As filed with the Securities and Exchange Commission on July 31, 1997.
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: [ ]
----
Post-Effective Amendment No: 10 [X]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 11
---
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 , 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on __________, 1997 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on __________, 1997 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, 1997.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 6
Performance Information 7
Who Should Invest 7
Investment Objectives and Policies 8
Investment Techniques 12
How You Can Invest in the Funds 14
How Your Shareholder Account is Maintained 16
How You Can Redeem Your Primary Shares 16
How Net Asset Value is Determined 17
Dividends and Other Distributions 18
Taxes 18
Shareholder Services 20
The Fund's Management and Investment Adviser 21
The Fund's Distributor 22
The Funds' Custodian and Transfer Agent 23
Description of the Trust and its Shares 23
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE TRUST OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
[Recyle Logo] PRINTED ON RECYCLED PAPER
LMF-038
LEGG MASON
TAX-FREE
INCOME
FUNDS
MARYLAND TAX-FREE
PENNSYLVANIA TAX-FREE
TAX-FREE INTERMEDIATE
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
PROSPECTUS
JULY 31, 1997
[Legg Mason Funds Logo]
<PAGE>
LEGG MASON TAX-FREE INCOME FUNDS -- PRIMARY SHARES
LEGG MASON TAX-FREE INCOME FUND:
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
This Prospectus sets forth concisely the information about the funds
that a prospective investor ought to know before investing. It should be
read and retained for future reference. A Statement of Additional
Information about the funds dated July 31, 1997 has been filed with the
Securities and Exchange Commission ("SEC") and, as amended or supplemented
from time to time, is incorporated herein by reference. The Statement of
Additional Information is available without charge upon request from the
funds' distributor, Legg Mason Wood Walker, Incorporated ("Legg Mason")
(address and telephone numbers listed below).
Shares of Legg Mason Maryland Tax-Free Income Trust qualify for sale to
investors only in the States of Maryland, Delaware, Florida, New Jersey,
Pennsylvania, Texas, Virginia, West Virginia, Wyoming and the District of
Columbia. Shares of Legg Mason Pennsylvania Tax-Free Income Trust qualify
for sale to investors only in the States of Pennsylvania, Delaware,
Florida, Maryland, New Jersey, New York, Ohio, West Virginia, Wyoming and
the District of Columbia. These Funds are not being offered for sale to
investors in any other State.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE
FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
July 31, 1997
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
The Legg Mason Tax-Free Income Fund ("Trust") is an open-end
management investment company which currently offers three series.
The LEGG MASON MARYLAND TAX-FREE INCOME TRUST ("Maryland Tax-Free"),
is a non-diversified, professionally managed portfolio seeking a high
level of current income exempt from federal and Maryland state and local
income taxes, consistent with prudent investment risk and preservation of
capital.
The LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST ("Pennsylvania
Tax-Free") is a non-diversified, professionally managed portfolio seeking
a high level of current income exempt from federal income tax and
Pennsylvania personal income tax, consistent with prudent investment risk
and preservation of capital.
The LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST ("Tax-Free
Intermediate") is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal income tax,
consistent with prudent investment risk.
In attempting to achieve Maryland Tax-Free's objective, the investment
adviser, Legg Mason Fund Adviser, Inc. ("Adviser"), invests primarily in
debt instruments issued by or on behalf of the State of Maryland, its
political subdivisions, municipalities, agencies, instrumentalities or
public authorities, the interest on which, in the opinion of counsel to
the issuer, is exempt from federal and Maryland state and local income
taxes ("Maryland municipal obligations") and which are investment grade,
I.E., securities rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch Investors
Service, Inc. ("Fitch") or, if unrated by Moody's, S&P or Fitch ("unrated
securities") deemed by the Adviser to be of comparable quality. Maryland
Tax-Free also may engage in hedging transactions.
In attempting to achieve Pennsylvania Tax-Free's objective, the
Adviser invests primarily in debt instruments issued by or on behalf of
the Commonwealth of Pennsylvania, its political subdivisions,
municipalities, agencies, instrumentalities or public authorities, the
interest on which, in the opinion of counsel to the issuer, is exempt from
federal income tax and Pennsylvania personal income tax ("Pennsylvania
municipal obligations") and which are rated investment grade by Moody's,
S&P or Fitch or unrated securities deemed by the Adviser to be of
comparable quality. Pennsylvania Tax-Free's shares are exempt from
Pennsylvania county personal property tax to the extent that it invests in
Pennsylvania municipal obligations. Pennsylvania Tax-Free also may engage
in hedging transactions.
In attempting to achieve Tax-Free Intermediate's objective, the
Adviser invests primarily in debt instruments issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income tax and which are rated
investment grade by Moody's, S&P or Fitch or unrated securities deemed by
the Adviser to be of comparable quality. Tax-Free Intermediate also may
engage in hedging transactions.
INVESTMENT TECHNIQUES AND RISKS:
There can be no assurance that Maryland Tax-Free, Pennsylvania
Tax-Free and Tax-Free Intermediate (each a "Fund") will achieve their
respective objective. The value of the debt instruments held by any Fund,
and thus the net asset value of Fund shares, generally fluctuates
inversely with movements in interest rates. Under normal circumstances,
Maryland Tax-Free's and Pennsylvania Tax-Free's dollar-weighted average
maturities are expected to be between 12 and 24 years and Tax-Free
Intermediate's dollar-weighted average maturity is expected to be between
2 and 10 years; therefore, the net asset value of the Funds' shares will
be more sensitive to interest rate movements and will fluctuate more than
a portfolio of shorter-term securities. Additionally, changes in economic
conditions in, or governmental policies of, the
2
<PAGE>
State of Maryland (with respect to Maryland Tax-Free), the Commonwealth of
Pennsylvania (with respect to Pennsylvania Tax-Free) and the various
states and municipalities (with respect to Tax-Free Intermediate) could
have a significant impact on the performance of the Funds. As
non-diversified series, the Funds may be subject to greater risk with
respect to their portfolio securities than investment companies that have
a broader range of investments, because changes in the financial condition
or market assessment of a single issuer may cause greater fluctuation in a
Fund's total return and the price of a Fund's shares. Moody's considers
those securities rated in its fourth highest category (I.E., Baa) to have
speculative characteristics. A Fund's participation in hedging and option
strategies also involves certain investment risks and transaction costs.
See "Yield and Risk Factors" and "Investment Techniques," pages 12-16.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER:
Legg Mason Fund Adviser, Inc.
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 23.
DIVIDENDS:
Declared daily and paid monthly. See "Dividends and Other
Distributions," page 20.
REINVESTMENT:
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. There is a $1,000
minimum, generally for initial purchases, and a $100 minimum, generally
for subsequent purchases. Lower minimums for initial and subsequent
purchases apply for automatic investments. See "How You Can Invest in the
Funds," page 16. Larger purchases may be eligible for reduced initial
sales charges, as may purchases pursuant to a Letter of Intention as
described on page 18.
REDEMPTION METHODS:
Redeem by calling your Legg Mason or affiliated financial advisor or
redeem by mail. See "How You Can Redeem Your Primary Shares," page 19.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value plus any applicable sales charge (maximum sales charge
is 2.75% of public offering price for Maryland Tax-Free and Pennsylvania
Tax-Free; maximum sales charge is 2.00% of public offering price for
Tax-Free Intermediate). With respect to Tax-Free Intermediate, the front-
end sales charge will be waived for all purchases made through July 31,
1998.
3
<PAGE>
EXPENSES
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth below are based on average net assets and annual Fund operating
expenses related to Primary Shares for the year ended March 31, 1997.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH
FUND
Maximum sales charge on purchases
(as a percentage of offering price):
Maryland Tax-Free and Pennsylvania Tax-Free 2.75%(A)
Tax-Free Intermediate 2.00%(A,B)
Sales charge on reinvested dividends None
Redemption or exchange fees None
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES (C)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
------------------------------------
Management fees
(after fee
waivers) 0.26% 0.18% 0.11%
12b-1 fees 0.25% 0.25% 0.25%
Other expenses(D) 0.16% 0.24% 0.31%
Total operating
expenses (after
fee waivers)(D) 0.67% 0.67% 0.67%
(A) See "How You Can Invest In The Funds," page 16, for additional
information concerning volume reductions, sales charge waivers and
reduced sales charge purchase plans.
(B) Effective August 1, 1995 through July 31, 1998, the sales charge on
Tax-Free Intermediate will be waived for all new accounts and
subsequent investments into existing accounts. After July 31, 1998,
any exchanges of these shares will be subject to the full sales
charge, if any, since no sales charge will be paid on shares purchased
during this period.
(C) Pursuant to a voluntary expense limitation, the Adviser and Legg Mason
have agreed to waive management and 12b-1 fees such that total
operating expenses relating to Primary Shares (exclusive of taxes,
interest, brokerage fees, and extraordinary expenses) will not exceed
annual rates of 0.70% of average daily net assets of each Fund until
July 31, 1998 or until Maryland Tax-Free's net assets reach $200
million, whichever occurs first; or until Pennsylvania Tax-Free's net
assets reach $125 million, whichever occurs first; or until Tax-Free
Intermediate's net assets reach $100 million, whichever occurs first.
In the absence of such waivers, the expense ratios relating to Primary
Shares of Maryland Tax-Free, Pennsylvania Tax-Free and Tax-Free
Intermediate would be 0.96%, 1.04% and 1.11%, respectively.
(D) Each Fund has entered into an arrangement with its custodian whereby
uninvested cash balances generate credits used to reduce custodian
expenses. Other expenses and Total operating expenses net of this
reduction were as follows: for Maryland Tax-Free, 0.15% and 0.66%,
respectively, of the Fund's average net assets; for Pennsylvania
Tax-Free, 0.23% and 0.66%, respectively, of the Fund's average net
assets; and for Tax-Free Intermediate, 0.30% and 0.66%, respectively,
of the Fund's average net assets.
EXAMPLE
The following examples illustrate the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. The Funds charge no redemption fees of any kind.
1 3 5 10
YEAR YEARS YEARS YEARS
----------------------------
Maryland Tax-Free $34 $48 $64 $109
Pennsylvania Tax-Free $34 $48 $64 $109
Tax-Free Intermediate:
Assuming the maximum
initial 2% sales charge $27 $41 $57 $102
Assuming no initial sales
charge $ 7 $21 $37 $ 83
This example assumes that the maximum initial sales charge (2.75% with
respect to Maryland Tax-Free and Pennsylvania Tax-Free; 2.00% with respect
to Tax-Free Intermediate) is deducted at the time of purchase, that the
percentage amounts listed under "Annual Fund Operating Expenses" remain
the same over the time periods shown and that all dividends and capital
gain distributions are reinvested in additional Fund shares. If the
waivers are not extended beyond July 31, 1998, the expense figures in the
examples will be higher.
The above tables and the assumption in the examples of a 5% annual
return are required by regulations of the SEC applicable to all mutual
funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT
REPRESENT, THE PROJECTED OR ACTUAL PERFORMANCE OF PRIMARY SHARES OF
4
<PAGE>
THE FUNDS. THE TABLES AND EXAMPLE NOTED ON THE PREVIOUS PAGE SHOULD NOT BE
CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The actual expenses attributable to
Primary Shares will depend upon, among other things, the level of average
net assets, the levels of sales and redemptions of shares, the extent to
which the Adviser and Legg Mason waive their fees and the extent to which
Primary Shares incur variable expenses, such as transfer agency costs.
Because each Fund pays a 12b-1 fee with respect to Primary Shares,
long-term investors in Primary Shares may pay more in distribution
expenses than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
("NASD"). For further information concerning Fund expenses, see "The
Fund's Management and Investment Adviser," page 24.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. Each Fund's financial
statements for the year ended March 31, 1997 and the report of Coopers &
Lybrand L.L.P. thereon are included in the combined annual report and are
incorporated by reference into the Statement of Additional Information. The
annual report is available to shareholders without charge by calling your
Legg Mason or affiliated financial advisor or Legg Mason's Funds Marketing
Department at 800-822-5544.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- --------------------------------------
Net In Excess
Asset Net Net Realized Total Net of Net
Value, Investment and Unrealized From Net Realized Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Gain on Total
of Year (Loss) Investments Operations Income Investments Investments Distributions
-------------------------------------------------------------------------------------------------------------
<S> <C>
MARYLAND TAX-FREE INCOME TRUST
Years Ended Mar. 31,
1997 $ 16.07 $ .83(D) $ (.09) $ .74 $ (.83) $ (.07) $ -- $ (.90)
1996 15.87 .86(D) .25 1.11 (.86) (.05) -- (.91)
1995 15.69 .83(D) .18 1.01 (.83) -- -- (.83)
1994 15.97 .84(D) (.27) .57 (.84) -- (.01) (.85)
1993 15.03 .88(D) .95 1.83 (.88) (.01) -- (.89)
1992(G) 14.70 .82(D) .33 1.15 (.82) -- -- (.82)
PENNSYLVANIA TAX-FREE INCOME TRUST
Years Ended Mar. 31,
1997 $ 16.10 $ .83(E) $ (.11) $ .72 $ (.83) $ (.19) -- $ (1.02)
1996 16.02 .89(E) .15 1.04 (.89) (.07) -- (.96)
1995 15.80 .85(E) .22 1.07 (.85) -- -- (.85)
1994 16.03 .86(E) (.23) .63 (.86) -- -- (.86)
1993 14.99 .91(E) 1.04 1.95 (.91) -- -- (.91)
1992(G) 14.70 .63(E) .29 .92 (.63) -- -- (.63)
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
Years Ended Mar. 31,
1997 $ 15.34 $ .68(F) $ (.12) $ .56 $ (.68) $ -- -- $ (.68)
1996 15.06 .68(F) .28 .96 (.68) -- -- (.68)
1995 14.96 .72(F) .10 .82 (.72) -- -- (.72)
1994 15.06 .70(F) (.09) .61 (.70) (.01) -- (.71)
1993(G) 14.70 .28(F) .36 .64 (.28) -- -- (.28)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------------------------
Net Net
Asset Total Net Investment Net Assets
Value, Expenses Expenses Income (Loss) Portfolio End of
End of Total to Average to Average to Average Turnover Year
Year Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
----------------------------------------------------------------------------------------------------
<S> <C>
MARYLAND TAX-FREE INCOME TRUST
Years Ended Mar. 31,
1997 $ 15.91 4.73% .67%(D) .66%(D) 5.18%(D) 6.0% $145,974
1996 16.07 7.11% .59%(D) .58%(D) 5.29%(D) 14.1% 146,645
1995 15.87 6.60% -- .54%(D) 5.32%(D) 9.5% 142,314
1994 15.69 3.51% -- .46%(D) 5.10%(D) 6.6% 145,578
1993 15.97 12.47% -- .40%(D) 5.61%(D) -- 128,566
1992(G) 15.03 8.04%(H) -- .18%(D) 5.91%(D) 5.4%(I) 83,052
PENNSYLVANIA TAX-FREE INCOME TRUST
Years Ended Mar. 31,
1997 $ 15.80 4.61% .67%(E) .66%(E) 5.20%(E) 13.6% $ 64,875
1996 16.10 6.52% .54%(E) .53%(E) 5.42%(E) 17.2% 65,275
1995 16.02 7.03% -- .49%(E) 5.42%(E) 2.1% 63,929
1994 15.80 3.81% -- .40%(E) 5.16%(E) -- 62,904
1993 16.03 13.31% -- .32%(E) 5.74%(E) -- 49,959
1992(G) 14.99 6.36%(H) -- .12%(E) 6.11%(E) -- 28,873
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
Years Ended Mar. 31,
1997 $ 15.22 3.71% .67%(F) .66%(F) 4.43%(F) 8.9% $ 54,736
1996 15.34 6.47% .57%(F) .56%(F) 4.41%(F) -- 60,042
1995 15.06 5.65% -- .34%(F) 4.83%(F) 24.8% 48,837
1994 14.96 3.99% -- .30%(F) 4.44%(F) 6.6% 54,032
1993(G) 15.06 4.35%(H) -- .20%(F,I) 4.71%(F,I) -- 37,138
</TABLE>
(A) EXCLUDING SALES CHARGE.
