Fund has paid. (There are no redemption fees.) The
tables do not include the effect of any income tax that an investor would have
to pay on distributions.
For the Maryland Tax-Free Fund:
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- ------------- --------------------------- ------------------ -----------
1992* $ 9,942 $ 561 $10,503
1993 10,569 1,244 11,813
1994 10,395 1,832 12,227
1995 10,507 2,527 13,034
1996 10,637 3,323 13,960
26
<PAGE>
* May 1, 1991 (commencement of operations) to March 31, 1992.
If the investor had not reinvested dividends and capital gain
distributions, the total value of the hypothetical investment as of March 31,
1996 would have been $10,628, and the investor would have received a total of
$3,042 in distributions. If the Adviser had not waived or reimbursed certain
Fund expenses in each of the fiscal years, returns would have been lower.
For the Pennsylvania Tax-Free Fund:
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- ------------- ------------------------- ----------------------- -----------
1992* $10,192 $ 437 $10,629
1993 10,602 1,113 11,715
1994 10,450 1,711 12,161
1995 10,595 2,421 13,016
1996 10,702 3,162 13,864
* August 1, 1991 (commencement of operations) to March 31, 1992.
If the investor had not reinvested dividends and capital gain
distributions, the total value of the hypothetical investment as of March 31,
1996 would have been $10,648, and the investor would have received a total of
$2,775 in distributions. If the Adviser had not waived or reimbursed certain
Fund expenses in each of the fiscal years, returns would have been lower.
For the Tax-Free Intermediate Fund:
Value of Original Shares
Plus Shares Obtained Value of Shares
Through Reinvestment Acquired Through
of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- ------------- ------------------------- ------------------------ -----------
1993* $10,040 $ 186 $10,226
1994 9,980 640 10,620
1995 10,047 1,187 11,234
1996 10,234 1,462 11,696
* November 9, 1992 (commencement of operations) to March 31, 1993.
27
<PAGE>
If the investor had not reinvested dividends and capital gain
distributions, the total value of the hypothetical investment as of March 31,
1996 would have been $10,227, and the investor would have received a total of
$1,587 in distributions. If the Adviser had not waived or reimbursed certain
Fund expenses in each fiscal year, returns would have been lower.
Total Return Calculations Average annual total return quotes used in
each Fund's advertising and other promotional materials ("Performance
Advertisements") are calculated according to the following formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, the
Maryland Tax-Free and Pennsylvania Tax-Free's maximum 2.75% initial sales charge
or the Tax-Free Intermediate's maximum 2.00% initial sales charge is deducted
from the initial $1,000 payment and all dividends and capital gain distributions
by a Fund are assumed to have been reinvested at net asset value on the
reinvestment dates during the period. Cumulative and average annual returns for
the year ended March 31, 1996 are contained in each Fund's prospectus. The
front-end sales charge is waived for all purchases of Primary Shares of the
Tax-Free Intermediate Fund made through December 31, 1996.
YIELD Yield figures used in each Fund's Performance Advertisements are
calculated by dividing the Fund's net investment income for a 30-day period
("Period"), by the average number of shares entitled to receive dividends during
the Period, and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the maximum offering price per share at the end of
the Period. Yield quotations are calculated according to the following formula:
6
YIELD = 2[(a-b + 1) - 1]
---
cd
where: a = dividends and interest earned during the Period
b = expenses accrued for the Period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the Period.
Except as noted below, in determining net investment income earned
during the Period (variable "a" in the above formula), each Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity based on the market
28
<PAGE>
value of the obligation (including actual accrued interest) on the last business
day of the Period or, if the obligation was purchased during the Period, the
purchase price plus accrued interest and (2) dividing the yield to maturity by
360, and multiplying the resulting quotient by the market value of the
obligation (including actual accrued interest). Once interest earned is
calculated in this fashion for each debt obligation held by a Fund, interest
earned during the Period is then determined by totalling the interest earned on
all debt obligations. For purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to be the next date on
which the obligation reasonably can be expected to be called or, if none, the
maturity date.
Tax-exempt yield is calculated according to the same formula except
that a = interest exempt from federal income tax earned during the Period. This
tax-exempt yield is then translated into tax equivalent yield according to the
following formula:
TAX EQUIVALENT YIELD = ( E ) = t
-----
l - p
E = tax-exempt yield
p = stated income tax rate
t = taxable yield
From time to time, the Maryland Tax-Free Fund may also illustrate the
effect of tax equivalent yields using information such as that set forth below:
<TABLE>
<CAPTION>
Federal State & Taxable Yield
Marginal Local Blended
Single MFJ Rates Rates ^ Rate 5.00% 5.50% 6.00% 6.50% 7.00%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Not over $24,000 Not over $40,100 15.0% 8.0% 21.8% 3.91% 4.30% 4.69% 5.08% 5.47%
$24,000 to $58,150 $40,100 to $96,900 28.0% 8.0% 33.8% 3.31% 3.64% 3.97% 4.31% 4.64%
$58,150 to $121,300 $96,900 to $147,700 31.0% 8.0% 36.5% 3.17% 3.49% 3.81% 4.13% 4.44%
$121,300 to $263,750 $147,700 to $263,750 36.0% 8.0% 41.1% 2.94% 3.24% 3.53% 3.83% 4.12%
Over $263,750 Over $263,750 39.6% 8.0% 44.4% 2.78% 3.06% 3.33% 3.61% 3.89%
</TABLE>
^ Based on 1996 tax rates using a state rate of 5% and a local rate of 60% of
the 5% state rate, or 3%.
Rate limits for high income taxpayers have been eliminated for tax years
after 12/31/94.
From time to time, the Pennsylvania Tax-Free Fund may also illustrate
the effect of tax equivalent yields using information such as that set forth
below:
<TABLE>
<CAPTION>
Marginal State & Taxable Yield
Federal Local Blended
Single MFJ Rates ^ Rates ^ Rate 5.00% 5.50% 6.00% 6.50% 7.00%
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Not over $24,000 Not over $40,100 15.0% 2.8% 17.4% 4.13% 4.54% 4.96% 5.37% 5.78%
$24,000 to $58,150 $40,100 to $96,900 28.0% 2.8% 30.0% 3.50% 3.85% 4.20% 4.55% 4.90%
$58,150 to $121,300 $96,900 to $147,700 31.0% 2.8% 32.9% 3.35% 3.69% 4.02% 4.36% 4.69%
$121,300 to $263,750 $147,700 to $263,750 36.0% 2.8% 37.8% 3.11% 3.42% 3.73% 4.04% 4.35%
Over $263,750 Over $263,750 39.6% 2.8% 41.3% 2.94% 3.23% 3.52% 3.82% 4.11%
^ Based on 1996 tax rates.
29
<PAGE>
From time to time, the Tax-Free Intermediate Fund may also illustrate
the effect of tax equivalent yields using information such as that set forth
below:
</TABLE>
<TABLE>
<CAPTION>
Marginal Taxable Yield
Federal
Single MFJ Rates ^ 5.00% 5.50% 6.00% 6.50% 7.00%
- ----------------------------------------------------------------------------------------------------
<S> <C>
Not over $24,000 Not over $40,100 15.0% 4.25% 4.68% 5.10% 5.53% 5.95%
$24,000 to $58,150 $40,100 to $96,900 28.0% 3.60% 3.96% 4.32% 4.68% 5.04%
$58,150 to $121,300 $96,900 to $147,700 31.0% 3.45% 3.80% 4.14% 4.49% 4.83%
$121,300 to $263,750 $147,700 to $263,750 36.0% 3.20% 3.52% 3.84% 4.16% 4.48%
Over $263,750 Over $263,750 39.6% 3.02% 3.32% 3.62% 3.93% 4.23%
</TABLE>
^ Based on 1996 tax rates
For the 30-day period ended March 31, 1996, the Maryland Tax-Free
Fund's yield and tax equivalent yield (assuming a 23% combined tax rate) were
5.00% and 6.49%, respectively. The Pennsylvania Tax-Free Fund's yield and tax
equivalent yield (assuming an 17.8% combined tax rate) for the same period were
5.19% and 6.31%, respectively. The Tax-Free Intermediate Fund's yield and tax
equivalent yield (assuming a 15% tax rate) for the same period were 4.33% and
5.09%, respectively.
OTHER INFORMATION From time to time, in reports and promotional
literature, each class of shares of a Fund's performance may be compared to
indices of broad groups of managed and unmanaged securities considered to be
representative of or similar to Fund portfolio holdings such as the Bond Buyer
20, Lipper General Purpose Municipal Bond Average, Lipper Maryland State
Municipal Bond Fund Average (Maryland Tax-Free Fund only) and Shearson
Lehman/American Express Municipal Bond Index. Securities indices may take no
account of the cost of investing or of any tax consequences of distributions.
The Funds may invest in securities not included in the indices to which they
make such comparisons.
A Fund may also cite rankings and ratings and compare the return of a
class with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. A Fund may also refer in
such materials to mutual fund performance rankings, ratings and comparisons with
funds having similar investment objectives and other mutual funds reported
periodically in national financial publications such as MONEY Magazine, FORBES,
BUSINESS WEEK and BARRON's.
A Fund may compare the investment return of a class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on a certificate of
deposit, which remains at a specified rate for a specified period of time, the
return of each class of shares will vary.
In advertising, the Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the
30
<PAGE>
Consumer Price Index and Chase Global Data and Research may supply data
concerning interest rates, college tuitions, the rate of inflation, Social
Security benefits, mortality statistics and other relevant information. The Fund
may use other recognized sources as they become available.
The Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
The Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
The Fund may also include in advertising biographical information on
key investment and managerial personnel.
The Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount,
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through low price levels.
The Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $35.8 billion as of June 30,
1996.
THE TRUST'S TRUSTEES AND OFFICERS
The Trust's officers are responsible for the operation of the Trust
under the direction of the Board of Trustees. The officers and trustees and
their principal occupations during the past five years are set forth below. An
asterisk (*) indicates those officers and/or trustees who are "interested
persons" of the Trust as defined by the Investment Company Act of 1940 ("1940
Act"). The business address of each officer and trustee is 111 South Calvert
Street, Baltimore, Maryland, unless otherwise indicated.
JOHN F. CURLEY [57], JR.*, Chairman of the Board and Trustee; Vice
Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.;
Director of Legg Mason Fund Adviser, Inc. and Western Asset Management Company;
Officer and/or Director of various other affiliates of Legg Mason, Inc.;
President and Director of three Legg Mason funds; Chairman of the Board,
President and Trustee of one Legg Mason fund; Chairman of the Board and Director
of four Legg Mason funds.
31
<PAGE>
EDMUND J. CASHMAN, JR.* [59], President and Trustee; Senior Executive
Vice President and Director of Legg Mason, Inc.; Officer and/or Director of
various other affiliates of Legg Mason, Inc.; President and Director of one Legg
Mason fund; Director of Worldwide Value Fund, Inc.
RICHARD G. GILMORE [69], Trustee; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in manufacture and
sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia Electric
Company); Director of six Legg Mason funds; and Trustee of two Legg Mason funds.
Formerly: Senior Vice President and Chief Financial Officer of Philadelphia
Electric Company (now PECO Energy Company); Executive Vice President and
Treasurer, Girard Bank, and Vice President of its parent holding company, the
Girard Company; and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH [71], Trustee; 14201 Laurel Park Drive, Suite 104,
Laurel, Maryland. Real Estate Developer and Investor; President and Director of
Resource Enterprises, Inc. (real estate brokerage); Chairman of Resource Realty
LLC (management of retail and office space); Partner in Greater Laurel Health
Park Ltd. Partnership (real estate investment and development); Director of six
Legg Mason funds; and Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN [53], Trustee; The Baltimore Museum of Art, Art Museum
Drive, Baltimore, Maryland. Director of the Baltimore Museum of Art; Director
of six Legg Mason funds; Trustee of two Legg Mason funds.
JILL E. McGOVERN [52], Trustee; 1500 Wilson Boulevard, Arlington,
Virginia. Chief Executive of the Marrow Foundation. Director of six Legg Mason
funds; Trustee of two Legg Mason funds. Formerly: Executive Director of the
Baltimore International Festival (January 1991 - March 1993); and Senior
Assistant to the President of The Johns Hopkins University (1986-1991).
T. A. RODGERS [62], Trustee; 2901 Boston Street, Baltimore, Maryland.
Principal, T. A. Rodgers & Associates (management consulting); Director of six
Legg Mason funds; Trustee of two Legg Mason funds. Formerly: Director and Vice
President of Corporate Development, Polk Audio, Inc. (manufacturer of audio
components).
EDWARD A. TABER, III* [53], Trustee; Senior Executive Vice President
of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice Chairman and Director
of Legg Mason Fund Adviser, Inc.; Director of three Legg Mason funds; President
and Director of two Legg Mason funds; Trustee of two Legg Mason funds; Vice
President of Worldwide Value Fund, Inc. Formerly: Executive Vice President of
T. Rowe Price-Fleming International, Inc. (1986-1992) and Director of the
Taxable Fixed Income Division at T. Rowe Price Associates, Inc. (1973-1992).
The executive officers of the Trust, other than those who also serve as
Trustees, are:
MARIE K. KARPINSKI* [47], Vice President and Treasurer; Treasurer of
Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of eight Legg Mason
funds; and Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice President of
Legg Mason.
32
<PAGE>
KATHI D. BAIR* [31], Assistant Secretary; Secretary and/or Assistant
Treasurer of three Legg Mason funds; employee of Legg Mason.
BLANCHE P. ROCHE* [48], Assistant Secretary and Assistant Vice
President; Assistant Secretary and Assistant Vice President of seven Legg Mason
funds; employee of Legg Masonsince 1991. Formerly: Manager of Consumer
Financial Services, Primerica Corporation (1989-1991).
Officers and Trustees of the Trust who are "interested persons" thereof
receive no salary or fees from the Trust. Independent Trustees of the Trust
receive a fee of $400 annually for serving as a trustee and a fee of $400 for
each meeting of the Board of Trustees attended by him or her.
The Nominating Committee of the Board of Trustees is responsible for
the selection and nomination of disinterested trustees. The Committee is
composed of Messrs. Gilmore, Haugh, Lehman and Rodgers and Dr. McGovern.
On May 31, 1996, the trustees and officers of the Trust owned, in the
aggregate, less than 1% of the outstanding shares of the Maryland Tax-Free Fund,
the Pennsylvania Tax-Free Fund and the Tax-Free Intermediate Fund.
The following table provides certain information relating to the
compensation of the Trust's trustees for the fiscal year ended March 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Compensation From Total Compensation From Trust and
Name of Person and Position the Trust* Fund Complex Paid to Trustees**
<S> <C>
John F. Curley, Jr. -
Chairman of the Board and
Trustee None None
Edward A. Taber, III -
Trustee None None
Edmund J. Cashman, Jr.-
President and Trustee None None
Richard G. Gilmore -
Trustee $2,000 $21,600
Charles F. Haugh -
Trustee $2,000 $23,600
Arnold L. Lehman -
Trustee $2,000 $23,600
Jill E. McGovern -
Trustee $2,000 $23,600
T. A. Rodgers -
Trustee $2,000 $21,600
==========================================================================================================
</TABLE>
33
<PAGE>
* Represents fees paid to each trustee during the fiscal year ended
March 31, 1996.
** Represents aggregate compensation paid to each trustee during the
calendar year ended December 31, 1995 by all the Legg Mason funds on
which Board each individual sits.
THE FUNDS' INVESTMENT ADVISER
The Adviser, a Maryland corporation, is located at 111 South Calvert
Street, Baltimore, Maryland 21202. The Adviser is a wholly owned subsidiary of
Legg Mason, Inc., which also is the parent of Legg Mason Wood Walker,
Incorporated. The Adviser serves as each Fund's investment adviser and manager
under an Investment Advisory and Management Agreement ("Advisory Agreement")
dated March 25, 1991. Continuation of the Agreement was most recently approved
by the Board of Trustees on October 27, 1995. The Advisory Agreement provides
that, subject to overall direction by the Board of Trustees, the Adviser manages
the investment and other affairs of each Fund. The Adviser is responsible for
managing each Fund consistent with the Funds' investment objectives and policies
described in their Prospectuses and this Statement of Additional Information.
The Adviser also is obligated to (a) furnish each Fund with office space and
executive and other personnel necessary for the operations of the Fund; (b)
supervise all aspects of each Fund's operations; (c) bear the expense of certain
informational and purchase and redemption services to each Fund's shareholders;
(d) arrange, but not pay for, the periodic updating of prospectuses, proxy
material, tax returns and reports to shareholders and state and federal
regulatory agencies; and (e) report regularly to the Trust's officers and
trustees. The Adviser and its affiliates pay all the compensation of trustees
and officers of the Trust who are employees of the Adviser. Each Fund pays all
its other expenses which are not expressly assumed by the Adviser. These
expenses include, among others, interest expense, taxes, auditing and accounting
fees, distribution fees, if any, fees and expenses of the independent trustees
of the Trust, brokerage fees and commissions, expenses of preparing prospectuses
and of printing and distributing prospectuses annually to existing shareholders,
custodian charges, transfer agency fees, legal expenses, insurance expenses,
association membership dues, governmental fees, expenses of registering and
qualifying Fund shares for sale under federal and state law, and the expense of
reports to shareholders, shareholders' meetings and proxy solicitations. Each
Fund also pays the expenses for maintenance of its financial books and records,
including computation of the Fund's daily net asset value per share and
dividends. Each Fund is also liable for such nonrecurring expenses as may arise,
including litigation to which the Fund may be a party. Each Fund also may have
an obligation to indemnify the trustees and officers of the Trust with respect
to litigation.
Under the Advisory Agreement, the Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
34
<PAGE>
With respect to each Fund, the Advisory Agreement terminates
automatically upon assignment. It also is terminable at any time without penalty
by vote of the Trust's Board of Trustees, by vote of a majority of each Fund's
outstanding voting securities, or by the Adviser, on not less than 60 days'
notice to the other party to the Agreement and may be terminated immediately
upon the mutual written consent of both parties to the Agreement.