(B) PURSUANT TO SECURITIES AND EXCHANGE COMMISSION REGULATIONS EFFECTIVE
DECEMBER 31, 1995, THIS RATIO REFLECTS TOTAL EXPENSES BEFORE COMPENSATING
BALANCE CREDITS. PREVIOUSLY, CREDITS WERE INCLUDED IN THE RATIO.
(C) THIS RATIO REFLECTS TOTAL EXPENSES REDUCED BY THE IMPACT OF COMPENSATING
BALANCE CREDITS.
(D) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.35% OF AVERAGE DAILY NET
ASSETS UNTIL JUNE 30, 1992; 0.40% UNTIL DECEMBER 31, 1992; 0.45% UNTIL
DECEMBER 31, 1993; 0.50% UNTIL JUNE 30, 1994; 0.55% UNTIL JULY 31, 1995;
0.60% UNTIL MARCH 31, 1996; 0.65% UNTIL DECEMBER 31, 1996 AND 0.70%
THROUGH JULY 31, 1998.
(E) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.25% OF AVERAGE DAILY NET
ASSETS UNTIL JUNE 30, 1992; 0.30% UNTIL SEPTEMBER 30, 1992; 0.35% UNTIL
JULY 31, 1993; 0.40% UNTIL DECEMBER 31, 1993; 0.45% UNTIL JUNE 30, 1994;
0.50% UNTIL JULY 31, 1995; 0.55% UNTIL MARCH 31, 1996; 0.65% UNTIL
DECEMBER 31, 1996 AND 0.70% THROUGH JULY 31, 1998.
(F) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.20% OF AVERAGE DAILY NET
ASSETS UNTIL MARCH 31, 1993; 0.30% UNTIL JUNE 30, 1994; 0.35% UNTIL JULY
31, 1995; 0.65% UNTIL DECEMBER 31, 1996 AND 0.70% THROUGH JULY 31, 1998.
(G) FOR THE PERIOD MAY 1, 1991 (COMMENCEMENT OF OPERATIONS OF MARYLAND
TAX-FREE INCOME TRUST) TO MARCH 31, 1992. FOR THE PERIOD AUGUST 1, 1991
(COMMENCEMENT OF OPERATIONS OF PENNSYLVANIA TAX-FREE INCOME TRUST) TO
MARCH 31, 1992. FOR THE PERIOD NOVEMBER 9, 1992 (COMMENCEMENT OF
OPERATIONS OF TAX-FREE INTERMEDIATE-TERM INCOME TRUST) TO MARCH 31, 1993.
(H) NOT ANNUALIZED
(I) ANNUALIZED
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PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of a class of
shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and capital gain
distributions. CUMULATIVE TOTAL RETURN shows the fund's performance over a
specific period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
The Funds' total returns reflect deduction of the maximum initial sales
charge at the time of purchase. Average annual returns, which differ from
actual year-by-year results, tend to smooth out variations in a fund's
return.
Total returns of Primary Shares as of March 31, 1997 were as follows:
MARYLAND PENNSYLVANIA TAX-FREE
CUMULATIVE TOTAL RETURN: TAX-FREE TAX-FREE INTERMEDIATE
----------------------------------------------------------------------
One Year +1.88% +1.71% +1.66%
Five Years +35.32 +36.46 --
Life of Class +46.20(A) +45.03(B) +24.05(C)
AVERAGE ANNUAL TOTAL MARYLAND PENNSYLVANIA TAX-FREE
RETURN: TAX-FREE TAX-FREE INTERMEDIATE
-----------------------------------------------------------------------
One Year +1.88% +1.71% +1.66%
Five Years +6.23 +6.41 --
Life of Class +6.63(A) +6.78(B) +5.03(C)
(A) Inception of Maryland Tax-Free -- May 1, 1991.
(B) Inception of Pennsylvania Tax-Free -- August 1, 1991.
(C) Inception of Tax-Free Intermediate -- November 9, 1992.
Each Fund also may advertise its yield or tax equivalent yield. Yield
reflects investment income net of expenses over a 30-day (or one-month)
period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share at the end of the period. Tax equivalent
yield shows the taxable yield an investor would have to earn before taxes
to equal the Fund's tax-exempt yield. A tax equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus a stated
federal, state and local income tax rate. The effective yield, although
calculated similarly, will be slightly higher than the yield because it
assumes that income earned from the investment is reinvested (i.e., the
compounding effect of reinvestment). Yield computations differ from other
accounting methods and therefore may differ from dividends actually paid
or reported net income.
Total return and yield information reflect past performance and are
not predictions or guarantees of future results. Yields and total returns
of Primary Shares of the Funds would be lower if the Adviser and Legg
Mason had not waived a portion of the fees during the fiscal years 1992
through 1997. Investment return and share price will fluctuate, and the
value of your shares, when redeemed, may be worth more or less than their
original cost. Further information about each Fund's performance is
contained in the combined annual report to shareholders, which may be
obtained without charge by calling your Legg Mason or affiliated financial
advisor or Legg Mason's Funds Marketing Department at 800-822-5544.
WHO SHOULD INVEST
Maryland Tax-Free is designed for longer-term investors who are able
to benefit from income exempt from federal and Maryland state and local
income taxes. Pennsylvania Tax-Free is designed for longer-term investors
who are able to benefit from income exempt from federal income tax and
Pennsylvania personal income tax. Tax-Free Intermediate is designed for
intermediate-term investors who are able to benefit from income exempt
from federal income tax. The value of Primary Shares can generally be
expected to fluctuate inversely with changes in interest rates and,
because of the potential negative impact of rising interest rates and
other risks, the Funds would not be appropriate for investors whose
primary goal is stability of principal. Each Fund is not intended to be a
balanced investment program. Each Fund is not an appropriate investment
for "substantial users" of certain facilities financed by industrial
development or private activity bonds or related persons thereof. See
"Taxes -- Federal Income Tax," page 21.
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Trust's Board
of Trustees without a shareholder vote. There can be no assurance that any
Fund will achieve its investment objective.
MARYLAND TAX-FREE'S investment objective is to earn a high level of
current income exempt from federal and Maryland state and local income
taxes, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the State of
Maryland, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal and Maryland
state and local income taxes. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Maryland municipal obligations, exclusive of any such obligations the
interest on which is a tax preference item for purposes of the federal
alternative minimum tax ("Tax Preference Item"). See "Temporary
Investments," page 12.
PENNSYLVANIA TAX-FREE'S investment objective is to earn a high level
of current income exempt from federal income tax and Pennsylvania personal
income tax, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the Commonwealth
of Pennsylvania, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax and
Pennsylvania personal income tax. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Pennsylvania municipal obligations, exclusive of any such obligations the
interest on which is a Tax Preference Item. See "Temporary Investments"
page 12.
TAX-FREE INTERMEDIATE'S investment objective is to earn a high level
of current income exempt from federal income tax, consistent with prudent
investment risk. The Fund seeks to achieve its investment objective by
investing primarily in debt instruments issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia
and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income tax ("municipal
obligations"), while maintaining an average dollar-weighted maturity of
between 2 and 10 years. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
municipal obligations, exclusive of any such obligations the interest on
which is a Tax Preference Item. See "Temporary Investments" page 12.
Each Fund invests in securities that, in the opinion of the Adviser,
present acceptable credit risks and that, at the time of purchase, are
rated:
"Baa" or higher by Moody's, "BBB" or higher by S&P or Fitch in the
case of bonds;
"MIG-1" by Moody's, "SP-1" or higher by S&P or "F-1" or higher by
Fitch in the case of notes;
"P1" by Moody's, "A1" by S&P or "F-1" or higher by Fitch in the case
of commercial paper; and
"VMIG-1" by Moody's in the case of variable rate demand notes.
Each Fund also invests in securities unrated by any of the above
services which are deemed by the Adviser to be of comparable quality.
The bond ratings noted above are considered "investment grade" by the
respective rating agencies. A rating of a municipal obligation represents
the rating agency's opinion regarding its quality and is not a guarantee
of quality. Moody's considers bonds rated in its fourth highest category
(I.E., Baa) to have speculative characteristics; changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for the issuers of such securities to make principal and interest
payments than is the case for higher rated bonds. In the event the rating
on an issue held in a Fund's portfolio is changed by Moody's, S&P or
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Fitch, such change will be considered by the Adviser in its evaluation of
the overall investment merits of that security. If, as a result of any
downgradings by Moody's, S&P or Fitch, or, for unrated securities, any
determinations by the Adviser that securities are no longer of comparable
quality to investment grade securities, more than 5% of a Fund's total
assets are represented by securities rated below investment grade or the
equivalent, the Adviser will, as soon as practicable consistent with
achieving an orderly disposition of the securities, sell such holdings
until they represent 5% or less of the Fund's total assets. A discussion
of the ratings outlined above is included in the Statement of Additional
Information.
In addition to the agency ratings, there are other criteria which will
be used by the Adviser in selecting securities for a portfolio.
Consideration will be given to the maturity and duration of each bond as
well as its effect on the overall average maturity and duration of the
portfolio. Analysis of the current and historical yield spreads is done to
determine the relative value in any bond considered for purchase. The
coupon level and call features also figure in the decision on the relative
merits of an investment. Consideration is also given to the type of
bond -- whether it is a general obligation or a revenue bond. In addition
to this examination of bond characteristics, significant effort is devoted
to analysis of the creditworthiness of the bond issuer at the time of
purchase and on an ongoing basis.
Each Fund is permitted to invest in municipal securities of any
maturity. The maturities of a Fund's portfolio securities will reflect the
Adviser's judgment concerning current and future market conditions as well
as other factors, such as the Fund's liquidity needs. Under normal
circumstances, the dollar-weighted average maturities of Maryland
Tax-Free's and Pennsylvania Tax-Free's portfolios are expected to be
between 12 and 24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be between 2 and 10
years.
Each Fund does not expect its portfolio turn-
over rate to exceed 90% per year.
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities. Interest on certain
tax-exempt PABs will constitute a Tax Preference Item. Accordingly, under
normal circumstances, each Fund's investment in obligations, the interest
on which is such an item, including PABs, will be limited to a maximum of
20% of its total assets.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to a
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or
9
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class of facilities or from the proceeds of a special excise tax or other
specific revenue source such as the corporate user of the facility being
financed. IDBs and PABs are usually revenue bonds and are not payable from
the unrestricted revenues of the issuer. The credit quality of the IDBs
and PABs is usually directly related to the credit standing of the
corporate user of the facilities.
TEMPORARY INVESTMENTS
During unusual market conditions, including if, in the Adviser's
opinion, there are insufficient suitable Maryland municipal obligations
(with respect to Maryland Tax-Free), Pennsylvania municipal obligations
(with respect to Pennsylvania Tax-Free) or municipal obligations (with
respect to Tax-Free Intermediate) available that pay interest that is not
a Tax Preference Item, a Fund temporarily may invest more than 20% of its
total assets in municipal obligations the interest on which is exempt from
federal income tax but is such an item (with respect to Tax-Free
Intermediate) and/or is subject to Maryland state and local income taxes
(with respect to Maryland Tax-Free) and/or is subject to Pennsylvania
personal income tax (with respect to Pennsylvania Tax-Free). Each Fund
expects that under normal circumstances it will maintain needed liquidity
through the purchase of short-term municipal securities. However, for
liquidity purposes, or pending the investment of the proceeds of the sale
of shares, a Fund temporarily may invest in taxable short-term investments
consisting of: obligations of the U.S. Government, its agencies and
instrumentalities; certificates of deposit and bankers' acceptances of
U.S. domestic banks with assets of one billion dollars or more; commercial
paper or other corporate notes of high quality; and any of such items
subject to short-term repurchase agreements. Each Fund may invest without
limit in such instruments for temporary, defensive purposes, when in the
Adviser's opinion, no suitable municipal securities are available. No more
than 10% of a Fund's net assets will be invested in repurchase agreements
maturing in more than seven days and other illiquid securities. Interest
earned from such taxable investments will be taxable to investors as
ordinary income when distributed to them.
As a fundamental policy, each Fund may borrow money solely for
temporary purposes from banks or by engaging in reverse repurchase
agreements in an amount up to 10% of the value of its total assets;
however, borrowings by a Fund in excess of 5% of the value of its total
assets may be only from banks.
YIELD AND RISK FACTORS
Yield
The yield of a municipal obligation is dependent on a variety of
factors, including general municipal securities market conditions, general
fixed-income market conditions, the financial condition of the issuer, the
size of the particular offering, the maturity of the obligation, the
credit quality and rating of the issue and expectations regarding changes
in income tax rates.
Interest Rate Risk
If general market interest rates increase, the prices of municipal
obligations ordinarily will decrease. In a market of decreasing interest
rates, the opposite generally will be true. Although longer-term bonds
generally offer higher yields than shorter-term bonds, their prices are
more sensitive to changes in interest rates than bonds with shorter
maturities. Under normal circumstances, the dollar-weighted average
maturities of Maryland Tax-Free's and Pennsylvania Tax-Free's portfolios
are expected to be 12-24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be 2-10 years.
For Maryland Tax-Free:
Changes in economic conditions in, or governmental policies of, the
State of Maryland could have a significant impact on the performance of
the Fund. For example, services (including mining), wholesale and retail
trade, government, and manufacturing (primarily printing and publishing,
food and kindred products, instruments and related products, electronic
equipment, industrial machinery and transportation equipment) are the
leading areas of employment in the State of Maryland. In contrast to the
nation as a whole, more people in Maryland are employed in government
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than in manufacturing. The relatively high concentration of governmental
employment in Maryland makes the state potentially vulnerable to any
decreases in federal, including military, and state governmental spending.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The outlook for those sectors is
subject to question given disclosures indicating continuing financial
weakness in major banking and insurance companies having their corporate
headquarters in Maryland and the general regional decline in real estate
activity and values.
The Fund may invest in certain municipal obligations with unique
risks. These include, but are not limited to, securities issued by
hospitals and other health care providers. The hospital industry
throughout the nation has been subjected to pressure to reduce expenses
and to limit lengths of stay. That pressure may adversely affect the
financial health of some hospitals.
An expanded discussion of certain investment considerations relating
to debt obligations of Maryland and its political subdivisions is
contained in the Statement of Additional Information.
For Pennsylvania Tax-Free:
Changes in economic conditions in, or governmental policies of, the
Commonwealth of Pennsylvania could have a significant impact on the
performance of the Fund. For example, Pennsylvania's continued dependence
on manufacturing, mining and steel has made Pennsylvania vulnerable to
cyclical industry fluctuations, foreign imports and environmental
concerns. However, growth in the service and trade sectors has helped
diversify Pennsylvania's economy and reduce its unemployment rate below
the national average. Changes in local economic conditions or local
governmental policies within Pennsylvania, which can vary substantially by
region, could also have a significant impact on the performance of
municipal obligations held by the Fund. The City of Philadelphia, for
example, experienced severe financial problems which impaired its ability
to borrow money and adversely affected the ratings of its obligations and
their marketabilty. While the Fund may invest in obligations that are
secured by obligors other than Pennsylvania or its political subdivisions
(such as hospitals, universities, corporate obligors and corporate credit
and liquidity providers) and obligations limited to specific revenue
pledges (such as sewer authority bonds), the creditworthiness of these
obligors may be partly dependent on the creditworthiness of Pennsylvania
or its municipal authorities.
An expanded discussion of certain investment considerations relating
to debt obligations of Pennsylvania and its political subdivisions is
contained in the Statement of Additional Information.
Concentration
Each Fund may invest 25% or more of its total assets in a particular
segment of the municipal securities market, such as hospital revenue
bonds, housing agency bonds, IDBs or airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project. In
such circumstances, economic, business, political or other changes
affecting one issue of bonds (such as proposed legislation affecting
healthcare or the financing of a project, shortages or price increases of
needed materials, or declining markets or needs for the projects) would
most likely affect other bonds in the same segment, thereby potentially
increasing market risk. As a result, each Fund is subject to greater risk
than other funds that do not follow this practice.
Non-Diversification
Each Fund has registered as a "non-diversified" investment company.
Therefore, the percentage of Fund assets invested in any single issuer is
not limited by the Investment Company Act of 1940, as amended ("1940
Act"). However, each Fund intends to continue to qualify as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended ("Code"). To qualify as a RIC, a Fund generally must meet the
following diversification requirements at the close of each quarter of its
taxable year: (1) at least 50% of the value of its total assets must
consist of cash, securities of the U.S. Government and other RICs and
holdings of other securities, which, with respect to any one issuer, do
not have a value greater than 5% of the value of the Fund's total
11
<PAGE>
assets; and (2) no more than 25% of the value of its total assets may be
invested in the securities of a single issuer. For these purposes, the
term "issuer" does not include the U.S. Government or other RICs. To the
extent that a Fund's assets are invested in the obligations of a limited
number of issuers, the value of that Fund's shares will be more
susceptible to any single economic, political or regulatory occurrence
affecting one or more of those issuers than the shares of a diversified
investment company would be.
Other Risks
Current efforts to restructure the federal budget and the relationship
between the federal government and state and local governments may impact
the financing of some issuers of municipal securities. Some states and
localities are experiencing substantial deficits and may find it difficult
for political or economic reasons to increase taxes. Some local
jurisdictions have invested heavily in derivative instruments and may now
hold portfolios of uncertain valuation. Each of these factors may affect
the ability of an issuer of municipal securities to meet its obligations.
Efforts by Congress to restructure the federal income tax system could
adversely affect the value of municipal securities.
INVESTMENT TECHNIQUES
Each Fund may employ the investment techniques described below, among
others. Use of certain of these techniques may give rise to taxable
income.
When-Issued Securities
Each Fund may enter into commitments to purchase municipal obligations
or other securities on a when-issued basis. Such securities are often the
most efficiently priced and have the best liquidity in the bond market.
When a Fund purchases securities on a when-issued basis, it assumes the
risks of ownership, including the risk of price fluctuation, at the time
of purchase, not at the time of receipt. However, a Fund does not have to
pay for the obligations until they are delivered to it, normally 15 to 45
days later. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. Use of this practice would have a leveraging effect on a Fund. Each
Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 25% of total assets.
Callable Bonds
Callable municipal bonds are municipal bonds which carry a provision
permitting the issuer to redeem the bonds prior to their maturity dates at
a specified price which typically reflects a premium over the bonds'
original issue price. If the proceeds of a bond owned by a Fund called
under circumstances favorable to the issuer are reinvested, the result may
be a lower overall yield on such proceeds upon reinvestment because of
lower prevailing interest rates. If the purchase price of such bonds
included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the
Funds, depending on the price at which such bonds were redeemed.
Each callable bond is "marked-to-market" daily based on the bond's
call date so that the call of some or all of a Fund's callable bonds is
not expected to have a material impact on that Fund's net asset value. In
light of the previously described pricing policies and because each Fund
follows certain amortization procedures required by the Internal Revenue
Service, each Fund does not expect to suffer any material adverse impact
in connection with a call of bonds purchased at a premium. Notwithstanding
such policies, however, as with any investment strategy, there is no
guarantee that a call may not have a more substantial impact than
anticipated.
Stand-By Commitments
Each Fund may acquire "stand-by commitments" with respect to its
investments in municipal obligations. A stand-by commitment is a put (that
is, the right to sell the underlying security within a specified period of
time at a specified exercise price that may be sold, transferred or
assigned only with the underlying security) that entitles the Fund to
same-day settlement. Under a
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stand-by commitment, a broker, dealer or bank agrees to purchase, at the
Fund's option, specified municipal obligations at amortized cost plus
accrued interest. The total amount paid for outstanding stand-by
commitments held by a Fund will not exceed 25% of that Fund's total assets
calculated immediately after each stand-by commitment is acquired.
Securities Lending, Zero Coupon and Deferred Interest Bonds
Each Fund may engage in securities lending and may invest in zero
coupon and deferred interest bonds. However, each Fund does not currently
intend to loan securities with a value exceeding 5% of its net assets or
to invest more than 5% of its net assets in zero coupon and deferred
interest bonds. Any income from securities lending would be taxable when
distributed to shareholders. For further information concerning securities
lending, zero coupon and deferred interest bonds, see the Statement of
Additional Information.
Variable Rate and Floating Rate Obligations
Each Fund may invest in variable rate municipal obligations and notes.
Variable rate obligations have a yield that is adjusted periodically based
upon market conditions.
Each Fund may also invest in floating rate and variable rate demand
notes. Demand notes provide that the holder may demand payment of the note
at its par value plus accrued interest. These notes may be supported by an
unconditional bank letter of credit guaranteeing payment of the principal
or both the principal and accrued interest. Floating rate demand notes
have an interest rate related to a known lending rate, such as the prime
rate, and are automatically adjusted when such known rate changes. Such
securities often react to changes in market interest rates in a manner
similar to shorter-term securities that mature at the time of the next
interest rate reset for the variable or floating rate instrument. In
calculating its dollar-weighted average maturity, a Fund may determine the
maturity of a variable or floating rate note according to the interest
rate reset date, or the date principal can be recovered on demand, rather
than the date of ultimate maturity.
Futures and Option Strategies
To protect against the effect of adverse changes in interest rates,
each Fund may purchase and sell interest rate futures contracts and
options on securities indexes, and may purchase put options on interest
rate futures contracts (practices known as "hedging"). A Fund may purchase
put options on interest rate futures contracts or sell interest rate
futures contracts (that is, enter into a futures contract to sell the
underlying security) to attempt to reduce the risk of fluctuations in its
share value. A Fund may purchase an interest rate futures contract (that
is, enter into a futures contract to purchase the underlying security) to
attempt to establish more definitely the return on securities the Fund
intends to purchase. The Funds may not use these instruments for
speculation or leverage. In addition, a Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations. Any gains from futures and options transactions would be
taxable.
The success of a Fund's strategies in reducing risks depends on many
factors, the most significant of which is the Adviser's ability to predict
market interest rate changes correctly, which differs from its ability to
select portfolio securities. In addition, a hedge could be unsuccessful if
the changes in the value of a Fund's futures contract or option positions
do not correlate to the changes in the value of its investments. It is
also possible that a Fund may be unable to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or
that a Fund may need to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions. Because the markets
for futures and options are not always liquid, a Fund may be unable to
close out or liquidate its hedged position and may be locked in during a
market decline. The Adviser attempts to minimize the possible negative
effects of these factors through careful selection and monitoring of each
Fund's futures and options positions. The Adviser is of the opinion that a
Fund's investments in futures transactions will not have a material
adverse effect on that Fund's liquidity or ability to honor redemptions.
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The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the portfolios.
While utilization of options, future contracts and similar instruments may
be advantageous to a Fund, if the Adviser is not successful in employing
such instruments in managing a Fund's investments or in predicting
interest rate changes, that Fund's performance will be worse than if the
Fund did not use such instruments. In addition, a Fund will pay
commissions and other costs in connection with such investments, which may
increase that Fund's expenses and reduce its yield. A more complete
discussion of the possible risks involved in transactions in options and
futures contracts is contained in the Statement of Additional Information.
Each Fund's current policy is to limit options and futures
transactions to those described above. Each Fund currently does not intend
to purchase put and call options having a value in excess of 5% of its
total assets.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental limitations that, like its
investment objective, can be changed only by the vote of a majority of the
outstanding voting securities of that Fund. For these purposes, a "vote of
a majority of the outstanding voting securities" of a Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund, or (2) 67% or more of the shares present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented in person or by proxy. These investment limitations are set
forth under "Additional Information About Investment Limitations and
Policies" in the Statement of Additional Information. Fund policies,
unless described as fundamental, can be changed by the Board of Trustees.
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason, with an affiliate that has an agreement with Legg
Mason or with an unaffiliated entity having an agreement with Legg Mason
("Financial Advisor or Service Provider"). Your Financial Advisor or
Service Provider will be pleased to explain the shareholder services
available from the Funds and answer any questions you may have.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds, is $1,000, and the minimum investment for each purchase of
additional shares is $100. For those investing through a Fund's Future
First Systematic Investment Plan, payroll deduction plans and plans
involving automatic payment of funds from financial institutions or
automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. Each Fund may change
these minimum amount requirements at its discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. THROUGH YOUR FINANCIAL ADVISOR OR SERVICE PROVIDER
Shares may be purchased through a Financial Advisor or Service
Provider. A Financial Advisor or Service Provider will be pleased to open
an account for you, explain to you the shareholder services available from
the Funds, and answer any questions you may have. After you have
established an account, you can order shares from your Financial Advisor
or Service Provider in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Funds of $50 or more by authorizing
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Boston Financial Data Services ("BFDS"), the Funds' transfer agent, to
transfer funds each month from your checking account. Please contact a
Financial Advisor or Service Provider for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through a Financial Advisor
or Service Provider.
Primary Share purchases will be processed at the net asset value next
determined (plus any applicable sales charge, which will vary with the
amount purchased, as shown below) after your Financial Advisor or Service
Provider has received your order. Effective August 1, 1995 through July
31, 1998, Tax-Free Intermediate's sales charge will be waived for all new
accounts and subsequent investments into existing accounts. After July 31,
1998, any exchanges of these shares will be subject to the full sales
charge, if any, since no sales charge will be paid on shares purchased
during this period.
SALES CHARGE SCHEDULE FOR TAX-FREE INTERMEDIATE
Sales Charge as
Sales Charge as a Percentage of
a Percentage of Net Amount
Public Offering Invested (Net
Amount of Purchase Price Asset Value)
------------------ --------------- ---------------
Less than $50,000 2.00% 2.04%
$50,000 to $99,999 1.75 1.78
$100,000 to $249,999 1.50 1.52
$250,000 to $499,999 1.25 1.27
$500,000 to $999,999 1.00 1.01
$1,000,000 and over 0.75 0.76
SALES CHARGE SCHEDULE FOR MARYLAND TAX-FREE
AND PENNSYLVANIA TAX-FREE
Sales Charge as
Sales Charge as a Percentage of
a Percentage of Net Amount
Public Offering Invested (Net
Amount of Purchase Price Asset Value)
------------------ --------------- ---------------
Less than $50,000 2.75% 2.83%
$50,000 to $99,999 2.50 2.56
$100,000 to $249,999 2.00 2.04
$250,000 to $499,999 1.50 1.52
$500,000 to $999,999 1.25 1.27
$1,000,000 to $2,999,999 1.00 1.01
$3,000,000 to $4,999,999 0.50 0.50
$5,000,000 and over 0.25 0.25
Shares of any Fund may be obtained without a sales charge by
exchanging shares of another Fund for which an equal or higher sales
charge was paid, or by exchanging shares of other Legg Mason funds which
were originally obtained through exchange of Fund shares on which an equal
or higher sales charge was paid. If the sales charges previously paid were
less than sales charges on the Fund into which you are exchanging, an
additional sales charge equal to the difference is due. In addition, Fund
shares may be purchased without a sales charge by employees, directors and
officers of Legg Mason or its affiliates, directors or trustees and
officers of any of the Legg Mason funds, the spouses and children under 21
years of age of any of the foregoing persons and by advisory clients of
investment advisers affiliated with Legg Mason.
Shareholders who have redeemed shares on which a sales charge was paid
may reinstate their Fund account without a sales charge up to the dollar
amount redeemed by purchasing shares within 90 days of the redemption
("reinstatement privilege"). Shareholders may exercise their reinstatement
privilege by notifying their financial advisor or Service Provider of such
desire and placing an order for the amount to be purchased within 90 days
after the date of redemption. The reinstatement will be made at the net
asset value next determined after the Notice of Reinstatement and order
have been received by Legg Mason's Funds Processing.