As explained in the Prospectus, the Adviser receives for its services a
fee, calculated daily and payable monthly, at an annual rate of 0.55% of the
average daily net assets of each Fund. The Adviser has agreed to waive its fees
and reimburse each Fund if and to the extent its expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) exceed during any month annual
rates of each Fund's average daily net assets for such month, or certain asset
levels, whichever occurs first, in accordance with the following schedules:
Rate Expiration Date Asset Level
For the Maryland Tax-Free Fund:
Primary Shares:
0.65% December 31, 1996 $200 million
0.60% March 31, 1996 $200 million
0.55% December 31, 1994 $200 million
0.50% June 30, 1994 $200 million
0.45% December 31, 1993 $175 million
0.40% December 31, 1992 $150 million
Navigator Shares:
0.40% December 31, 1996 $200 million
0.35% March 31, 1996 $200 million
For the Pennsylvania Tax-Free Fund:
Primary Shares:
0.65% December 31, 1996 $125 million
0.55% March 31, 1996 $125 million
0.50% December 31, 1994 $125 million
0.45% June 30, 1994 $125 million
0.40% December 31, 1993 $100 million
0.35% July 31, 1993 $100 million
Navigator Shares:
0.40% December 31, 1996 $125 million
0.30% March 31, 1996 $125 million
For the Tax-Free Intermediate Fund:
Primary Shares:
0.65% December 31, 1996 $100 million
35
<PAGE>
0.35% December 31, 1994 $100 million
0.30% June 30, 1994 $100 million
0.30% December 31, 1993 $75 million
0.20% March 31, 1993 $75 million
Navigator Shares:
0.40% December 31, 1996 $100 million
For the years ended March 31, 1996, 1995 and 1994, the Maryland
Tax-Free Fund paid advisory fees of $809,671, $778,739 and $806,670 (prior to
fees waived of $541,013, $569,982 and $707,590), respectively. For the year
ended March 31, 1996, 1995 and 1994, the Pennsylvania TaxFree Fund paid advisory
fees of $363,545, $342,774 and $327,975 (prior to fees waived of $320,401,
$326,376 and $327,975), respectively. For the years ended March 31, 1996, 1995
and 1994, TaxFree Intermediate Fund paid advisory fees of $300,560, $280,013 and
$279,875 (prior to fees waived of $287,375, $280,013 and $279,875),
respectively.
Under the Advisory Agreement, each Fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated or until the right
is withdrawn in writing by the Adviser.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, the Trust and the Adviser have adopted policies that
restrict securities trading in the personal accounts of portfolio managers and
others who normally come into advance possession of information on portfolio
transactions. These policies comply, in all material respects, with the
recommendations of the Investment Company Institute.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of each Fund's shares pursuant to an
Underwriting Agreement with the Trust. The Underwriting Agreement obligates Legg
Mason to promote the sale of Fund shares and to pay certain expenses in
connection with its distribution efforts, including expenses for the printing
and distribution of prospectuses and periodic reports used in connection with
the offering to prospective investors (after the prospectuses and reports have
been prepared, set in type and mailed to existing shareholders at the Fund's
expense) and for supplementary sales literature and advertising costs.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
with principal offices at 200 Gibraltar Road, Horsham, Pennsylvania, may act as
a dealer for Navigator Shares pursuant to a Dealer Agreement with Legg Mason.
Neither Legg Mason nor Fairfield receives any compensation from the Funds for
its activities in selling Navigator Shares.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits each Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. Under the Plan, the aggregate
fees may not exceed an annual rate of 0.25% of the Fund's average daily net
36
<PAGE>
assets attributable to Primary Shares. Distribution activities for which such
payments may be made include, but are not limited to, compensation to persons
who engage in or support distribution and redemption of shares, printing of
prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses, all with respect to Primary Shares only. Legg Mason may
pay all or a portion of the fees to its investment executives. The Plan has been
amended, effective July 1, 1993, to make clear that, of the aggregate 0.25%
fees, 0.125% is paid for distribution services and 0.125% is paid for ongoing
services to shareholders. The amendments also specify that the Fund may not pay
more in distribution fees than 6.25% of total new gross assets, plus interest,
as specified in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD").
Continuation of the Plan was most recently approved on October 27, 1995
by the Board of Trustees of the Trust, including a majority of the trustees who
are not "interested persons" of the Trust as that term is defined in the 1940
Act and who have no direct or indirect financial interest in the operation of
the Plan or the Underwriting Agreement ("12b-1 Trustees"). In approving the
continuance of the Plan, in accordance with the requirements of Rule 12b-1, the
trustees determined that there was a reasonable likelihood that the Plan would
benefit each Fund and its Primary Class shareholders. The trustees considered,
among other things, the extent to which the potential benefits of the Plan to
each Fund's Primary Class shareholders outweighed the costs of the Plan; the
likelihood that the Plan would succeed in producing such potential benefits; the
merits of certain possible alternatives to the Plan; and the extent to which
the retention of assets and additional sales of each Fund's Primary Shares
would be likely to maintain or increase the amount of compensation paid by a
Fund to its Adviser.
In considering the costs of the Plan, the trustees gave particular
attention to the fact that any payments made by a Fund to Legg Mason under the
Plan would increase the Fund's level of expenses in the amount of such payments.
Further, the trustees recognized that the Adviser would earn greater management
fees if a Fund's assets were increased, because such fees are calculated as a
percentage of the Fund's assets and thus would increase if net assets increase.
The trustees further recognized that there can be no assurance that any of the
potential benefits described below would be achieved if the Plan were
implemented.
Among the potential benefits of the Plan, the trustees noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
each Fund's Primary Shares and to maintain and enhance the level of services
they provide to the Funds' Primary Class shareholders. These efforts, in turn,
could lead to increased sales and reduced redemptions, eventually enabling a
Fund to achieve economies of scale and lower per share operating expenses. Any
reduction in such expenses would serve to offset, in whole or in part, the
additional expenses incurred by a Fund in connection with the Plan. Furthermore,
the investment management of a Fund could be enhanced, as net inflows of cash
from new sales might enable its portfolio manager to take advantage of
attractive investment opportunities, and reduced redemptions could eliminate the
potential need to liquidate attractive securities positions in order to raise
the funds necessary to meet the redemption requests.
As compensation for its services and expenses, Legg Mason receives from
each Fund an annual distribution fee equivalent to 0.125% of its average daily
net assets attributable to Primary
37
<PAGE>
Shares and a service fee equivalent to 0.125% of its average daily net assets
attributable to Primary Shares in accordance with the Plan. The distribution
and service fees are calculated daily and payable monthly. Legg Mason
has voluntarily agreed to waive its fees and reimburse each Fund if and to
the extent its expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month annual rates of each Fund's
average daily net assets attributable to Primary Shares for such month, or
certain asset levels, whichever occurs first, in accordance with the schedules
described previously.
For the years ended March 31, 1996, 1995 and 1994, the Maryland
Tax-Free Fund paid distribution and service fees of $368,033, $353,972 and
$366,668, respectively, to Legg Mason. For the years ended March 31, 1996, 1995
and 1994, the Pennsylvania Tax-Free Fund paid distribution and service fees of
$165,248, $155,806 and $98,689, respectively, to Legg Mason. For the years ended
March 31, 1996 and 1995, the Tax-Free Intermediate Fund paid distribution and
service fees of $136,619 and $49,798, respectively, to Legg Mason, and for the
year ended March 31, 1994, Legg Mason waived all distribution and service fees
for the Tax-Free Intermediate Fund.
The Plan will continue in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Trustees, including a
majority of the 12b-1 Trustees, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated with respect to a Fund
by a vote of a majority of 12b-1 Trustees or by vote of a majority of the
outstanding Primary Shares of the Fund. Any change in the Plan that would
materially increase the distribution costs to a Fund requires shareholder
approval; otherwise, the Plan may be amended by the trustees, including a
majority of the 12b-1 Trustees.
In accordance with Rule 12b-1, the Plan provides that Legg Mason will
submit to the Trust's Board of Trustees, and the trustees will review at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Trustees will be
committed to the discretion of such Independent Trustees.
For the year ended March 31, 1996, Legg Mason incurred the following
expenses:
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
Fund Fund Fund
------------ ---------------- ---------------
Compensation to sales
personnel $163,000 $ 74,000 $ 61,000
Advertising 17,000 16,000 40,000
Printing and mailing of
prospectuses to
prospective shareholders 58,000 50,000 94,000
Other 199,000 169,000 215,000
------------ ---------------- ---------------
Total expenses $437,000 $309,000 $410,000
============ ================ ===============
38
<PAGE>
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute each Fund's
Primary Shares.
Initial sales charges on purchases of shares of the Funds are paid to
Legg Mason. For the year ended March 31, 1996, Legg Mason received $347,000 from
sales of the Maryland Tax-Free Fund, $174,000 from sales of the Pennsylvania
Tax-Free Fund and $100,000 from sales of the TaxFree Intermediate Fund. For the
year ended March 31, 1995, Legg Mason received $475,000 from sales of the
Maryland Tax-Free Fund, $117,000 from sales of the Pennsylvania Tax-Free Fund
and $102,000 from sales of the Tax-Free Intermediate Fund. For the year ended
March 31, 1994, Legg Mason received $992,000 from sales of the Maryland Tax-Free
Fund, $471,000 from sales of the Pennsylvania Tax-Free Fund and $530,000 from
sales of the Tax-Free Intermediate Fund. Initial sales charges are waived on
purchases of Primary Shares of the Tax-Free Intermediate Fund made through
December 31, 1996.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under each Advisory Agreement, the Adviser is responsible for the
execution of portfolio transactions. Corporate, municipal and government debt
securities are generally traded on the over-the-counter ("OTC") market on a
"net" basis without a stated commission, through dealers acting for their own
account and not as brokers. Prices paid to a dealer in debt securities will
generally include a "spread," which is the difference between the price at which
the dealer is willing to purchase and sell the specific security at the time,
and includes the dealer's normal profit. Some portfolio transactions may be
executed through brokers acting as agent. In selecting brokers or dealers, the
Adviser must seek the most favorable price (including the applicable dealer
spread) and execution for such transactions, subject to the possible payment as
described below of higher brokerage commissions to brokers who provide research
and analysis. The Funds may not always pay the lowest commission or spread
available. Rather, in placing orders on behalf of a Fund, the Adviser also takes
into account such factors as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, the
Adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the Adviser for its use, may place orders
with brokers who provide supplemental investment and market research and
securities and economic analysis, and may pay to these brokers a higher
brokerage commission than may be charged by other brokers. Such research and
analysis may be useful to the Adviser in connection with services to clients
other than the Funds. The Adviser's fee is not reduced by reason of its
receiving such brokerage and research services.
Although the Funds do not expect to purchase securities on a commission
basis, the Funds may use Legg Mason to effect agency transactions in listed
securities at commission rates and under circumstances consistent with the
policy of best execution. Commissions paid to Legg
39
<PAGE>
Mason will not exceed "usual and customary brokerage commissions." Rule
17e-1 under the 1940 Act defines "usual and customary" commissions to include
amounts which are "reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the OTC market,
the Funds generally will deal with responsible primary market makers unless a
more favorable execution can otherwise be obtained.
Except as permitted by SEC rules or orders, the Funds may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. The Trust's Board of Trustees has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby each Fund may purchase securities
that are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. These procedures, among other things, limit
a Fund's investment in the amount of securities of any class of securities
offered in an underwriting in which Legg Mason or any of its affiliated persons
is a participant so that: (i) the Fund together with all other registered
investment companies advised by the Adviser, may not purchase more than 4% of
the principal amount of the offering of such class or $500,000 in principal
amount, whichever is greater, but in no event greater than 10% of the principal
amount of the offering; and (ii) the consideration to be paid by the Fund in
purchasing the securities being offered may not exceed 3% of the total assets of
the Fund. In addition, a Fund may not purchase securities during the existence
of an underwriting if Legg Mason is the sole underwriter of those securities.
Because Legg Mason is a principal underwriter of municipal obligations, the
Funds may be precluded from purchasing certain new issues of municipal
securities or may be permitted to make only limited investments therein.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from executing transactions on an exchange for its affiliates, such as the
Funds, unless the affiliate expressly consents by written contract. The Advisory
Agreement expressly provides such consent.
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by the Adviser. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this procedure may adversely affect the price or quantity of the security
available to a particular Fund. In other cases, however a Fund's ability to
participate in large-volume transactions may produce better executions and
prices.
Portfolio Turnover
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. Each Fund's portfolio turnover rate may vary from year to year,
depending on market conditions. A high turnover rate (100% or more) will involve
correspondingly greater transaction costs, which will be borne directly by a
Fund. It may also change the character of capital gains, if any, realized by a
Fund and would affect dividends paid to shareholders because short-term capital
gains are taxable as ordinary income. For the years ended March 31, 1996 and
1995, the Maryland Tax-Free Fund's portfolio turnover rates were 14.1% and 9.5%,
respectively; the Pennsylvania Tax-Free Fund's portfolio turnover rates were
40
<PAGE>
17.21% and 2.08%, respectively; and the Tax-Free Intermediate Fund's portfolio
turnover rates were 0% and 24.8%, respectively.
THE TRUST'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston
Massachusetts, serves as custodian of the Funds' assets. BFDS, P.O. Box 953,
Boston, Massachusetts 02103, serves as transfer and dividend-disbursing agent
and administrator of various shareholder services. Legg Mason also assists BFDS
with certain of its duties as transfer agent, for which BFDS pays Legg Mason a
fee. Each Fund reserves the right, upon 60 days' written notice, to make other
charges to investors to cover administrative costs.
OTHER INFORMATION
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of each Fund could, under
certain circumstances, be held personally liable for the obligations of that
Fund and of the other Funds. However, the Trust's Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust or the Funds and
requires that notice of such disclaimer be given in each note, bond, contract,
instrument, certificate or undertaking made or issued by the trustees or by any
officers or officer by or on behalf of the Trust, a Fund, the trustees or any of
them in connection with the Trust. The Declaration of Trust provides for
indemnification from each Fund's property for all losses and expenses of any
Fund shareholder held personally liable for the obligations of that Fund. Thus,
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which a Fund itself would be unable to
meet its obligations, a possibility which the Adviser believes is remote . Upon
payment of any liability incurred by a Fund shareholder solely by reason of
being or having been a shareholder, the shareholder paying such liability will
be entitled to reimbursement from the general assets of that Fund. The trustees
intend to conduct the operations of each Fund in such a way as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of each
Fund.
THE TRUST'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036, serves as counsel to the Trust.
THE TRUST'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, Maryland
21202, have been selected by the Trustees to serve as the Trust's independent
accountants.
FINANCIAL STATEMENTS
The Statements of Net Assets as of March 31, 1996; the Statements of
Operations for the year ended March 31, 1996; the Statements of Changes in Net
Assets for the years ended March
41
<PAGE>
31, 1996 and 1995; the Financial Highlights for the periods presented, the
Notes to Financial Statements and the Reports of the Independent Accountants,
for each Fund, all of which are included in the respective annual reports
of the Legg Mason Maryland Tax-Free Income Trust, the Legg Mason Pennsylvania
Tax-Free Income Trust and the Legg Mason Tax-Free Intermediate-Term Income
Trust for the year ended March 31, 1996, are hereby incorporated by reference
in this Statement of Additional Information.
42
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
1. Description of Moody's Investors Service, Inc. ("Moody's") Ratings
Municipal Bonds
Aaa--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Municipal Notes
Moody's ratings for state and municipal notes and other short-term
obligations are designated Moody's Investment Grade ("MIG") and for variable
rated demand obligations are designated Variable Moody's Investment Grade
("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term credit risk. Notes bearing the designation
MIG-1 or VMIG-1 are of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic
A-1
<PAGE>
rating, the modifier 2 indicates a mid-range rating; the modifier 3
indicates that the issue ranks in the lower end of its generic rating.
Commercial Paper
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers with a Prime-1 ("P-1") rating will normally have the following
characteristics: (1) leading market posiitions in well-established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (4) broad
margins in earning coverage of fixed financial charges and high interanl cash
generation; and (5) well-established access to a range of financial markets and
assured sources of alternate liquidity.
2. Description of Standard & Poor's ("S&P")
Municipal Bonds
AAA--This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds which are rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
Municipal Notes
Municipal notes with maturities of three years or less are usually given
note ratings by S&P to distinguish more clearly the credit quality of notes as
compared to bonds. Notes rated SP-1 have a very strong or strong capacity to pay
principal and
A-2
<PAGE>
interest. Those issues determined to possess overwhelming safety
characteristics are given the designation SP-1+.
Commercial Paper
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
3. Description of Fitch Investors Service, Inc. ("Fitch") Ratings
Investment Grade Bonds
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonable foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+".
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse change in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Short-term Ratings
A-3
<PAGE>
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
A-4
<PAGE>
LEGG MASON TAX-FREE INCOME FUND
Table of Contents
Page
Additional Information About Investment
Limitations and Policies 3
Additional Purchase and Redemption Information 15
Special Factors Affecting Maryland and
Pennsylvania 18
Additional Tax Information 22
Valuation of Fund Shares 24
Performance Information 24
The Trust's Trustees and Officers 29
The Funds' Investment Adviser 33
The Funds' Distributor 35
Portfolio Transactions and Brokerage 38
The Trust's Custodian and Transfer and
Dividend-Disbursing Agent 39
Other Information 40
The Trust's Legal Counsel 40
The Trust's Independent Accountants 40
Financial Statements 40
Appendix A: Ratings of Securities A-1
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offering made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by a Fund or its distributor. The Prospectuses
and this Statement of Additional Information do not constitute an offering by
any Fund or by its distributor in any jurisdiction in which such offering may
not lawfully be made.
<PAGE>
Legg Mason Tax-Free Income Fund
Part C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The financial statements of the Maryland
Tax-Free Income Trust, the Pennsylvania Tax-Free Income Trust
and the Tax-Free Intermediate-Term Income Trust for the year
ended March 31, 1996 and the reports of the independent
accountants thereon are incorporated into the Statement of
Additional Information by reference to each Portfolio's Annual
Report to Shareholders for the same period.
Each Fund's Financial Data Schedule appears as Exhibit 27.1
through 27.3.