Primary Shares may be purchased at reduced sales charges through
either of the two Legg
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Mason reduced sales charge plans. These are (1) a Letter of Intention
("LOI") and (2) a Right of Accumulation, as described below.
Through an LOI, you may pay a lower sales charge if the dollar amount
of shares currently being purchased plus the dollar amount of any
purchases you intend to make during the next thirteen months of shares of
these and other Legg Mason funds sold with an initial sales charge equals
$50,000 or more. To take advantage of an LOI, you should indicate the
total amount you intend to purchase over the thirteen-month period on the
form available from your financial advisor or Service Provider. Holdings
acquired up to 90 days before the LOI is filed will be counted toward
completion of the LOI, and will be entitled to a retroactive downward
adjustment of the initial sales charge.
If the Funds' transfer agent, BFDS, does not receive a completed LOI
within 20 business days after settlement of the first LOI purchase or if
the total purchases indicated on the LOI are not made within the
thirteen-month period, your account will be charged with the difference
between the reduced LOI sales charge and the sales charge applicable to
the purchase actually made. Shares with a value of up to 2 1/2% of the
intended LOI purchases will be held in escrow during the thirteen-month
period (registered in your name) to assure such necessary payment. These
escrowed shares may not be exchanged for shares of other Legg Mason funds.
If you redeem your account during this period, the applicable Fund will
withhold from the escrow amount sufficient shares to pay any unpaid sales
charge.
Under the Right of Accumulation, the current value of an investor's
existing shares in Legg Mason funds sold with an initial sales charge may
be combined with the amount of the investor's current purchase in
determining the sales charge for the current purchase. In determining both
the current value of existing shares and the amount of the investor's
current purchase, shares held or purchased by the investor's spouse,
and/or children under the age of 21, may be included. Legg Mason may
require supporting documentation in connection with purchases made under
the Right of Accumulation.
Orders received by your Financial Advisor or Service Provider before
the close of regular trading on the New York Stock Exchange ("Exchange")
(normally 4:00 p.m. Eastern time) ("close of the Exchange") on any day the
Exchange is open will be executed at the net asset value, plus any
applicable sales charge, determined as of the close of the Exchange on
that day. Orders received by your Financial Advisor or Service Provider
after the close of the Exchange or on days the Exchange is closed will be
executed at the net asset value, plus any applicable sales charge,
determined as of the close of the Exchange on the next day the Exchange is
open. See "How Net Asset Value is Determined," page 20. Payment must be
made within three business days to Legg Mason. Each Fund reserves the
right to reject any order for its shares or to suspend the offering of
shares for a period of time.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. Shares may not be held in, or
transferred to, an account with any brokerage firm that does not have an
agreement with Legg Mason. The Funds no longer issue share certificates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Financial Advisor or Service Provider an order for redemption of
your shares in person or over the telephone. Please have the following
information ready when you call: the name of the Fund, the number of
shares (or dollar amount) to be redeemed and your shareholder account
number. Second, you may send a written request for redemption to: [insert
complete Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476.
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Requests for redemption received by your Financial Advisor or Service
Provider before the close of the Exchange on any day when the Exchange is
open, will be transmitted to BFDS, transfer agent for the Funds, for
redemption at the net asset value per share determined as of the close of
the Exchange on that day. Requests for redemption received by your
Financial Advisor or Service Provider after the close of the Exchange will
be executed at the net asset value determined as of the close of the
Exchange on its next trading day. A redemption request received by your
Financial Advisor or Service Provider may be treated as a request for
repurchase and, if it is accepted, your shares will be purchased at the
net asset value per share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your brokerage account
two business days after trade date. The proceeds of your redemption or
repurchase may be more or less than your original cost. If the shares to
be redeemed or repurchased were paid for by check (including certified or
cashier's checks) within 10 business days of the redemption or repurchase
request, the proceeds may not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
Written requests for redemption must be in "good order." A redemption
request will be considered to be received in "good order" only if:
1. You have indicated in writing the number of Primary Shares (or
dollar amount) to be redeemed, the complete Fund name and your shareholder
account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Financial
Advisor or Service Provider.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges should call their Financial Advisor or Service Provider for
further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, no Fund will redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in your account, you will be notified
that your account is below $500 and will be allowed 60 days in which to
make an additional investment in order to avoid having your account
closed.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the Adviser, the Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended).
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily, as
of the close of the Exchange, on every day that the Exchange is open,
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by subtracting the liabilities attributable to Primary Shares from the
total assets attributable to such shares and dividing the result by the
number of Primary Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued based upon appraisals received from an independent pricing
service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities
received from recognized dealers in those securities. Debt securities with
remaining maturities of 60 days or less are valued at amortized cost,
unless conditions otherwise indicate. Other securities are valued at fair
value as determined by, or under the supervision of, the Board of Trustees
of the Trust.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income of each Fund are declared daily
and paid monthly. Shareholders begin to earn dividends on their Primary
Shares as of the settlement date, which is normally the third business day
after their orders are placed with their Legg Mason or affiliated
financial advisor. Dividends from net short-term capital gain, if any, and
distributions of substantially all net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any,
generally are declared and paid after the end of the taxable year in which
the gain is realized. A second distribution of net capital gain may be
necessary in some years to avoid imposition of the excise tax described
under the heading "Additional Tax Information" in the Statement of
Additional Information. Dividends and capital gain distributions, if any,
on shares held by shareholders maintaining a Systematic Withdrawal Plan
generally are reinvested in Primary Shares on the payment dates. Other
shareholders may elect to:
1. Receive both dividends and capital gain distributions in Primary
Shares of the distributing Fund;
2. Receive dividends in cash and capital gain distributions in Primary
Shares of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
capital gain distributions in cash; or
4. Receive both dividends and capital gain distributions in cash.
In certain cases, you may reinvest your dividends and capital gain
distributions in the corresponding class of shares of another Legg Mason
fund. Please contact your Financial Advisor or Service Provider for
additional information about this option.
If no election is made, both dividends and capital gain distributions
are credited to your account in Primary Shares of the distributing Fund at
the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also are credited to your
account at that net asset value. If you elect to receive dividends and/or
capital gain distributions in cash, you will be sent a check or will have
your Legg Mason account credited after the payment date. You may elect at
any time to change your option by notifying the applicable Fund in writing
at: [insert complete Fund name], c/o Legg Mason Funds Processing, P.O. Box
1476, Baltimore, Maryland 21203-1476. Your election must be received at
least 10 days before the record date in order to be effective for
dividends and capital gain distributions paid to shareholders as of that
date.
TAXES
FEDERAL INCOME TAX
Each Fund intends to continue to qualify for treatment as a RIC under
the Code so that it will be relieved of federal income tax on that part of
its investment company taxable income (generally, taxable net investment
income and any net short-term capital gain) and net capital gain that it
distributes to its shareholders. If a Fund so qualifies and, at the close
of each quarter of its taxable year, at least 50% of the value of its
total assets consists of certain obligations the interest on which is
excludable from gross income under Section 103(a) of the Code, that Fund
may pay "exempt-interest" dividends to its shareholders. Those dividends
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<PAGE>
constitute the portion of the aggregate dividends (excluding capital gain
distributions), as designated by the Fund, equal to the excess of the
excludable interest over certain amounts disallowed as deductions.
Exempt-interest dividends are excludable from a shareholder's gross
income; however, the amount of such dividends must be reported on the
recipient's federal income tax return.
If and to the extent a Fund receives interest on certain PABs, a
proportionate part of the exempt-interest dividends paid by the Fund will
be treated as a Tax Preference Item. In addition, exempt-interest
dividends received by a corporate shareholder may be indirectly subject to
the federal alternative minimum tax without regard to whether the Fund's
tax-exempt interest is attributable to PABs.
To the extent dividends are derived from taxable income from temporary
investments, from net short-term capital gain or from the use of certain
investment techniques described in "Investment Objectives and Policies,"
page 10, they are taxable to shareholders as ordinary income (whether paid
in cash or reinvested in Primary Shares). No portion of those dividends
will qualify for the corporate dividends-received deduction. Distributions
derived from net capital gain, if any, are taxable to shareholders as
long-term capital gain regardless of the length of time they have held
their Primary Shares (and irrespective of whether those distributions are
paid in cash or reinvested in Primary Shares).
Interest on indebtedness incurred or continued by a shareholder in
order to purchase or carry Fund shares generally is not deductible.
Persons who are "substantial users" (or related persons) of facilities
financed by IDBs or PABs should consult their tax advisers before
purchasing shares of a Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, a "substantial user" includes a non-exempt person
who regularly uses in trade or business a part of a facility financed from
the proceeds of IDBs or PABs.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares (which normally includes any sales charge paid). An exchange of
Primary Shares for shares of any other Legg Mason fund generally will have
similar tax consequences. However, special tax rules apply if (1) a
shareholder disposes of Fund shares through a redemption or exchange
within 90 days after the shareholder acquired the shares and (2) the
shareholder subsequently acquires shares of that Fund or of another Legg
Mason fund without the imposition of a sales charge that otherwise would
have been imposed except for the reinstatement privilege or exchange
privilege. See "How You Can Invest in the Funds," page 16, and
"Shareholder Services -- Exchange Privilege," page 23. In these cases, any
sales charge that was imposed on the purchase of the original Primary
shares will not be taken into account in determining the amount of gain or
loss on the redemption or exchange -- the tax effect of that charge will
instead be deferred by being treated as having been incurred in connection
with the newly acquired shares. In addition, if Fund shares are purchased
within 30 days before or after redeeming, at a loss, other shares of the
same Fund (regardless of class) all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
FOR MARYLAND TAX-FREE:
MARYLAND TAXES
Distributions paid by Maryland Tax-Free to Maryland residents
attributable to interest received or capital gains recognized by the Fund
on Maryland municipal obligations are exempt from Maryland state and local
income taxes. Distributions attributable to interest received or capital
gains recognized by the Fund on certain U.S. government obligations also
are exempt from Maryland state and local income taxes. Distributions
attributable to the Fund's other income or gains generally are subject to
these taxes.
Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for purposes of either
Maryland state or local income tax. Fund shares held by an
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<PAGE>
individual are not subject to the Maryland personal property tax. Fund
shares held by a corporation also are not subject to the Maryland personal
property tax. Subject to a three year phase-in period, dividends paid by
the Fund with respect to Maryland municipal obligations and profits
realized on the sale or exchange of such obligations are not subject to
the Maryland Franchise Tax imposed on "financial institutions" and
measured by net earnings.
In the case of individuals, Maryland imposes an income tax on Tax
Preference Items. Interest paid on certain PABs is a Tax Preference Item.
Accordingly, if the Fund holds such bonds, 50% of the interest thereon in
excess of a threshold amount is subject to Maryland state and local tax.
FOR PENNSYLVANIA TAX-FREE:
PENNSYLVANIA TAXES
Individual shareholders of Pennsylvania Tax-Free who are otherwise
subject to the Pennsylvania personal income tax will not be subject to
that tax on distributions by the Fund that are attributable to interest on
Pennsylvania municipal obligations. Distributions attributable to most
other sources, including gains, will not be exempt from Pennsylvania
personal income tax.
Shares that are held by individual shareholders who are Pennsylvania
residents will be exempt from the Pennsylvania county personal property
tax to the extent that the Fund's portfolio consists of Pennsylvania
municipal obligations on the annual assessment date. Nonresidents of
Pennsylvania are not subject to this tax. Corporations are not subject to
any of these personal property taxes. For shareholders who are residents
of the City of Philadelphia, distributions of interest derived from
Pennsylvania municipal obligations are not taxable for purposes of the
Philadelphia School District investment net income tax, provided that the
Fund reports to its shareholders the percentage of Pennsylvania municipal
obligations held by it for the year. The Fund will report such percentage
to its shareholders.
Distributions of interest, but not gains, realized on Pennsylvania
municipal obligations are not subject to the Pennsylvania corporate net
income tax. The Pennsylvania Department of Revenue also takes the position
that shares of funds similar to the Fund are not considered exempt assets
of a corporation for the purposes of determining its capital stock value
subject to Pennsylvania capital stock and franchise taxes.
GENERAL
Shareholders receive information after the close of each year
concerning the tax status of all dividends and capital gain distributions
from their Fund(s). Each Fund is required to withhold 31% of all taxable
dividends, capital gain distributions and redemption proceeds payable to
any individuals and certain other noncorporate shareholders who do not
provide the Fund with a certified taxpayer identification number. Each
Fund also is required to withhold 31% of all taxable dividends and capital
gain distributions payable to such shareholders who otherwise are subject
to backup withholding. Dividends derived from interest on Maryland
municipal obligations may not be exempt from taxation under the laws of
states other than Maryland. Dividends derived from interest on
Pennsylvania municipal obligations may not be exempt from taxation under
the laws of states other than Pennsylvania.
The foregoing is only a summary of some of the important federal,
Maryland, Pennsylvania and certain local income tax considerations
generally affecting the respective Funds and their shareholders; see the
Statement of Additional Information for a further discussion. In addition
to those considerations which are applicable to any investment in the
Funds, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective shareholders are urged to
consult their tax advisers with respect to the effects of this investment
on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends or capital
gain distributions and purchases made through
20
<PAGE>
the Future First Systematic Investment Plan or through automatic
investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares through the Future
First Systematic Investment Plan or through automatic investments, in
which case an account statement will be sent quarterly. Reports will be
sent to each Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its independent accountants.
Shareholder inquiries should be addressed to "[insert complete fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476."
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Financial
Advisor or Service Provider for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus an
additional sales charge if the sales charge previously paid was less than
the sales charge applicable to the fund into which you are exchanging,
determined on the same business day as redemption of the Fund shares you
wish to redeem. Exchanges from the other Legg Mason funds sold without an
initial sales charge will be at net asset value plus the applicable sales
charge (unless the investment in the fund was transferred from a Legg
Mason fund sold with the same or higher sales charge). There is no charge
for the exchange privilege, but each Fund reserves the right to terminate
or limit the exchange privilege of any shareholder who makes more than
four exchanges from that Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Financial
Advisor or Service Provider. To effect an exchange by telephone, please
call your Financial Advisor or Service Provider with the information
described in "How You Can Redeem Your Primary Shares," page 19. The other
factors relating to telephone redemptions described in that section apply
also to telephone exchanges. Please read the prospectus for the other
fund(s) carefully before you invest by exchange. Each Fund reserves the
right to modify or terminate its exchange privilege upon 60 days' notice
to shareholders.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISER
BOARD OF TRUSTEES
The business and affairs of each Fund are managed under the direction
of the Board of Trustees of the Trust.