(b) Exhibits
(1) (a) Declaration of Trust1/
(b) Amendment dated January 31, 1991 to the
Declaration of Trust2/
(c) Amendment dated March 11, 1991 to the
Declaration of Trust3/
(d) Amendment dated July 30, 1992 to the
Declaration of Trust5/
(2) By-Laws1/
(3) Voting trust agreement - none
(4) Form of specimen security2/
(5) (a) Investment Advisory Contract with respect to
the Maryland, Pennsylvania
and High Quality Portfolios4/
(b) Advisory Fee Agreement with respect
to the Tax-Free Intermediate-Term
Income Trust7/
(6) (a) Underwriting Agreement with respect to the
Maryland, Pennsylvania and Tax-Free
Intermediate-Term Income Portfolios6/
(b) Amended Underwriting Agreement with respect
to the Maryland, Pennsylvania and Tax-Free
Intermediate-Term Income Portfolios -- filed
herewith
(c) Dealer Agreement with respect to Navigator
Shares -- filed herewith
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement4/
-
(9) Transfer Agency and Service Agreement4/
-
(10) (a) Opinion and consent of counsel with respect
to Registrant and the Maryland, Pennsylvania
and High Quality Portfolios 2/
(b) Opinion and consent of counsel with respect
to the Tax-Free Intermediate-Term Income
Portfolio5/
(11) Other opinions, appraisals, rulings and consents -
Accountant's consent -- filed herewith
(12) Financial statements omitted from Item 23 - none
(13) (a) Agreement for providing initial capital with
respect to the Registrant and the Maryland,
Pennsylvania and High Quality Portfolios2/
(b) Agreement for providing initial capital with
respect to the Tax-Free Intermediate-Term
Income Portfolio5/
<PAGE>
(14) Prototype Retirement Plan - none
(15) (a) Plan pursuant to Rule 12b-1 with respect to
the Maryland, Pennsylvania and Tax-Free
Intermediate-Term Income Portfolios6/
(b) Amended Plan pursuant to Rule 12b-1 with
respect to the Maryland, Pennsylvania and
Tax-Free Intermediate-Term Income
Portfolios -- filed herewith
(16) (a) Schedule for computation of performance
quotations for Legg Mason Maryland Tax-Free
Income Trust -- filed herewith
(b) Schedule for computation of performance
quotations for Legg Mason Pennsylvania Tax-
Free Income Trust -- filed herewith
(c) Schedule for computation of performance
quotations for Legg Mason Tax-Free
Intermediate-Term Income Trust -- filed
herewith
(17) Financial Data Schedules -- filed herewith
(18) Plan Pursuant to Rule 18f-3 -- none
1/ Incorporated herein by reference to corresponding exhibit of the initial
Registration Statement, SEC File No. 33-37971, filed November 21, 1990.
2/ Incorporated herein by reference to corresponding exhibit of Pre-Effective
Amendment No. 1 to the Registration Statement, SEC File No. 33-37971, filed
February 19, 1991.
3/ Incorporated herein by reference to corresponding exhibit of Pre-Effective
Amendment No. 2 to the Registration Statement, SEC File No. 33-37971, filed
March 19, 1991.
4/ Incorporated herein by reference to corresponding exhibit of Post-Effective
Amendment No. 1 to the Registration Statement, SEC File No. 33-37971, filed
June 11, 1992.
5/ Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 3 to the Registration Statement, SEC File No. 33-37971, filed
August 28, 1992.
6/ Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 5 to the Registration Statement, SEC File No. 33-37971, filed
June 30, 1993.
7/ Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 6 to the Registration Statement, SEC File No. 33-37971, filed
July 29, 1994.
Item 25. Persons Controlled By or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class (as of June 30, 1996)
- -------------- ----------------------
Shares of Capital Stock,
($.001 par value)
<PAGE>
Legg Mason Maryland Tax-Free Income Trust
Primary Shares 4,130
Navigator Shares 0
Legg Mason Pennsylvania Tax-Free Income Trust
Primary Shares 1,986
Navigator Shares 0
Legg Mason High Quality Tax-Free Income Trust
Primary Shares 1
Navigator Shares 0
Legg Mason Tax-Free Intermediate-Term Income Trust
Primary Shares 1,415
Navigator Shares 0
Item 27. Indemnification
This item is incorporated by reference to Item 27 of Part C of Post-Effective
Amendment No. 3 to Registration Statement, SEC File No. 33-37971, filed August
28, 1992.
Item 28. Business and Other Connections of Manager and Investment Adviser
Legg Mason Fund Adviser, Inc. ("Fund Adviser"), the Registrant's manager, is a
registered investment adviser incorporated on January 20, 1982. Fund Adviser is
engaged primarily in the investment advisory business. Fund Adviser serves as
investment adviser or manager for sixteen open-end investment companies or
portfolios and as investment consultant for one closed-end investment company.
Information as to the officers and directors of Fund Adviser is included in its
Form ADV filed on June [ ], 1996 with the Securities and Exchange Commission
(Registration Number 801-16958) and is incorporated herein by reference.
Item 29. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal
underwriter, Legg Mason Wood Walker, Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
Raymond A. Mason Chairman of the None
Board
<PAGE>
John F. Curley, Jr. Vice Chairman Chairman of the
of the Board Board and Trustee
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive President and
Vice President and Trustee
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice Trustee
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
<PAGE>
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
<PAGE>
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
Eileen M. O'Rourke Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
Alexsander M. Stewart Vice President None
<PAGE>
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
* All addresses are 111 South Calvert Street, Baltimore, Maryland
21202, unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
None.
Item 32. Undertakings
Registrant hereby undertakes to provide each person to whom a
prospectus is delivered with a copy of its latest annual
report to shareholders upon request and without charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Tax-Free Income Fund
certifies that it meets all the requirements for effectiveness of this
Post-Effective Amendment No. 9 to its Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore and State of Maryland, on the 29th day of
July, 1996.
Legg Mason Tax-Free Income Fund
By:/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman of the Board and
Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 9 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
Chairman of the Board
/s/ John F. Curley, Jr. and Trustee July 29, 1996
John F. Curley, Jr.
/s/ Edmund J. Cashman, Jr. President and Trustee July 29,1996
Edmund J. Cashman, Jr.
/s/ Edward A. Taber, III Trustee July 29,1996
Edward A. Taber, III
/s/ Charles F. Haugh Trustee July 29,1996
Charles F. Haugh*
/s/ Richard G. Gilmore Trustee July 29,1996
Richard G. Gilmore*
/s/ Arnold L. Lehman Trustee July 29,1996
Arnold L. Lehman*
/s/ Jill E. McGovern Trustee July 29,1996
Jill E. McGovern*
/s/ T. A. Rodgers Trustee July 29,1996
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President July 29,1996
Marie K. Karpinski and Treasurer
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
May 18, 1992, incorporated by reference to Pre-Effective Amendment No. 3, SEC
File No. 33-37971, filed August 28, 1992.
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 7th day of February, 1996, by
and between Legg Mason Tax-Free Income Fund, a Massachusetts business trust
("Trust"), and Legg Mason Wood Walker, Incorporated, a Maryland Trust (the
"Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and has registered its shares of beneficial
interest for sale to the public under the Securities Act of 1933 (the "1933
Act") and various state securities laws; and
WHEREAS, the Trust intends to offer for public sale distinct series of
shares of beneficial interest, each corresponding to a distinct portfolio
("Series"); and
WHEREAS, the Trust wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of the shares of beneficial
interest of each Series as now exists and as hereafter may be established
("Shares") and to furnish certain other services to the Trust as specified in
this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Trust's Board of Trustees and of certain disinterested Trustees in conformity
with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under, the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Trust hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of each Series. The
Distributor, as exclusive agent for the Trust, upon the commencement of
operations of any Series and subject to applicable federal and state law and the
Articles of InTrust and By-Laws of the Trust, shall: (i) promote the Series;
(ii) solicit orders for the purchase of the Shares subject to such terms and
conditions as the Trust may specify; and (iii) accept orders for the purchase of
the Shares on behalf of the Trust (collectively, "Distribution Services").
<PAGE>
The Distributor shall comply with all applicable federal and state laws and
offer the Shares of each Series on an agency or "best efforts" basis under which
the Trust shall issue only such Shares as are actually sold. The Distributor
shall have the right to use any list of shareholders of the Trust or any Series
or any other list of investors which it obtains in connection with its provision
of services under this Agreement; provided, however, that the Distributor shall
not sell or knowingly provide such list or lists to any unaffiliated person
without the consent of the Trust's Board of Trustees.
(b) The Distributor shall provide ongoing shareholder liaison services,
including responding to shareholder inquiries, providing shareholders with
information on their investments, and any other services now or hereafter deemed
to be appropriate subjects for the payments of "service fees" under Article III,
Section 26 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (collectively, "Shareholder Services").
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services, and may enter into agreements with qualified dealers
and other qualified entities to perform recordkeeping and sub-accounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Trust and the Distributor. In making such arrangements, the Distributor
shall act only as principal and not as agent for the Trust. No such dealer or
other entity is authorized to act as agent for the Trust in connection with the
offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of each Series shall be the
net asset value per share (as determined by the Trust) of the outstanding Shares
of the Series plus any applicable sales charge as described in the Registration
Statement of the Trust. The Trust shall furnish the Distributor with a statement
of each computation of public offering price and of the details entering into
such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect the gross proceeds derived from the sale of the Shares,
remit the net asset value thereof to the Trust upon receipt of the proceeds and
retain the sales charge, if any. The Distributor shall receive from each Series
a distribution fee and a service fee at the rates and under the terms and
conditions of the Plan of Distribution ("Plan") adopted by the Trust with
respect
- 2 -
<PAGE>
to the Series, as such Plan is in effect from time to time, and subject to any
further limitations on such fees as the Trust's Board of Trustees may impose.
The Distributor may reallow any or all of the sales charge, distribution fee and
service fee that it has received under this Agreement to such dealers or
sub-accountants as it may from time to time determine; provided, however, that
the Distributor may not reallow to any dealer for Shareholder Services an amount
in excess of .25% of the average annual net asset value of the shares with
respect to which said dealer provides Shareholder Services.
5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Trust with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to each Series filed by the Trust as part of
the Registration Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or sub-accountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Trust, and the Trust shall not be responsible in any way for
any other information, statements or representations given or made by the
Distributor, any dealer or sub-accountant, or their representatives or agents.
Except as specifically provided in this Agreement, the Trust shall bear none of
the expenses of the Distributor in connection with its offer and sale of the
Shares.