ADVISER
Pursuant to separate advisory agreements with each Fund (each an
"Advisory Agreement"), which were approved by the Trust's Board of
Trustees, the Adviser, a wholly owned subsidiary of Legg Mason, Inc. (a
financial services holding company), serves as each Fund's investment
adviser. The Adviser administers and acts as the portfolio manager for
each Fund and is responsible for the actual investment management of the
Funds, including the responsibility for making investment decisions and
placing orders to buy, sell or hold a particular security. Each Fund pays
the Adviser, pursuant to the Advisory Agreement, a management fee equal to
an annual rate of 0.55% of the Fund's average daily net assets
attributable
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to Primary Shares. Each Fund pays all its other expenses which are not
assumed by the Adviser.
Pursuant to a voluntary expense limitation, the Adviser and Legg Mason
have agreed to waive the management and 12b-1 fees relating to Primary
Shares (exclusive of taxes, interest, brokerage fees and extraordinary
expenses) in excess of: 0.70% (annualized) of average daily net assets of
Maryland Tax-Free until July 31, 1998 or until the Fund's net assets reach
$200 million, whichever occurs first; 0.70% (annualized) of average daily
net assets of Pennsylvania Tax-Free until July 31, 1998 or until the
Fund's net assets reach $125 million, whichever occurs first; and 0.70%
(annualized) of average daily net assets of Tax-Free Intermediate until
July 31, 1998 or until the Fund's net assets reach $100 million, whichever
occurs first. During the fiscal year ended March 31, 1997, the Maryland
Tax-Free's, Pennsylvania Tax-Free's and Tax-Free Intermediate's expenses
as a percentage of average net assets were 0.67%, 0.67% and 0.67%,
respectively.
The Adviser acts as investment adviser, manager or consultant to
investment company portfolios which had aggregate assets under management
of approximately $8.0 billion as of June 30, 1997. The Adviser's address
is 111 South Calvert Street, Baltimore, Maryland 21202.
Victoria M. Schwatka has been primarily responsible for the day-to-day
management of the Funds since their inception. Ms. Schwatka is a portfolio
manager and Senior Vice-President of Legg Mason's Fixed Income Group. Ms.
Schwatka has been employed by Legg Mason since June, 1986.
Jane E. Trust became co-manager of the Trust on July 31, 1997. Ms.
Trust has been a Vice President of the Adviser since July 1994, and a
portfolio manager for Legg Mason's Fixed Income Group since 1991.
THE FUNDS' DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of the Funds' shares pursuant to a separate Underwriting
Agreement with each Fund. Each Underwriting Agreement obligates Legg Mason
to pay certain expenses in connection with the offering of shares of the
Funds, including any compensation to its financial advisors, the printing
and distribution of prospectuses, statements of additional information and
periodic reports used in connection with the offering to prospective
investors, after the prospectuses, statements of additional information
and periodic reports have been prepared, set in type and mailed to
existing shareholders at the Fund's expense, and for any supplementary
sales literature and advertising costs. Legg Mason receives the sales
charge imposed on the purchase of Primary Shares.
The Trust's Board of Trustees has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the 1940
Act. The Plan provides that as compensation for its ongoing services to
investors in Primary Shares and its activities and expenses related to the
sale and distribution of Primary Shares, Legg Mason receives from each
Fund annual service and distribution fees payable from the assets
attributable to Primary Shares, each equal to an annual rate of 0.125% of
that Fund's average daily net assets. These fees are calculated daily and
paid monthly. The fees received by Legg Mason during any year may be more
or less than its cost of providing distribution and shareholder services
for Primary Shares.
Legg Mason receives a fee from BFDS for assisting it with its transfer
agent and shareholder servicing functions; for the year ended March 31,
1997, Legg Mason received from BFDS $18,000, $8,000 and $6,000 for
performing such services in connection with Maryland Tax-Free,
Pennsylvania Tax-Free and Tax-Free Intermediate, respectively.
NASD rules limit the amount of annual distribution and service fees
that may be paid by mutual funds and impose a ceiling on the cumulative
distribution fees received. Each Fund's Plan complies with those rules.
Legg Mason may enter into agreements with unaffiliated dealers to sell
Primary Shares of each Fund. Legg Mason pays such dealers up to 90% of the
distribution and shareholder service fees that it receives from a Fund
with respect to shares sold by the dealers.
The Chairman, President and Treasurer of the Trust are employed by
Legg Mason.
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THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of the
Funds. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, is the transfer agent for Fund shares and dividend-disbursing agent
for the Funds.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated November 21, 1990. The Declaration of Trust
authorizes the Trust to issue an unlimited number of shares and to create
additional series, each of which may issue separate classes of shares.
Three series of the Trust currently are being offered.
Each series of the Trust currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses and sales charges, which may
affect performance.
Investors may obtain more information concerning the Navigator Class
from their financial advisor or any person making available to them shares
of the Primary Class, or by calling 1-800-822-5544.
The Board of Trustees of the Trust does not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Board will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
trustees, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Trust will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
23
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
TAX-FREE
INCOME FUNDS
Putting Your Future First
TAX-FREE INCOME FUNDS
Navigator Class of Maryland
Tax-Free Income Trust
Navigator Class of
Pennsylvania Tax-Free
Income Trust
Navigator Class of
Tax-Free Intermediate-Term
Income Trust
PROSPECTUS
JULY 31, 1997
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000 800 (bullet) 822 (bullet) 5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
800 (bullet) 441 (bullet) 3885
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street
Baltimore, Maryland 21202
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by any Fund or its distributor. The Prospectus does not
constitute an offering by any Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
[LEGG MASON FUNDS LOGO]
<PAGE>
NAVIGATOR TAX-FREE INCOME FUNDS
PROSPECTUS
JULY 31, 1997
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
Shares of Navigator Maryland Tax-Free Income Trust, Navigator Pennsylvania
Tax-Free Income Trust and Navigator Tax-Free Intermediate-Term Income Trust
(collectively referred to as "Navigator Shares") represent separate classes
(each a "Navigator Class") of interest in Legg Mason Maryland Tax-Free Income
Trust ("Maryland Tax-Free"), Legg Mason Pennsylvania Tax-Free Income Trust
("Pennsylvania Tax-Free") and Legg Mason Tax-Free Intermediate-Term Income Trust
("Tax-Free Intermediate") (each a "Fund"), respectively. Each Fund is a separate
series of Legg Mason Tax-Free Income Fund ("Trust"), an open-end management
investment company.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they act in
a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust Company")
for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with Institutional 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.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
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 Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated July 31, 1997 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon request from the Funds' distributor, Legg Mason
Wood Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
on the next page).
SHARES OF MARYLAND TAX-FREE ARE QUALIFIED FOR SALE TO INVESTORS ONLY IN THE
STATES OF MARYLAND, DELAWARE, FLORIDA, PENNSYLVANIA, TEXAS, VIRGINIA, WEST
VIRGINIA, WYOMING AND THE DISTRICT OF COLUMBIA. SHARES OF PENNSYLVANIA TAX-FREE
ARE QUALIFIED FOR SALE TO INVESTORS ONLY IN THE STATES OF PENNSYLVANIA,
DELAWARE, FLORIDA, MARYLAND, NEW JERSEY, NEW YORK, OHIO, WEST VIRGINIA, WYOMING
AND THE DISTRICT OF COLUMBIA. THESE FUNDS ARE NOT BEING OFFERED FOR SALE TO
INVESTORS IN ANY OTHER STATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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 SHARES. SEE "HOW TO PURCHASE AND REDEEM SHARES." EACH FUND PAYS
MANAGEMENT FEES TO LEGG MASON FUND ADVISER, INC., BUT NAVIGATOR CLASSES PAY NO
DISTRIBUTION FEES.
MARYLAND TAX-FREE is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal and Maryland state
and local income taxes, consistent with prudent investment risk and preservation
of capital. In attempting to achieve the Fund's objective, the Funds' 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
<PAGE>
which are investment grade, i.e., securities rated within the four highest
grades by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P")
or Fitch Investors Service, Inc. ("Fitch") or, if unrated by Moody's, S&P or
Fitch ("unrated securities"), deemed by the Adviser to be of comparable quality.
Under normal circumstances, the dollar-weighted average maturity of the Fund's
portfolio is expected to be between 12 and 24 years. The Fund also may engage in
hedging transactions.
PENNSYLVANIA TAX-FREE is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal income tax and
Pennsylvania personal income tax, consistent with prudent investment risk and
preservation of capital. In attempting to achieve the Fund's objective, the
Adviser invests primarily in debt instruments issued by or on behalf of the
Commonwealth of Pennsylvania, its political subdivisions, municipalities,
agencies, instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax and
Pennsylvania personal income tax ("Pennsylvania municipal obligations") and
which are rated investment grade by Moody's, S&P or Fitch or, unrated
securities, deemed by the Adviser to be of comparable quality. The Fund's shares
are exempt from Pennsylvania county personal property tax to the extent that the
Fund invests in Pennsylvania municipal obligations. Under normal circumstances,
the dollar-weighted average maturity of the Fund's portfolio is expected to be
between 12 and 24 years. The Fund also may engage in hedging transactions.
TAX-FREE INTERMEDIATE is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal income tax,
consistent with prudent investment risk. In attempting to achieve the Fund's
objective, the Adviser invests primarily in debt instruments issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel to the
issuer, is exempt from federal income tax and which are rated investment grade
by Moody's, S&P or Fitch or unrated securities, deemed by the Adviser to be of
comparable quality, while maintaining an average dollar-weighted maturity of
between 2 and 10 years. The Fund also may engage in hedging transactions.
TABLE OF CONTENTS
Expenses 3
Performance Information 4
Who Should Invest 4
Investment Objectives and Policies 5
Investment Techniques 8
How To Purchase and Redeem Shares 10
How Shareholder Accounts are
Maintained 12
How Net Asset Value is Determined 12
Dividends and Other Distributions 12
Taxes 13
Shareholder Services 14
The Funds' Management and Investment Adviser 15
The Funds' Distributor 15
The Funds' Custodian and Transfer Agent 16
Description of the Trust and
Its Shares 16
Legg Mason Wood Walker, Incorporated
111 South Calvert Street, P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
2
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth in the table are based on estimated expenses for the initial
period of operations of the Navigator Classes.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
--------------------------------------
Management fees
(after fee
waivers) 0.26% 0.18% 0.11%
12b-1 fees None None None
Other expenses(B) 0.16% 0.24% 0.31%
--------------------------------------
Total operating
expenses(B)
(after fee
waivers) 0.42% 0.42% 0.42%
======================================
(A) Pursuant to a voluntary expense limitation, the Adviser has agreed to
waive management fees such that total operating expenses relating to
Navigator Shares (exclusive of taxes, interest, brokerage fees and
extraordinary expenses) will not exceed annual rates of 0.45% of average
daily net assets of each Fund until July 31, 1998 or until Maryland
Tax-Free's net assets reach $200 million, whichever occurs first; or
until Pennsylvania Tax-Free's net assets reach $125 million, whichever
occurs first; or until Tax-Free Intermediate's net assets reach $100
million, whichever occurs first. In the absence of such waivers, the
expense ratios for Navigator Maryland Tax-Free, Pennsylvania Tax-Free
and Tax-Free Intermediate would be 0.71%, 0.79% and 0.86%, respectively.
(B) Each Fund has entered into an arrangement with its custodian whereby
uninvested cash balances generate credits used to reduce custodian
expenses. Other expenses and Total operating expenses net of this
reduction were as follows: for Maryland Tax-Free, 0.15% and 0.41%,
respectively, of the Fund's average net assets; for Pennsylvania
Tax-Free, 0.23% and 0.41%, respectively, of the Fund's average net
assets; and for Tax-Free Intermediate, 0.30% and 0.41%, respectively, of
the Fund's average net assets.
For further information concerning the expenses of each Fund, please
see "The Funds' Management and Investment Adviser," page 18 and "The
Funds' Distributor," page 19.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming
(1) a 5% annual rate of return and (2) redemption at the end of each time
period. The Funds charge no redemption fees of any kind.
1 3 5 10
YEAR YEARS YEARS YEARS
----------------------------
Maryland Tax-Free $4 $13 $24 $53
Pennsylvania Tax-Free $4 $13 $24 $53
Tax-Free Intermediate $4 $13 $24 $53
This example assumes that all dividends and capital gain distributions
are reinvested and that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same over the time periods shown.
If the waivers are not extended beyond July 31, 1998, the expense
figures in the examples will be higher. The above table and example of a
5% annual return are required by regulations of the SEC applicable to all
mutual funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND
DOES NOT REPRESENT, THE PROJECTED OR ACTUAL PERFORMANCE OF NAVIGATOR
SHARES OF THE FUNDS. THE ABOVE TABLE AND EXAMPLE SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The actual expenses attributable to
Navigator Shares will depend upon, among other things, the level of
average net assets, the levels of sales and redemptions of shares, the
extent to which Navigator Shares incur variable expenses, such as transfer
agency costs, and whether the Adviser waives all or a portion of a Fund's
expenses.
3
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of a class of
shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and capital gain
distributions. CUMULATIVE TOTAL RETURN shows the fund's performance over a
specific period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-by-year results,
tend to smooth out variations in a fund's returns.
As of the date of this Prospectus, Navigator Shares have no
performance record. Because Navigator Shares have lower total expenses,
they will generally have a higher return than Primary Shares. Total
returns of Primary Shares as of March 31, 1997 were as follows:
MARYLAND PENNSYLVANIA TAX-FREE
CUMULATIVE TOTAL RETURN: TAX-FREE TAX-FREE INTERMEDIATE
---------------------------------------------------------------
One Year +1.88% +1.71% +1.66%
Five Years +35.32 +36.46 --
Life of Class +46.20(A) +45.03(B) +24.05(C)
AVERAGE ANNUAL MARYLAND PENNSYLVANIA TAX-FREE
TOTAL RETURN: TAX-FREE TAX-FREE INTERMEDIATE
---------------------------------------------------------------
One Year +1.88% +1.71% +1.66%
Five Years +6.23 +6.41 --
Life of Class +6.63(A) +6.78(B) +5.03(C)
(A) INCEPTION OF MARYLAND TAX-FREE -- MAY 1, 1991.
(B) INCEPTION OF PENNSYLVANIA TAX-FREE -- AUGUST 1, 1991.
(C) INCEPTION OF TAX-FREE INTERMEDIATE -- NOVEMBER 9, 1992.