7. The Trust agrees at its own expense to register the Shares with the
Securities and Exchange Commission, state and other regulatory bodies, and to
prepare and file from time to time such Prospectuses, Statements of Additional
Information, amendments, reports and other documents as may be necessary to
maintain the Registration Statement. Each Series shall bear all expenses related
to preparing and typesetting such Prospectuses, Statements of Additional
Information, and other materials required by law and such
- 3 -
<PAGE>
other expenses, including printing and mailing expenses, related to such Series'
communications with persons who are shareholders of that Series.
8. The Trust agrees to indemnify, defend and hold the Distributor, its
several officers and Trustees, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers or Trustees, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
required to be stated or necessary to make the Registration Statement not
misleading, provided that in no event shall anything contained in this Agreement
be construed so as to protect the Distributor against any liability to the Trust
or its shareholders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of its duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement, and further provided that the Trust shall not
indemnify the Distributor for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees, and any person who controls the Trust within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or
Trustees, or any such controlling person may incur, under the 1933 Act or under
common law or otherwise, on account of any wrongful act of the Distributor or
any of its employees or arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
the Distributor to the Trust for use in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement or
necessary to make such information not misleading. As used in this paragraph,
the term "employee" shall not include a corporate entity under contract to
provide services to the Trust or any Series, or any employee of such a corporate
entity, unless such person is otherwise an employee of the Trust.
- 4 -
<PAGE>
10. The Trust reserves the right at any time to withdraw all offerings
of the Shares of any or all Series by written notice to the Distributor at its
principal office.
11. The Trust shall not issue certificates representing Shares unless
requested by a shareholder. If such request is transmitted through the
Distributor, the Trust will cause certificates evidencing the Shares owned to be
issued in such names and denominations as the Distributor shall from time to
time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by telex or in writing, the
Trust and State Street Bank and Trust Company, the Trust's transfer agent, of
the orders for repurchase of Shares received by the Distributor since the last
such report, the amount to be paid for such Shares, and the identity of the
shareholders or dealers offering Shares for repurchase. Upon such notice, the
Trust shall pay the Distributor such amounts as are required by the Distributor
for the repurchase of such Shares in cash or in the form of a credit against
moneys due the Trust from the Distributor as proceeds from the sale of Shares.
The Trust reserves the right to suspend such repurchase right upon written
notice to the Distributor. The Distributor further agrees to act as agent for
the Trust to receive and transmit promptly to the Trust's transfer agent
shareholder and dealer requests for redemption of Shares.
13. The Distributor is an independent contractor and shall be agent for
the Trust only in respect to the sale and redemption of the Shares.
14. The services of the Distributor to the Trust under this Agreement
are not to be deemed exclusive, and the Distributor shall be free to render
similar services or other services to others so long as its services hereunder
are not impaired thereby.
15. The Distributor shall prepare reports for the Trust's Board of
Trustees on a quarterly basis showing such information concerning expenditures
related to this Agreement as from time to time shall be reasonably requested by
the Board of Trustees.
- 5 -
<PAGE>
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective with respect to each Series on
the date first written above and, unless sooner terminated as provided herein,
will continue in effect for one year from the above written date. Thereafter, if
not terminated, this Agreement shall continue in effect with respect to each
Series for successive annual periods ending on the same date of each year,
provided that such continuance is specifically approved at least annually (i) by
the Trust's Board of Trustees or (ii) by a vote of a majority of the outstanding
voting securities of the Series (as defined in the 1940 Act), provided that in
either event the continuance is also approved by a majority of the Trust's
Trustees who are not interested persons (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval.
18. This Agreement is terminable with respect to any Series or in its
entirety without penalty by the Trust's Board of Trustees, by vote of a majority
of the outstanding voting securities of each affected Series (as defined in the
1940 Act), or by the Distributor, on not less than 60 days' notice to the other
party and will be terminated upon the mutual written consent of the Distributor
and the Trust. This Agreement will also automatically and immediately terminate
in the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharged
or terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Trust hereby agrees that it
will eliminate from its corporate name any reference to the name of "Legg
Mason." The Trust shall have the non-exclusive use of the name "Legg Mason" in
whole or in part only so long as this Agreement is effective or until such
notice is given.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON TAX-FREE INCOME FUND
By: /s/Kathi D. Bair By: /s/Marie K. Karpinski
------------------------------- ------------------------------
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By: /s/Ana Ramage By: /s/John F. Curley, Jr.
------------------------------- -------------------------------
- 7 -
DEALER AGREEMENT
NAVIGATOR CLASS OF THE LEGG MASON FUNDS
AGREEMENT made as of August 1, 1995, between Legg Mason Wood
Walker, Inc. ("Legg Mason") and Fairfield Group, Inc.
("Fairfield").
WHEREAS each of the entities listed on Schedule A hereto is a
corporation or business trust (each referred to herein as a "Company")
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company;
WHEREAS each Company has established one or more separate series of
shares, the assets and liabilities associated with which are maintained
separately from the assets and liabilities associated with any other series;
WHEREAS the board of directors/trustees of each Company ("Board") has
established in one or more of its series a class of shares of common stock known
as the Navigator Shares ("Navigator Shares");
WHEREAS Legg Mason has entered into a Distribution Contract with
respect to each such series ("Distribution Contract") pursuant to which Legg
Mason serves as principal underwriter in connection with the offering and sale
of the Navigator Shares of the series;
WHEREAS Legg Mason is acting as an underwriter within the meaning of
Article III, Section 26 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.; and
WHEREAS Legg Mason is offering to sell to Fairfield Navigator Shares of
each series listed on Schedule B (each such series referred to herein as a
"Fund"), on the terms set forth below;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein, Legg Mason and Fairfield agree as follows with
respect to each Fund:
<PAGE>
(a) Fairfield will offer and sell Navigator Shares only at the
regular public offering price currently determined by the Fund in the manner
described in its Registration Statement.
(b) Any order received by Fairfield for the purchase of
Navigator Shares through Legg Mason shall be accepted at the time it is received
by Fairfield (or any clearinghouse agency that Legg Mason may designate from
time to time), and at the offering and sale price next determined, unless
rejected by Legg Mason or the Fund. Any order received by Fairfield for the
redemption or repurchase of Navigator Shares through Legg Mason shall be
accepted at the time it is received by Fairfield, and at the redemption price
next determined. In addition to the right to reject any purchase order, the Fund
has reserved the right to withhold Navigator Shares from sale temporarily or
permanently. Fairfield agrees not to accept any order which is placed on a
conditional basis or subject to any delay or contingency prior to execution, and
Legg Mason will not accept such orders from Fairfield. The procedure relating to
the handling of orders shall be subject to instructions which Legg Mason shall
forward from time to time to Fairfield. The Navigator Shares purchased will be
issued by the Fund only against receipt of the purchase price, in collected New
York Clearinghouse funds. If payment for the Navigator Shares purchased is not
received within three business days after the date of confirmation, the sale may
be canceled forthwith, by Legg Mason or by the Fund, without any responsibility
or liability on the part of Legg Mason or on the part of the Fund, and Legg
Mason and/or the Fund may hold Fairfield responsible for any loss, expense,
liability or damage, including loss of profit suffered by Legg Mason and/or the
Fund resulting from Fairfield's delay or failure to make payment as aforesaid.
(c) Fairfield is obliged to date and time stamp all purchase
and redemption orders received by Fairfield and promptly transmit all orders to
Legg Mason in time to provide for processing at the price next determined after
receipt by Fairfield, in accordance with the Fund's Registration Statement.
Fairfield is not to withhold placing with Legg Mason any purchase or redemption
orders received from any customers for Navigator Shares so as to profit itself
as a result of such withholding. Fairfield shall not purchase Navigator Shares
through Legg Mason
- 2 -
<PAGE>
except for the purpose of covering purchase orders already received by
Fairfield, or for its bona fide investment.
(d) Legg Mason shall furnish Fairfield without charge
reasonable quantities of Prospectuses, with any supplements currently in effect,
copies of current shareholder reports of the Fund, and sales materials issued by
Legg Mason from time to time. In the purchase of Navigator Shares through Legg
Mason, Fairfield is entitled to rely only on the information contained in the
Registration Statement.
(e) This Agreement is in all respects subject to statements
regarding the sale and repurchase or redemption of Navigator Shares made in the
Registration Statement of the Fund, and to the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., which shall control and
override any provision to the contrary in this Agreement.
(f) Fairfield shall make available Navigator Shares of the
Fund only through Legg Mason. In no transaction (whether of purchase or sale)
shall Fairfield have any authority to act as agent for, partner of, or
participant in a joint venture with, Legg Mason or with the Fund or any other
entity having any other Agreement with Legg Mason.
(g) Legg Mason acts solely as agent for the Fund, and is not
responsible for qualifying the Fund or its shares for sale in any jurisdiction.
Legg Mason also is not responsible for the issuance, form, validity,
enforceability or value of shares of the Fund.
(h) All communications to Legg Mason should be sent to the
address below. Any notice to Fairfield shall be duly given if mailed or
telegraphed to Fairfield at the address specified by Fairfield below.
(i) Fairfield shall not be obligated to sell any
certain number of Navigator Shares.
(j) To facilitate redemption of Navigator Shares by
shareholders directly or through dealers, Fairfield is authorized but not
required to repurchase Navigator Shares presented to it by shareholders and
other dealers at the price determined in
- 3 -
<PAGE>
accordance with, and in the manner set forth in, the Registration
Statement.