Each Fund also may advertise its yield or tax equivalent yield. Yield
reflects investment income net of expenses over a 30-day (or one-month)
period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share at the end of the period. Tax equivalent
yield shows the taxable yield an investor would have to earn before taxes
to equal the Fund's tax-exempt yield. A tax equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus a stated
federal, state and local income tax rate. The effective yield, although
calculated similarly, will be slightly higher than the yield because it
assumes that income earned from the investment is reinvested (i.e., the
compounding effect of reinvestment). Yield computations differ from other
accounting methods and therefore may differ from dividends actually paid
or reported net income.
Total return and yield information reflect past performance and are
not predictions or guarantees of future results. Yields and total returns
of Primary Shares of the Funds would be lower if the Adviser and Legg
Mason had not waived a portion of the fees during the fiscal years 1992
through 1997. Investment return and share price will fluctuate, and the
value of your shares, when redeemed, may be worth more or less than their
original cost.
Further information about each Fund's performance is contained in the
combined Annual Report to Shareholders, which may be obtained without
charge by calling a financial advisor at Fairfield, Legg Mason or Legg
Mason's Funds Marketing Department at 800-822-5544.
WHO SHOULD INVEST
Maryland Tax-Free is designed for longer-term investors who are able
to benefit from income exempt from federal and Maryland state and local
income taxes. Pennsylvania Tax-Free is designed for longer-term investors
who are able to benefit from income exempt from federal income tax and
Pennsylvania personal income tax. Tax-Free Intermediate is designed for
intermediate-term investors who are able to benefit from income exempt
from federal income tax. The value of Navigator Shares can generally be
expected to fluctuate inversely with changes in interest rates and,
because of the potential negative impact of rising interest rates and
other risks, the Funds would not be appropriate for investors whose
primary goal is stability of principal. Each Fund is not intended to be a
balanced investment program. Each Fund is not an appropriate investment
for "substantial users" of certain facilities financed by industrial
development or private activity bonds or related persons thereof. See
"Taxes -- Federal Income Tax," page 16.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Trust's Board
of Trustees without a shareholder vote. There can be no assurance that any
Fund will achieve its investment objective.
MARYLAND TAX-FREE'S investment objective is to earn a high level of
current income exempt from federal and Maryland state and local income
taxes, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the State of
Maryland, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal and Maryland
state and local income taxes. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Maryland municipal obligations, exclusive of any such obligations the
interest on which is a tax preference item for purposes of the federal
alternative minimum tax ("Tax Preference Item"). See "Temporary
Investments," page 9.
PENNSYLVANIA TAX-FREE'S investment objective is to earn a high level
of current income exempt from federal income tax and Pennsylvania personal
income tax, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the Commonwealth
of Pennsylvania, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax and
Pennsylvania personal income tax. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Pennsylvania municipal obligations, exclusive of any such obligations the
interest on which is a Tax Preference Item. See "Temporary Investments"
page 9.
TAX-FREE INTERMEDIATE'S investment objective is to earn a high level
of current income exempt from federal income tax, consistent with prudent
investment risk. The Fund seeks to achieve its investment objective by
investing primarily in debt instruments issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia
and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income tax ("municipal
obligations"), while maintaining an average dollar-weighted maturity of
between 2 and 10 years. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
municipal obligations exclusive of any such obligations the interest on
which is a Tax Preference Item. See "Temporary Investments," page 9.
Each Fund invests in securities that, in the opinion of the Adviser,
present acceptable credit risks and that, at the time of purchase, are
rated:
"Baa" or higher by Moody's, "BBB" or higher by S&P or Fitch in the
case of bonds;
"MIG-1" by Moody's, "SP-1" or higher by S&P or "F-1" or higher by
Fitch in the case of notes;
"P1" by Moody's, "A1" by S&P or "F-1" or higher by Fitch in the case
of commercial paper; and
"VMIG-1" by Moody's in the case of variable rate demand notes.
Each Fund also invests in securities unrated by any of the above
services which are deemed by the Adviser to be of comparable quality.
The bond ratings noted above are considered "investment grade" by the
respective rating agencies. A rating of a municipal obligation represents
the rating agency's opinion regarding its quality and is not a guarantee
of quality. Moody's considers bonds rated in its fourth highest category
(i.e., Baa) to have speculative characteristics; changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for the issuers of such securities to make principal and interest
payments than is the case for higher rated bonds. In the event the rating
on an issue held in a Fund's portfolio is changed by Moody's, S&P or
Fitch, such change will be considered by the Adviser in its evaluation of
the overall investment merits of that security. If, as a result of any
downgradings by Moody's, S&P or Fitch or, for unrated securities, any
determinations by the Adviser that securities are no longer of comparable
quality to investment grade securities, more than 5% of a Fund's total
assets are represented by securities rated below investment grade or the
equivalent, the Adviser will, as soon as practicable consistent
5
<PAGE>
with achieving an orderly disposition of the securities, sell such
holdings until they represent 5% or less of the Fund's total assets. A
discussion of the ratings outlined above is included in the Statement of
Additional Information.
In addition to the agency ratings, there are other criteria which will
be used by the Adviser in selecting securities for a portfolio.
Consideration will be given to the maturity and duration of each bond as
well as its effect on the overall average maturity and duration of the
portfolio. Analysis of the current and historical yield spreads is done to
determine the relative value in any bond considered for purchase. The
coupon level and call features also figure in the decision on the relative
merits of an investment. Consideration is also given to the type of
bond -- whether it is a general obligation or a revenue bond. In addition
to this examination of bond characteristics, significant effort is devoted
to analysis of the creditworthiness of the bond issuer at the time of
purchase and on an ongoing basis.
Each Fund is permitted to invest in municipal securities of any
maturity. The maturities of a Fund's portfolio securities will reflect the
Adviser's judgment concerning current and future market conditions as well
as other factors, such as the Fund's liquidity needs. Under normal
circumstances, the dollar-weighted average maturities of Maryland
Tax-Free's and Pennsylvania Tax-Free's portfolios are expected to be
between 12 and 24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be between 2 and 10
years.
Each Fund does not expect its portfolio turnover rate to exceed 90%
per year.
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities. Interest on certain
tax-exempt PABs will constitute a Tax Preference Item. Accordingly, under
normal circumstances, each Fund's investment in obligations, the interest
on which is such an item, including PABs, will be limited to a maximum of
20% of its total assets.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to a
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
TEMPORARY INVESTMENTS
During unusual market conditions, including if, in the Adviser's
opinion, there are insufficient suitable Maryland municipal obligations
(with respect to Maryland Tax-Free), Pennsylvania municipal obligations
(with respect to Pennsylvania Tax-Free) or municipal obligations (with
respect to Tax-Free Intermediate) available that pay interest that is not
a Tax Preference Item, a Fund temporarily may invest more than 20% of its
total assets in municipal obligations the interest on which is exempt from
federal income tax but is such an item (with respect to Tax-Free
Intermediate) and/or is subject to Maryland state and local income taxes
(with respect to Maryland Tax-Free) and/or is subject to Pennsylvania
personal income tax (with respect to Pennsylvania Tax-Free). Each
6
<PAGE>
Fund expects that under normal circumstances it will maintain needed
liquidity through the purchase of short-term municipal securities.
However, for liquidity purposes, or pending the investment of the proceeds
of the sale of shares, a Fund temporarily may invest in taxable short-term
investments consisting of: obligations of the U.S. Government, its
agencies and instrumentalities; certificates of deposit and bankers'
acceptances of U.S. domestic banks with assets of one billion dollars or
more; commercial paper or other corporate notes of high quality; and any
of such items subject to short-term repurchase agreements. Each Fund may
invest without limit in such instruments for temporary, defensive
purposes, when in the Adviser's opinion, no suitable municipal securities
are available. No more than 10% of a Fund's net assets will be invested in
repurchase agreements maturing in more than seven days and other illiquid
securities. Interest earned from such taxable investments will be taxable
to investors as ordinary income when distributed to them.
As a fundamental policy, each Fund may borrow money solely for
temporary purposes from banks or by engaging in reverse repurchase
agreements in an amount up to 10% of the value of its total assets;
however, borrowings by a Fund in excess of 5% of the value of its total
assets may be only from banks.
YIELD AND RISK FACTORS
Yield
The yield of a municipal obligation is dependent on a variety of
factors, including general municipal securities market conditions, general
fixed-income market conditions, the financial condition of the issuer, the
size of the particular offering, the maturity of the obligation, the
credit quality and rating of the issue and expectations regarding changes
in income tax rates.
Interest Rate Risk
If general market interest rates increase, the prices of municipal
obligations ordinarily will decrease. In a market of decreasing interest
rates, the opposite generally will be true. Although longer-term bonds
generally offer higher yields than shorter-term bonds, their prices are
more sensitive to changes in interest rates than bonds with shorter
maturities. Under normal circumstances, the dollar-weighted average
maturities of Maryland Tax-Free's and Pennsylvania Tax-Free's portfolios
are expected to be 12 -24 years and the dollar-weighted average maturity
of Tax-Free Intermediate's portfolio is expected to be 2 -10 years.
For Maryland Tax-Free:
Changes in economic conditions in, or governmental policies of, the
state of Maryland could have a significant impact on the performance of
the Fund. For example, services (including mining), wholesale and retail
trade, government, and manufacturing (primarily printing and publishing,
food and kindred products, instruments and related products, electronic
equipment, industrial machinery and transportation equipment) are the
leading areas of employment in the State of Maryland. In contrast to the
nation as a whole, more people in Maryland are employed in government than
in manufacturing. The relatively high concentration of governmental
employment in Maryland makes the state potentially vulnerable to any
decreases in federal, including military, and state governmental spending.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The outlook for those sectors is
subject to question given disclosures indicating continuing financial
weakness in major banking and insurance companies having their corporate
headquarters in Maryland and the general regional decline in real estate
activity and values.
The Fund may invest in certain municipal obligations with unique
risks. These include, but are not limited to, securities issued by
hospitals and other health care providers. The hospital industry
throughout the nation has been subjected to pressure to reduce expenses
and to limit lengths of stay. That pressure may adversely affect the
financial health of some hospitals.
An expanded discussion of certain investment considerations relating
to debt obligations of Maryland and its political subdivisions is
contained in the Statement of Additional Information.
For Pennsylvania Tax-Free:
Changes in economic conditions in, or governmental policies of, the
Commonwealth of Pennsylvania could have a significant impact on the
performance of the Fund. For example, Pennsylvania's continued dependence
on manufacturing, mining and steel has made Pennsylvania vulnerable to
cyclical industry fluctuations, foreign imports and environmental
concerns. However, growth in the service and trade sectors has helped
diversify Pennsylvania's economy and reduce its unemployment rate below
the national average. Changes in local economic conditions or local
governmental policies within Pennsylvania, which can vary substantially by
region, could also have a significant impact on the performance of
municipal
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obligations held by the Fund. The City of Philadelphia, for example,
experienced severe financial problems which impaired its ability to borrow
money and adversely affected the ratings of its obligations and their
marketability. While the Fund may invest in obligations that are secured
by obligors other than Pennsylvania or its political subdivisions (such as
hospitals, universities, corporate obligors and corporate credit and
liquidity providers) and obligations limited to specific revenue pledges
(such as sewer authority bonds), the creditworthiness of these obligors
may be partly dependent on the creditworthiness of Pennsylvania or its
municipal authorities.
An expanded discussion of certain investment considerations relating
to debt obligations of Pennsylvania and its political subdivisions is
contained in the Statement of Additional Information.
Concentration
Each Fund may invest 25% or more of its total assets in a particular
segment of the municipal securities market, such as hospital revenue
bonds, housing agency bonds, IDBs or airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project. In
such circumstances, economic, business, political or other changes
affecting one issue of bonds (such as proposed legislation affecting
healthcare or the financing of a project, shortages or price increases of
needed materials, or declining markets or needs for the projects) would
most likely affect other bonds in the same segment, thereby potentially
increasing market risk. As a result, each Fund is subject to greater risk
than other funds that do not follow this practice.
Non-Diversification
Each Fund has registered as a "non-diversified" investment company.
Therefore, the percentage of Fund assets invested in any single issuer is
not limited by the Investment Company Act of 1940, as amended ("1940
Act"). However, each Fund intends to continue to qualify as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended ("Code"). To qualify as a RIC, a Fund generally must meet the
following diversification requirements at the close of each quarter of its
taxable year: (1) at least 50% of the value of its total assets must
consist of cash, securities of the U.S. Government and other RICs and
holdings of other securities, which, with respect to any one issuer, do
not have a value greater than 5% of the value of the Fund's total assets;
and (2) no more than 25% of the value of its total assets may be invested
in the securities of a single issuer. For these purposes, the term
"issuer" does not include the U.S. Government or other RICs. To the extent
that a Fund's assets are invested in the obligations of a limited number
of issuers, the value of that Fund's shares will be more susceptible to
any single economic, political or regulatory occurrence affecting one or
more of those issuers than the shares of a diversified investment company
would be.
Other Risks
Current efforts to restructure the federal budget and the relationship
between the federal government and state and local governments may impact
the financing of some issuers of municipal securities. Some states and
localities are experiencing substantial deficits and may find it difficult
for political or economic reasons to increase taxes. Some local
jurisdictions have invested heavily in derivative instruments and may now
hold portfolios of uncertain valuation. Each of these factors may affect
the ability of an issuer of municipal securities to meet its obligations.
Efforts by Congress to restructure the federal income tax system could
adversely affect the value of municipal securities.
INVESTMENT TECHNIQUES
Each Fund may employ the investment techniques described below, among
others. Use of certain of these techniques may give rise to taxable
income.
When-Issued Securities
Each Fund may enter into commitments to purchase municipal obligations
or other securities on a when-issued basis. Such securities are often the
most efficiently priced and have the best liquidity in the bond market.
When a Fund purchases securities on a when-issued basis, it assumes the
risks of ownership, including the risk of price fluctuation, at the time
of purchase, not at the time of receipt. However, a Fund does not have to
pay for the obligations until they are delivered to it, normally 15 to 45
days later. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. Use of this practice would have a leveraging effect on a Fund. Each
Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 25% of total assets.
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Callable Bonds
Callable municipal bonds are municipal bonds which carry a provision
permitting the issuer to redeem the bonds prior to their maturity dates at
a specified price which typically reflects a premium over the bonds'
original issue price. If the proceeds of a bond owned by a Fund called
under circumstances favorable to the issuer are reinvested, the result may
be a lower overall yield on such proceeds upon reinvestment because of
lower prevailing interest rates. If the purchase price of such bonds
included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the
Funds, depending on the price at which such bonds were redeemed.
Each callable bond is "marked-to-market" daily based on the bond's
call date so that the call of some or all of a Fund's callable bonds is
not expected to have a material impact on that Fund's net asset value. In
light of the previously described pricing policies and because each Fund
follows certain amortization procedures required by the Internal Revenue
Service, each Fund does not expect to suffer any material adverse impact
in connection with a call of bonds purchased at a premium. Notwithstanding
such policies, however, as with any investment strategy, there is no
guarantee that a call may not have a more substantial impact than
anticipated.