(k) Fairfield shall not, if acting as principal, purchase any
Navigator Shares of the Fund from a recordholder at a price lower than the net
asset value next determined by or for the Fund's Shares. Fairfield shall,
however, be permitted to sell any Navigator Shares for the account of a
shareholder of the Fund at the net asset value currently quoted by or for the
Fund's Shares.
(l) Fairfield represents and warrants that: (i) it is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD") and agrees to abide by the NASD Rules of Fair Practice; (ii) it is
registered as a broker-dealer with the Securities and Exchange Commission; (iii)
it will maintain any filings and licenses required by federal and state laws to
conduct the business contemplated under this Agreement; (iv) it will notify Legg
Mason immediately if it ceases to be so registered or licensed or a member in
good standing of the NASD; and (v) it will comply with all federal and state
laws and regulations applicable to the offer and sale of Navigator Shares.
(m) Fairfield shall not permit any employee or agent to offer
or sell Navigator Shares unless such person is duly licensed under applicable
federal and state laws and regulations.
(n) Fairfield shall not incur any debts or obligations on
behalf of Legg Mason or the Fund. Fairfield shall bear all costs that it incurs
in selling Navigator Shares and in complying with the terms and conditions of
this Agreement as more specifically set forth in paragraph 8, except as may be
agreed between Legg Mason and Fairfield.
(o) Fairfield shall not (i) furnish any information or make
any representations concerning the Fund or Navigator Shares other than those
contained in the Registration Statement or in sales literature or advertising
that has been prepared or approved by Legg Mason as provided in paragraph 6 or
(ii) offer or sell Navigator Shares in jurisdictions in which they have not been
approved for offer and sale.
- 4 -
<PAGE>
3. Services Not Exclusive. The services furnished by Fairfield
hereunder are not to be deemed exclusive, and Fairfield shall be free to furnish
similar services to others so long as its services under this Agreement are not
impaired thereby.
4. Compensation. Legg Mason shall not be obligated to pay any
compensation to Fairfield hereunder nor to reimburse any of Fairfield's expenses
incurred hereunder, except as Legg Mason and the Fund otherwise agree.
5. Duties of Legg Mason.
(a) Legg Mason shall keep Fairfield adequately informed of the
Fund's affairs and shall make available to Fairfield copies of all information,
financial statements and other papers which Fairfield may reasonably request for
use in connection with the distribution of Navigator Shares, including, without
limitation, certified copies of any financial statements prepared for the Fund
by its independent accountants and such reasonable number of copies of the most
current prospectus, statement of additional information, and annual and interim
reports of the Fund as Fairfield may request, and Legg Mason shall cooperate
fully in the efforts of Fairfield to sell and arrange for the sale of the
Navigator Shares and in the perfor mance of Fairfield under this Agreement.
(b) Legg Mason shall comply with all state and federal laws
and regulations applicable to it as distributor of Navigator Shares.
6. Advertising. Legg Mason agrees to make available such sales and
advertising materials relating to Navigator Shares as Legg Mason in its
discretion determines appropriate. Fairfield agrees to submit all sales and
advertising materials developed by it relating to the Fund or Navigator Shares
to Legg Mason for approval. Fairfield agrees not to publish or distribute such
materials without first receiving such approval in writing, as well as any
advance regulatory approval that may be required. Legg Mason shall assist
Fairfield in obtaining any regulatory approvals of such materials that may be
required or reasonably desired by Fairfield.
- 5 -
<PAGE>
7. Records. Fairfield agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of Navigator Shares. Legg Mason and its representatives shall have access to
such records for review and copying during normal business hours.
8. Expenses of Fairfield. Except as the parties may otherwise agree,
Fairfield shall bear all costs and expenses of (i) preparing, printing, and
distributing any materials not prepared by the Fund or Legg Mason and other
materials used by Fairfield in connection with its offering of Navigator Shares
for sale; (ii) any expenses of advertising incurred by Fairfield in connection
with such offering; (iii) the expenses of registration and qualification of
Fairfield as a dealer and/or broker under federal and state laws and the
expenses of continuing such regis tration or qualification; and (iv) all
compensation paid to Fairfield's investment executives or other employees and
others for selling Navigator Shares, and all expenses of Fairfield, its
investment executives and employees and others who engage in or support the sale
of Navigator Shares. Fairfield shall bear such additional costs and expenses as
it and Legg Mason may agree upon, such agreement to be evidenced in a writing
signed by both parties.
9. Indemnification.
(a) Legg Mason agrees to indemnify, defend, and hold
Fairfield, its officers and directors, and any person who controls Fairfield
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which Fairfield, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Navigator Shares
provided by Legg Mason to Fairfield. However, this
- 6 -
<PAGE>
indemnity agreement shall not apply to any claims, demands, liabilities, or
expenses that arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Fairfield to Legg Mason or the Fund for
use in the Registration Statement or in any sales or advertising material; and
further provided, that in no event shall anything contained herein be so
construed as to protect Fairfield against any liability to Legg Mason or the
Fund or to the shareholders of the Fund to which Fairfield would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement.
(b) Fairfield agrees to indemnify, defend, and hold Legg Mason
and its officers and directors, the Fund, its officers and directors, and any
person who controls Legg Mason or the Fund within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabili ties and expenses (including the cost of investigating or defend ing
against such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which Legg Mason or its officers or directors or the Fund,
its officers or directors, or any such controlling person may incur under the
1933 Act, under common law, or otherwise, arising out of or based upon
Fairfield's activities in offering or selling Navigator Shares; arising out of
or based upon any alleged untrue statement of a material fact contained in
information furnished in writing by Fairfield to Legg Mason or the Fund for use
in the Registration Statement; arising out of or based upon any alleged omission
to state a material fact in connection with such information required to be
stated in the Registration Statement or necessary to make such information not
misleading; arising out of any agreement between Fairfield and any retail
dealer; or arising out of any sales or advertising material used by Fairfield in
connection with its duties under this Agreement.
10. Duration and Termination.
(a) This Agreement shall become effective with respect to a
Fund upon the date written above, provided that this Agreement has first been
approved by vote of a majority of the Board of the Company of which said Fund is
part.
- 7 -
<PAGE>
(b) Notwithstanding the foregoing, this Agreement may be
terminated at any time, without the payment of any penalty, by either party,
upon the giving of 30 days' written notice. Such notice shall be deemed to have
been given on the date it is received in writing by the other party or any
officer thereof. This Agreement may also be terminated at any time with respect
to a Fund, without the payment of any penalty, by vote of the Board of the
Company of which said Fund is a part.
(c) This Agreement may be terminated immediately in the event of
its assignment or in the event that the Distribution Agreement is terminated.
11. Amendment of this Agreement. No provision of this Agreement may
be amended, changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought.
12. Use of Fairfield Name. Fairfield hereby authorizes Legg Mason
to use the name "Fairfield Group, Inc." or any name derived therefrom in
any prospectus, statement of additional information, registration statement,
sales or advertising materials prepared and/or used by Legg Mason in
connection with its duties as distributor of Navigator Shares, but only for
so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of Fairfield.
13. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Maryland and the 1940 Act. To the extent that the
applicable laws of the State of Maryland conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. Notices. Any notices required or permitted hereunder shall be
considered as having been sent when transmitted via first class mail, guaranteed
delivery service, or verified telecopier, to the other party as follows:
If to Legg Mason:
- 8 -
<PAGE>
Legg Mason Wood Walker, Inc.
111 South Calvert Street
Baltimore, Md 21202
Attention: Edward Taber
If to Fairfield:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, Pa 19044
Attention: Robert Walker
15. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective succes sors; this Agreement
is for the benefit of and enforceable by each of Fairfield, Legg Mason and the
Fund. As used in this Agreement, the terms "majority of the outstanding voting
securities," "interested person" and "assignment" shall have the same meaning as
such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first written
above.
LEGG MASON WOOD WALKER, INC.
Attest: /s/Kathi D. Bair By: /s/Edward A. Taber
------------------------------- ---------------------------------
FAIRFIELD GROUP, INC.
Attest: /s/Marilyn Holdren By: /s/R. J. Walker
------------------------------- ---------------------------------
- 9 -
<PAGE>
SCHEDULE A
COMPANIES SUBJECT TO DEALER AGREEMENT
WITH RESPECT TO THE
NAVIGATOR CLASS OF THE LEGG MASON FUNDS
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Global Trust Inc.
Legg Mason Investors Trust, Inc.
Legg Mason Tax-Free Income Fund
- 10 -
<PAGE>
SCHEDULE B
FUNDS SUBJECT TO DEALER AGREEMENT
WITH RESPECT TO THE
NAVIGATOR CLASS OF THE LEGG MASON FUNDS
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason U.S. Government Intermediate-Term Portfolio (a series
of Legg Mason Income Trust, Inc.)
Legg Mason Investment Grade Income Portfolio (a series of Legg Mason Income
Trust, Inc.)
Legg Mason High Yield Portfolio (a series of Legg Mason Income
Trust, Inc.)
Legg Mason Global Government Trust (a series of Legg Mason Global
Trust Inc.)
Legg Mason International Equity Trust (a series of Legg Mason
Global Trust, Inc.)
Legg Mason Emerging Markets Trust (a series of Legg Mason
Global Trust, Inc.)
Legg Mason American Leading Companies Trust (a series of Legg Mason
Investors Trust, Inc.)
Legg Mason Balanced Trust (a series of Legg Mason Investors
Trust, Inc.)