Stand-By Commitments
Each Fund may acquire "stand-by commitments" with respect to its
investments in municipal obligations. A stand-by commitment is a put (that
is, the right to sell the underlying security within a specified period of
time at a specified exercise price that may be sold, transferred or
assigned only with the underlying security) that entitles the Fund to
same-day settlement. Under a stand-by commitment, a broker, dealer or bank
agrees to purchase, at the Fund's option, specified municipal obligations
at amortized cost plus accrued interest. The total amount paid for
outstanding stand-by commitments held by a Fund will not exceed 25% of
that Fund's total assets calculated immediately after each stand-by
commitment is acquired.
Securities Lending, Zero Coupon and Deferred Interest Bonds
Each Fund may engage in securities lending and may invest in zero
coupon and deferred interest bonds. However, each Fund does not currently
intend to loan securities with a value exceeding 5% of its net assets or
to invest more than 5% of its net assets in zero coupon and deferred
interest bonds. Any income from securities lending would be taxable when
distributed to shareholders. For further information concerning securities
lending, zero coupon and deferred interest bonds, see the Statement of
Additional Information.
Variable Rate and Floating Rate Obligations
Each Fund may invest in variable rate municipal obligations and notes.
Variable rate obligations have a yield that is adjusted periodically based
upon market conditions.
Each Fund may also invest in floating rate and variable rate demand
notes. Demand notes provide that the holder may demand payment of the note
at its par value plus accrued interest. These notes may be supported by an
unconditional bank letter of credit guaranteeing payment of the principal
or both the principal and accrued interest. Floating rate demand notes
have an interest rate related to a known lending rate, such as the prime
rate, and are automatically adjusted when such known rate changes. Such
securities often react to changes in market interest rates in a manner
similar to shorter-term securities that mature at the time of the next
interest rate reset for the variable or floating rate instrument. In
calculating its dollar-weighted average maturity, a Fund may determine the
maturity of a variable or floating rate note according to the interest
rate reset date, or the date principal can be recovered on demand, rather
than the date of ultimate maturity.
Futures and Option Strategies
To protect against the effect of adverse changes in interest rates,
each Fund may purchase and sell interest rate futures contracts and
options on securities indexes, and may purchase put options on interest
rate futures contracts (practices known as "hedging"). A Fund may purchase
put options on interest rate futures contracts or sell interest rate
futures contracts (that is, enter into a futures contract to sell the
underlying security) to attempt to reduce the risk of fluctuations in its
share value. A Fund may purchase an interest rate futures contract (that
is, enter into a futures contract to purchase the underlying security) to
attempt to establish more definitely the return on securities the Fund
intends to purchase. The Funds may not use these instruments for
speculation or leverage. In addition, a Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations. Any gains from futures and options transactions would be
taxable.
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The success of a Fund's strategies in reducing risks depends on many
factors, the most significant of which is the Adviser's ability to predict
market interest rate changes correctly, which differs from its ability to
select portfolio securities. In addition, a hedge could be unsuccessful if
the changes in the value of a Fund's futures contract or option positions
do not correlate to the changes in the value of its investments. It is
also possible that a Fund may be unable to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or
that a Fund may need to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions. Because the markets
for futures and options are not always liquid, a Fund may be unable to
close out or liquidate its hedged position and may be locked in during a
market decline. The Adviser attempts to minimize the possible negative
effects of these factors through careful selection and monitoring of each
Fund's futures and options positions. The Adviser is of the opinion that a
Fund's investment in futures transactions will not have a material adverse
effect on that Fund's liquidity or ability to honor redemptions.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the portfolios.
While utilization of options, futures contracts and similar instruments
may be advantageous to a Fund, if the Adviser is not successful in
employing such instruments in managing a Fund's investments or in
predicting interest rate changes, that Fund's performance will be worse
than if the Fund did not use such instruments. In addition, a Fund will
pay commissions and other costs in connection with such investments, which
may increase that Fund's expenses and reduce its yield. A more complete
discussion of the possible risks involved in transactions in options and
futures contracts is contained in the Statement of Additional Information.
Each Fund's current policy is to limit options and futures
transactions to those described above. Each Fund currently does not intend
to purchase put and call options having a value in excess of 5% of its
total assets.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental limitations that, like its
investment objective, can be changed only by the vote of a majority of the
outstanding voting securities of that Fund. For these purposes, a "vote of
a majority of the outstanding voting securities" of a Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund, or (2) 67% or more of the shares present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented in person or by proxy. These investment limitations are set
forth under "Additional Information About Investment Limitations and
Policies" in the Statement of Additional Information. Fund policies,
unless described as fundamental, can be changed by the Board of Trustees.
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutional Clients. Such Institutional Clients may receive payments
from the Funds' distributor for account servicing, and may receive
payments from their customers for other services performed. Investors
otherwise eligible to purchase Navigator Shares can purchase them from
Legg Mason without receiving or paying for such other services.
Institutional Clients purchasing or holding Navigator Shares on behalf
of their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to a Fund on a timely basis.
PURCHASE OF SHARES
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ( "close of the Exchange") on any day the Exchange is open
will be executed
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at the net asset value determined as of the close of the Exchange on that
day. Orders received by Legg Mason or Fairfield after the close of the
Exchange or on days the Exchange is closed will be executed at the net
asset value determined as of the close of the Exchange on the next day the
Exchange is open. See "How Net Asset Value is Determined" on page 15.
Each Fund reserves the right to reject any order for its shares, to
suspend the offering of shares for a period of time, or to waive any
minimum investment requirements. In addition to Institutional Clients
purchasing shares directly from Fairfield, Navigator Shares may be
purchased through procedures established by Fairfield in connection with
requirements of Customer Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in a Fund. Information concerning
these services and any applicable charges will be provided by the
Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
financial advisor at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. The proceeds of redemption or
repurchase may be more or less than the original cost. If the shares to be
redeemed or repurchased were paid for by check (including certified or
cashier's checks) within 10 business days of the redemption or repurchase
request, the proceeds may not be disbursed unless that Fund can be
reasonably assured that the check has been collected.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the Adviser, that Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.)
Each Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges should call their financial advisor for further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to the investor. However, no Fund will redeem accounts that fall
below $500 solely as a result of a reduction in net asset
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value per share. If a Fund elects to redeem the shares in an account, the
investor will be notified that the account is below $500 and will be
allowed 60 days in which to make an additional investment in order to
avoid having the account closed.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each investor.
Any shares the investor purchases or receives as a dividend or other
distribution will be credited directly to the account at the time of
purchase or receipt. Shares may not be held in, or transferred to, an
account with any brokerage firm other than Fairfield, Legg Mason or their
affiliates. The Funds no longer issue share certificates.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued based upon appraisals received from an independent pricing
service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities
received from recognized dealers in those securities. Debt securities with
remaining maturities of 60 days or less are valued at amortized cost,
unless conditions otherwise indicate. Other securities are valued at fair
value as determined by, or under the supervision of, the Board of Trustees
of the Trust.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income of each Fund are declared daily
and paid monthly. Shareholders begin to earn dividends on their Navigator
Shares as of the settlement date, which is normally the third business day
after their orders are placed with their Legg Mason or affiliated
financial advisor. Each Fund also distributes to shareholders
substantially all net capital gain (the excess of net long-term capital
gain over net short-term capital loss) after the end of the taxable year
in which the gain is realized. A second distribution of net capital gain
may be necessary in some years to avoid imposition of the excise tax
described under the heading "Additional Tax Information" in the Statement
of Additional Information. Shareholders may elect to:
1. Receive both dividends and capital gain distributions in Navigator
Shares of the distributing Fund;
2. Receive dividends in cash and capital gain distributions in
Navigator Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
capital gain distributions in cash; or
4. Receive both dividends and capital gain distributions in cash.
In certain cases, shareholders may reinvest dividends and capital gain
distributions in the corresponding class of shares of another Navigator
fund. A shareholder should contact his or her financial advisor for
additional information about this option. Qualified retirement plans that
obtained Navigator Shares through exchange generally receive dividends and
capital gain distributions in additional shares.
If no election is made, both dividends and capital gain distributions
are credited to the Institutional Client's account in Navigator Shares of
the distributing Fund at the net asset value of the shares determined as
of the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also are
credited to the account at that net asset value. If an investor elects to
receive dividends and/or capital gain distributions in cash, a check will
be sent. Investors purchasing through Fairfield may elect at any time to
change the distribution option by notifying the applicable Fund in writing
at: [insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing
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<PAGE>
through Legg Mason should write to: [insert complete Fund name], c/o Legg
Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland, 21203-1476. An
election must be received at least 10 days before the record date in order
to be effective for dividends and capital gain distributions paid to
shareholders as of that date.
TAXES
Federal Income Tax
Each Fund intends to continue to qualify for treatment as a RIC under
the Code so that it will be relieved of federal income tax on that part of
its investment company taxable income (generally, taxable net investment
income and any net short-term capital gain) and net capital gain that it
distributes to its shareholders. If a Fund so qualifies and, at the close
of each quarter of its taxable year, at least 50% of the value of its
total assets consists of certain obligations the interest on which is
excludable from gross income under Section 103(a) of the Code, that Fund
may pay "exempt-interest" dividends to its shareholders. Those dividends
constitute the portion of the aggregate dividends (excluding capital gain
distributions), as designated by the Fund, equal to the excess of the
excludable interest over certain amounts disallowed as deductions.
Exempt-interest dividends are excludable from a shareholder's gross
income; however, the amount of such dividends must be reported on the
recipient's federal income tax return.
If and to the extent a Fund receives interest on certain PABs, a
proportionate part of the exempt-interest dividends paid by the Fund will
be treated as a Tax Preference Item. In addition, exempt-interest
dividends received by a corporate shareholder may be indirectly subject to
the federal alternative minimum tax without regard to whether the Fund's
tax-exempt interest is attributable to PABs.
To the extent dividends are derived from taxable income from temporary
investments, from net short-term capital gain or from the use of certain
investment techniques described in "Investment Objective and Policies,"
page 8, they are taxable to shareholders as ordinary income (whether paid
in cash or reinvested in Navigator Shares). No portion of those dividends
will qualify for the corporate dividends-received deduction. Distributions
derived from net capital gain, if any, are taxable to shareholders as
long-term capital gain regardless of the length of time they have held
their Navigator Shares (and irrespective of whether those distributions
are paid in cash or reinvested in Navigator Shares).
Interest on indebtedness incurred or continued by a shareholder in
order to purchase or carry Fund shares generally is not deductible.
Persons who are "substantial users" (or related persons) of facilities
financed by IDBs or PABs should consult their tax advisers before
purchasing shares of a Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, a "substantial user" includes a non-exempt person
who regularly uses in trade or business a part of a facility financed from
the proceeds of IDBs or PABs.
A redemption of Navigator Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Navigator Shares for shares of any other Navigator
fund generally will have similar tax consequences. In addition, if Fund
shares are purchased within 30 days before or after redeeming at a loss
other shares of the same Fund (regardless of class), all or part of that
loss will not be deductible and instead will increase the basis of the
newly purchased shares.
For Maryland Tax-Free:
Maryland Taxes
Distributions paid by Maryland Tax-Free to Maryland residents
attributable to interest received or capital gains recognized by the Fund
on Maryland municipal obligations are exempt from Maryland state and local
income taxes. Distributions attributable to interest received or capital
gains recognized by the Fund on certain U.S. government obligations also
are exempt from Maryland state and local income taxes. Distributions
attributable to the Fund's other income or gains generally are subject to
these taxes.
Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for purposes of either
Maryland state or local income tax. Fund shares held by an individual are
not subject to the Maryland personal property tax. Fund shares held by a
corporation also are not subject to the Maryland personal property tax.
Subject to a three year phase-in period, dividends paid by the Fund with
respect to Maryland municipal obligations and profits
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realized on the sale or exchange of such obligations are not subject to
the Maryland Franchise Tax imposed on "financial institutions" and
measured by net earnings.
In the case of individuals, Maryland imposes an income tax on Tax
Preference Items. Interest paid on certain PABs is a Tax Preference Item.
Accordingly, if the Fund holds such bonds, 50% of the interest thereon in
excess of a threshold amount is subject to Maryland state and local tax.
For Pennsylvania Tax-Free:
Pennsylvania Taxes
Individual shareholders of Pennsylvania Tax-Free who are otherwise
subject to the Pennsylvania personal income tax will not be subject to
that tax on distributions by the Fund that are attributable to interest on
Pennsylvania municipal obligations. Distributions attributable to most
other sources, including gains, will not be exempt from Pennsylvania
personal income tax.
Navigator Shares that are held by individual shareholders who are
Pennsylvania residents will be exempt from the Pennsylvania county
personal property tax to the extent that the Fund's portfolio consists of
Pennsylvania municipal obligations on the annual assessment date.
Nonresidents of Pennsylvania are not subject to this tax. Corporations are
not subject to any of these personal property taxes. For shareholders who
are residents of the City of Philadelphia, distributions of interest
derived from Pennsylvania municipal obligations are not taxable for
purposes of the Philadelphia School District investment net income tax,
provided that the Fund reports to its shareholders the percentage of
Pennsylvania municipal obligations held by it for the year. The Fund will
report such percentage to its shareholders.
Distributions of interest, but not gains, realized on Pennsylvania
municipal obligations are not subject to the Pennsylvania corporate net
income tax. The Pennsylvania Department of Revenue also takes the position
that shares of funds similar to the Fund are not considered exempt assets
of a corporation for the purposes of determining its capital stock value
subject to Pennsylvania capital stock and franchise taxes.
General
Shareholders receive information after the close of each year
concerning the tax status of all dividends and capital gain distributions
from their Fund(s). Each Fund is required to withhold 31% of all taxable
dividends, capital gain distributions and redemption proceeds payable to
any individuals and certain other noncorporate shareholders who do not
provide the Fund with a certified taxpayer identification number. Each
Fund also is required to withhold 31% of all taxable dividends and capital
gain distributions payable to such shareholders who otherwise are subject
to backup withholding. Dividends derived from interest on Maryland
municipal obligations may not be exempt from taxation under the laws of
states other than Maryland. Dividends derived from interest on
Pennsylvania municipal obligations may not be exempt from taxation under
the laws of states other than Pennsylvania.