Legg Mason Maryland Tax-Free Income Trust (a series of Legg Mason
Tax-Free Income Fund)
Legg Mason Pennsylvania Tax-Free Income Trust (a series of Legg
Mason Tax-Free Income Fund)
- 11 -
<PAGE>
Legg Mason Tax-Free Intermediate-Term Income Trust (a series of
Legg Mason Tax-Free Income Fund)
- 12 -
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Legg Mason Tax-Free Income Fund:
We consent to the incorporation by reference in this Post-Effective
Amendement No. 9 to the Registration Statement of Legg Mason Tax-Free Income
Fund on Form N-1A (File No. 33-37971) of our reports dated April 29, 1996 on our
audits of the financial statements and financial highlights of the Maryland
TaxFree Income Trust, Pennsylvania Tax-Free Income Trust, and Tax-Free
IntermediateTerm Income Trust (three of the portfolios included in the Legg
Mason Tax-Free Income Fund) which reports are included in the Annual Report to
Shareholders for the year ended March 31, 1996, which are incorporated by
reference in the Registration Statement. We also consent to the reference to our
firm under the caption "The Funds' Independent Accountants/Auditors" in the
Statement of Additional Information.
/s/Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
July 29, 1996
AMENDED
DISTRIBUTION PLAN OF
LEGG MASON TAX-FREE INCOME FUND
WHEREAS, Legg Mason Tax-Free Income Fund (the "Trust") is an open-end
management investment company registered under the Investment Company Act of
1940, as amended ("1940 Act"), and has offered, and intends to continue
offering, for public sale distinct series of shares of beneficial interest
("Series"), each corresponding to a distinct portfolio;
WHEREAS, the Trust has registered the offering of its shares of
beneficial interest under a Registration Statement filed with the Securities and
Exchange Commission and that Registration Statement is in effect as of the date
hereof;
WHEREAS, the Trust's Board of Trustees has established three Series of
shares of beneficial interest of the Trust: Legg Mason Maryland Tax-Free Income
Trust; Legg Mason Pennsylvania Tax-Free Income Trust; and Legg Mason Tax-Free
Intermediate-Term Income Trust (each a "Fund" and collectively the "Funds");
WHEREAS, the Trust's Distribution Plan was adopted by the
Board of Trustees on [need date] ;
WHEREAS, the Trust has employed Legg Mason Wood Walker, Incorporated
("Legg Mason") as principal underwriter of the shares of the Trust;
NOW, THEREFORE, the Trust hereby adopts this Amended Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. A. Each Fund shall pay to Legg Mason, as compensation for Legg
Mason's services as principal underwriter of the Series' shares, a distribution
fee at the rate of 0.125% on an annualized basis of the average daily net assets
of the Trust's shares, such fee to be calculated and accrued daily and paid
monthly or at such other intervals as the Board shall determine.
<PAGE>
B. Each Fund shall pay to Legg Mason, as compensation for
ongoing services provided to the Trust's shareholders, a service fee at the rate
of 0.125% on an annualized basis of the average daily net assets of the Trust's
shares, such fee to be calculated and accrued daily and paid monthly or at such
other intervals as the Board shall determine.
C. The Trust may pay a distribution or service fee to Legg
Mason at a lesser rate than the fees specified in paragraphs 1.A. and 1.B.,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 4 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Article III, Section 26(d) of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD") remain
in effect and apply to distributors or dealers in the Trust's shares, the
amounts paid hereunder shall not exceed those limitations, including permissible
interest.
2. As principal underwriter of the Trust's shares, Legg Mason may spend
such amounts as it deems appropriate on any activities or expenses primarily
intended to result in the sale of the shares of the Series and/or the servicing
and maintenance of shareholder accounts, including, but not limited to,
compensation to employees of Legg Mason; compensation to Legg Mason, other
broker-dealers and other entities that engage in or support the distribution of
shares or who service shareholder accounts or provide sub-accounting and
recordkeeping services; expenses of Legg Mason and such other broker-dealers and
other entities, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
- 2 -
<PAGE>
4. This Amended Plan shall take effect on February 7, 1996 and shall
continue in effect for successive periods of one year from its execution for so
long as such continuance is specifically approved at least annually together
with any related agreements, by votes of a majority of both (a) the Board of
Trustees of the Trust and (b) those Trustees who are not "interested persons" of
the Trust, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements; and only if the
Trustees who approve the Plan taking effect have reached the conclusion required
by Rule 12b-1(e) under the 1940 Act.
5. Any person authorized to direct the disposition of monies paid or
payable by any Series pursuant to this Plan or any related agreement shall
provide to the Trust's Board of Trustees and the Board shall review, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made. Legg Mason shall submit only information
regarding amounts expended for "distribution activities," as defined in this
paragraph 5, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this paragraph 5, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated February 7, 1996, by and
between the Trust and Legg Mason, that are not deemed "service activities." As
used herein, "distribution activities" also includes sub-accounting or
recordkeeping services provided by an entity if the entity is compensated,
directly or indirectly, by the Fund or Legg Mason for such services. Such entity
may also be paid a service fee if it provides appropriate services. Nothing in
the foregoing is intended to or shall cause there to be any implication that
compensation for such services must be made only pursuant to a plan of
distribution under Rule 12b-1. "Service activities" shall mean activities
covered by the definition of "service fee" contained in amendments to Article
III, Section 26(d) of the
- 3 -
<PAGE>
NASD's Rules of Fair Practice, including the provision by Legg Mason of
personal, continuing services to investors in the Trust's shares. Overhead and
other expenses of Legg Mason related to its "distribution activities" or
"service activities," including telephone and other communications expenses, may
be included in the information regarding amounts expended for such distribution
or service activities, respectively.
6. This Plan may be terminated with respect to any Series at any time
by vote of a majority of the Rule 12b-1 Trustees or by vote of a majority of the
outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1.A. hereof or the amount of service
fees provided for in paragraph 1.B. hereof unless such amendment is approved by
a vote of at least a majority of the outstanding securities, as defined in the
1940 Act, of the Trust, and no material amendment to the Plan shall be made
unless such amendment is approved in the manner provided for continuing approval
in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons of the Trust, as defined in the 1940
Act, shall be committed to the discretion of Trustees who are themselves not
interested persons.
9. The Trust shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 5 hereof for a period of not less than six years from the date of such
report, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Trust has executed this Distribution Plan as of
the day and year set forth below:
- 4 -
<PAGE>
February 7, 1996
Date: ____________________________ LEGG MASON TAX-FREE INCOME FUND
By: /s/ Marie K. Karpinski
Attest: ___________________________
By: /s/ Kathi D. Bair
______________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ John F. Curley, Jr.
_______________________________
- 5 -
Exhibit 16(a) LEGG MASON MARYLAND TAX-FREE INCOME TRUST
March 31, 1995 - March 31, 1996 (one year)
Cumulative Total Return
ERV = (16.07 x 1.31351) - (16.32 x 1.24182) x 1000 + 1000 = 1041.53
------------------------------------
(16.32 x 1.24182)
P = 1000
C = 1041.53 - 1 = 0.0415 = 4.15%
------- ----
1000
Average Annual Return: Same
May 1, 1991 - March 31, 1996 (life of fund)
Cumulative Total Return
ERV = (16.07 X 1.31351) - (15.12 x 1.0) x 1000 + 1000 = 1396.04
------------------------------------
(15.12 x 1.0)
P = 1000
C = 1396.04 - 1 = 0.3960 = 39.60%
------- -----
1000
Average Annual Return:
1
-----
4.91781
(0.3960 + 1) - 1 = 7.04%
----
Exhibit 16(b) LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
March 31, 1995 - March 31, 1996 (one year)
Cumulative Total Return
ERV = (16.10 x 1.30194) - (16.47 x 1.22845) x 1000 + 1000 = 1036.01
------------------------------------
(16.47 x 1.22845)
P = 1000
C = 1036.01 - 1 = 0.0361 = 3.61%
------- ----
1000
Average Annual Return: Same
August 1, 1991 - March 31, 1996 (life of fund)
Cumulative Total Return
ERV = (16.10 X 1.30194) - (15.12 x 1.0) x 1000 + 1000 = 1386.33
--------------------------------------
(15.12 x 1.0)
P = 1000
C = 1386.33 - 1 = 0.3863 = 38.63%
------- -----
1000
Average Annual Return:
1
-----
4.66576
(0.3863 + 1) - 1 = 7.25%
----
Exhibit 16(c) LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
March 31, 1995 - March 31, 1996 (one year)
Cumulative Total Return
ERV = (15.34 x 1.16956) - (15.37 x 1.11895) x 1000 + 1000 = 1043.19
-------------------------------------
(15.37 x 1.11895)
P = 1000
C = 1043.19 - 1 = 0.0432 = 4.32%
------- ----
1000
Average Annual Return: Same
November 9, 1992 - March 31, 1996 (life of fund)
Cumulative Total Return
ERV = (15.34 X 1.16956) - (15.00 x 1.0) x 1000 + 1000 = 1196.07
------------------------------------
(15.00 x 1.0)
P = 1000
C = 1196.07 - 1 = 0.1961 = 19.61%
------- -----
1000
Average Annual Return:
1
-----
3.39178
(0.1961 + 1) - 1 = 5.42%
----
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000869906
<NAME> Maryland Tax-Free Income Trust
<SERIES>
<NUMBER> 1
<NAME> Maryland Tax-Free Income Trust
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 137,595
<INVESTMENTS-AT-VALUE> 144,628
<RECEIVABLES> 4,512
<ASSETS-OTHER> 8
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