The foregoing is only a summary of some of the important federal,
Maryland, Pennsylvania and certain local income tax considerations
generally affecting the respective Funds and their shareholders; see the
Statement of Additional Information for a further discussion. In addition
to those considerations which are applicable to any investment in the
Funds, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective shareholders are urged to
consult their tax advisers with respect to the effects of this investment
on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund. In addition, Legg Mason clients will
receive a monthly statement which will also show the total number of
shares being held in safekeeping by the Fund's transfer agent for the
account of the shareholder.
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or capital gain distributions) of Navigator
Shares made by Institutional Clients acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of persons maintaining
Customer Accounts at Institutional Clients will be sent to the
Institutional Client by the transfer agent. Beneficial ownership of shares
by Customer Accounts will be recorded by the Institutional Client and
reflected in the regular account statements provided by them to their
customers.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by its independent
accountants.
Shareholder inquiries should be addressed to: "[insert complete Fund
name], c/o Legg Mason
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Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476," or c/o
"Fairfield Group, Inc., 200 Gibraltar Road, Horsham, Pennsylvania 19044."
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for a
corresponding class of shares of any of the Legg Mason Funds, the Legg
Mason Cash Reserve Trust, the Navigator Money Market Fund, Inc. and the
Navigator Tax-Free Money Market Fund, Inc., provided the shares to be
acquired are eligible for sale under applicable state securities laws.
Investments by exchange into other Navigator funds are made at the per
share net asset value determined on the same business day as redemption of
the Fund shares you wish to exchange. To obtain further information
concerning the exchange privilege and prospectuses of other Navigator
funds, or to make an exchange, please contact your financial advisor. To
effect an exchange by telephone, please call your investment executive
with the information described in the section "How to Purchase and Redeem
Shares," page 13. The other factors relating to telephone redemptions
described in that section apply also to telephone exchanges. Please read
the prospectus for the other fund(s) carefully before you invest by
exchange. Each Fund reserves the right to modify or terminate its exchange
privilege upon 60 days' notice to shareholders.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISER
BOARD OF TRUSTEES
The business and affairs of each Fund are managed under the direction
of the Board of Trustees of the Trust.
ADVISER
Pursuant to separate advisory agreements with each Fund (each an
"Advisory Agreement"), which were approved by the Trust's Board of
Trustees, the Adviser, a wholly owned subsidiary of Legg Mason, Inc. (a
financial services holding company), serves as each Fund's investment
adviser. The Adviser administers and acts as the portfolio manager for
each Fund and is responsible for the actual investment management of the
Funds, including the responsibility for making investment decisions and
placing orders to buy, sell or hold a particular security. Each Fund pays
the Adviser, pursuant to the Advisory Agreement, a management fee equal to
an annual rate of 0.55% of each Fund's average daily net assets
attributable to Navigator Shares. Each Fund pays all its other expenses
which are not assumed by the Adviser.
Pursuant to a voluntary expense limitation, the Adviser has agreed to
waive management fees such that total operating expenses (exclusive of
taxes, interest, brokerage fees and extraordinary expenses) do not exceed
annual rates of: 0.45% of average daily net assets attributable to
Navigator Shares of Maryland Tax-Free or until the Fund's net assets reach
$200 million, whichever occurs first; 0.45% of average daily net assets
attributable to Navigator Shares of Pennsylvania Tax-Free or until the
Fund's net assets reach $125 million, whichever occurs first; and 0.45% of
average daily net assets attributable to Navigator Shares of Tax-Free
Intermediate or until the Fund's net assets reach $100 million, whichever
occurs first. These waiver agreements are in effect until July 31, 1998
and may be terminated by the Adviser at any time.
The Adviser acts as investment adviser, manager or consultant to
eighteen investment company portfolios which had aggregate assets under
management of approximately $8.0 billion as of June 30, 1997. The
Adviser's address is 111 South Calvert Street, Baltimore, Maryland 21202.
Victoria M. Schwatka has been primarily responsible for the day-to-day
management of the Fund since its inception. Mrs. Schwatka is a portfolio
manager and Senior Vice-President of Legg Mason's Fixed Income Group. Mrs.
Schwatka has been employed by Legg Mason since June, 1986.
Jane E. Trust became co-manager of the Trust on July 31, 1997. Ms.
Trust has been a Vice President of the Adviser since July 1994, and a
portfolio manager for Legg Mason's Fixed Income Group since 1991.
THE FUNDS' DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of the Funds' shares pursuant to a separate Underwriting
Agreement with each Fund. Each Underwriting Agreement obligates Legg Mason
to pay certain expenses in connection with the offering of shares of the
Funds, including any compensation to its financial advisors, the printing
and distribution of prospectuses, statements of additional information and
periodic reports used in connection with the offering to prospective
investors, after the prospectuses, statements of additional information
and periodic reports have been prepared, set in type and mailed to
existing shareholders at each respective Fund's expense, and for any
supplementary
15
<PAGE>
sales literature and advertising costs. Legg Mason also assists BFDS with
certain of its duties as transfer agent; for the year ended March 31,
1997, Legg Mason received from BFDS $18,000, $8,000 and $6,000 for
performing such services in connection with Maryland Tax-Free,
Pennsylvania Tax-Free and Tax-Free Intermediate, respectively.
Fairfield, a wholly owned subsidiary of Legg Mason, Inc., is a
registered broker-dealer with principal offices located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Fairfield may sell Navigator Shares
pursuant to a Dealer Agreement with the Funds' distributor, Legg Mason.
Neither Fairfield nor Legg Mason receives compensation from the Funds for
selling Navigator Shares.
The Chairman, President and Treasurer of the Trust are employed by
Legg Mason.
THE FUND'S CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of the
Funds. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, is the transfer agent for Fund shares and dividend-disbursing agent
for the Funds.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated November 21, 1990. The Declaration of Trust
authorizes the Trust to issue an unlimited number of shares and to create
additional series, each of which may issue separate classes of shares.
Three series of the Trust currently are being offered.
Each series of the Trust currently offers two Classes of Shares --
Class Y (known as "Navigator Shares") and Class A (known as "Primary
Shares"). The two Classes represent interests in the same pool of assets.
A separate vote is taken by a Class of Shares of a Fund if a matter
affects just that Class of Shares. Each Class of Shares may bear certain
differing Class-specific expenses and sales charges which may affect
performance.
The Board of Trustees of the Trust does not anticipate that there will
be any conflicts among the interests of the holders of the different
classes of Fund shares. On an ongoing basis, the Board will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
trustees, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Trust will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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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, 1997
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, 1997, AS APPROPRIATE, WHICH HAVE BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). COPIES OF THE FUNDS'
PROSPECTUSES ARE AVAILABLE WITHOUT CHARGE FROM THE FUNDS AT (410) 539- 0000.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AUTHORIZED FOR USE UNLESS
PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
The Legg Mason Tax-Free Income Fund ("Trust") is an open-end investment
company which currently has three separate investment series (each a "Fund").
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
<PAGE>
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 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 JULY 31, 1998.
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."
LEGG MASON WOOD WALKER
INCORPORATED
--------------------------------------------------------------
111 SOUTH CALVERT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410) 539-0000 (800) 822-5544
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<PAGE>
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);
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:
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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; or
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.
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 or makes use of repurchase agreements, the income from which
would be taxable.
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 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 "non- appropriation" 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.
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<PAGE>
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 Code, 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 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.
5
<PAGE>
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-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.
FIXED, VARIABLE 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
6
<PAGE>
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. Short-term fixed rate obligations are minimally affected by
interest rate changes; the greater the remaining period until maturity, the
greater the fluctuation in value of a fixed rate obligation is likely to be.
Variable rate obligation coupons are not fixed for the full term of the
obligation, but are adjusted periodically based upon changes in prevailing
interest rates. As a result, the value of variable rate obligations is less
affected by changes in interest rates. The more frequently such obligations are
adjusted, the less such obligations are affected by interest rate changes during
the period between adjustments. The value of a variable rate obligation,
however, may fluctuate in response to market factors and changes in the
creditworthiness of the issuer.
By investing in variable rate obligations, 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
7
<PAGE>
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
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 or other
appropriate liquid 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 a custodian bank until resold and will be supplemented by additional
collateral if necessary to maintain a total value equal to or in excess of the
value of the repurchase 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 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
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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.
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,
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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 appropriate liquid 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 appropriate liquid 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
By purchasing an interest rate futures contract, the Fund in effect
becomes exposed to price fluctuations resulting from changes in interest rates,
and by selling a futures contract the 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
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<PAGE>
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.
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
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<PAGE>
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
might continue to be obligated under an option it had written until the option
expired or was exercised.
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 Wood Walker,
Incorporated ("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 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 transfer funds each month
from your checking account to be used
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to buy Primary Shares of the Fund you selected at the per share net asset value
determined on the day the funds are sent from 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 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 financial advisor. 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 financial advisor 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 JULY
31, 1998.
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 of up to 2.5% for the Maryland and Pennsylvania Tax-Free Funds and
1.25% 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 financial advisor of your share
balance in Legg Mason funds sold with initial sales charges at the time of the
current purchase.
REINSTATEMENT PRIVILEGE --(Primary Shares)
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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 financial advisor 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
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.
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
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instrumentalities, as available on the date of this Statement of Additional
Information. The Funds assume no obligation to update this information.
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 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 December
31, 1996, $388.7 million of the Transportation'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
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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.
Although the total cargo tonnage at the Port had declined from 30,682,730 in
1982 to 26,176,378 in 1994, total tonnage increased to 30,999,141 in 1995. 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 $20.7 billion in 1995.
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
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 Authority'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. Annual debt service on the
obligations attributable to the Baltimore and Ocean City expansion projects is
projected to be $9,800,000 and $1,400,000, respectively.
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. Authority debt service on the bonds will be
$6.4 annually.
The Authority has also been assigned responsibility for construction of
a conference center in Montgomery County. The center is expected to cost
$27,500,000 and is being financed through a combination of funding from
Montgomery County and the Authority. The Authority is authorized to issue up to
$17,600,000 in revenue bonds which it expects to sell during the fiscal year
1998.
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
16
<PAGE>
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 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 $5,054.5 million at June 30, 1996.
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 March 11, 1997, 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 Tax-Free 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 $2,325.5 million and retire
bonded debt in the principal amount of $2,239.4 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, 1996, total combined debt outstanding for
these agencies was $8,356.1 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.
17
<PAGE>
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 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. For instance, 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 1996, 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 May, 1997 was 5.3% and for the
United States for May, 1997 was 4.7%. The population of Pennsylvania, 12,056
million people in 1996, according to the U.S. Bureau of the Census, represents a
slight increase from the 1987 estimate of 11.811 million. Per capita income in
Pennsylvania was $23,558 for calendar year 1995, slightly above the per capita
income of the United States of $23,208. 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, 1994, June 30, 1995 and June 30, 1996 with fund balances of $892.940
million, $688.304 million and $635.182 million, respectively.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain 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
18
<PAGE>
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 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
19
<PAGE>
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.
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 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.
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.
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
20
<PAGE>
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. Performance data is only historical and is not intended
to indicate future results.
FOR THE MARYLAND TAX-FREE FUND:
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Through Reinvestment of Through 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
1997 10,643 3,977 14,620
* 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,
1997 would have been $10,522, and the investor would have received a total of
$3,437 in distributions. If the Adviser had not waived certain Fund expenses in
each of the fiscal years, returns would have been lower.
FOR THE PENNSYLVANIA TAX-FREE FUND:
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1992* $10,192 $ 437 $10,629
1993 10,602 1,113 11,715
21
<PAGE>
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- --------------------------------------------------------------------------------
1994 10,450 1,711 12,161
1995 10,595 2,421 13,016
1996 10,702 3,162 13,864
1997 10,668 3,835 14,503
* 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,
1997 would have been $10,450, and the investor would have received a total of
$3,450 in distributions. If the Adviser had not waived certain Fund expenses in
each of the fiscal years, returns would have been lower.
FOR THE TAX-FREE INTERMEDIATE FUND:
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain 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
1997 10,154 2,251 12,405
* November 9, 1992 (commencement of operations) to March 31, 1993.
If the investor had not reinvested dividends and capital gain
distributions, the total value of the hypothetical investment as of March 31,
1997 would have been $10,147, and the investor would have received a total of
$2,041 in distributions. If the Adviser had not waived 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
22
<PAGE>
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, 1997 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 JULY 31, 1998.
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 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:
23
<PAGE>
<TABLE>
<CAPTION>
Federal State & Taxable Yield
Marginal Local Blended
Single MFJ Rates Rates(1) 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 $121,30 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 $263,75 39.6% 8.0% 44.4% 2.78% 3.06% 3.33% 3.61% 3.89%
</TABLE>
(1) 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(1) Rates(1) 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%
</TABLE>
(1) Based on 1996 tax rates.
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>
<CAPTION>
Marginal Taxable Yield
Federal
Single MFJ Rates(1) 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>
(1) Based on 1996 tax rates
For the 30-day period ended March 31, 1997, the Maryland Tax-Free
Fund's yield and tax equivalent yield (assuming a 21.8% blended tax rate) were
4.88% and 6.24%, respectively. The Pennsylvania Tax-Free Fund's yield and tax
equivalent yield (assuming an 17.4% blended tax rate) for the same period were
4.92% and 5.96%, respectively. The Tax-Free Intermediate Fund's yield and tax
equivalent yield (assuming a 15% tax rate) for the same period were 4.28% and
5.04%, 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
24
<PAGE>
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 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 $______ billion as of June
30, 1997.
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
25
<PAGE>
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 [07/24/39], 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.
EDMUND J. CASHMAN, JR.* [08/31/36], 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.
RICHARD G. GILMORE [06/09/27], 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/Trustee of eight 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 [12/27/25], 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/Trustee of eight Legg Mason funds.
ARNOLD L. LEHMAN [07/18/44], Trustee; The Baltimore Museum of Art, Art
Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of Art;
Director/Trustee of eight Legg Mason funds.
JILL E. McGOVERN [08/29/44], Trustee; 1500 Wilson Boulevard, Arlington,
Virginia. Chief Executive of the Marrow Foundation. Director/Trustee of eight
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 [10/22/34], Trustee; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting);
Director/Trustee of eight Legg Mason. Formerly: Director and Vice President of
Corporate Development, Polk Audio, Inc. (manufacturer of audio components).
EDWARD A. TABER, III* [08/25/33], 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/Trustee of four Legg Mason funds. 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* [01/01/49], Vice President and Treasurer; Treasurer
of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of eight Legg
Mason funds; Vice President of Legg Mason.
26
<PAGE>
KATHI D. BAIR* [12/15/64], Assistant Secretary; Secretary and/or
Assistant Treasurer of three Legg Mason funds; employee of Legg Mason.
SUSAN L. SILVA* [03/29/67], Assistant Secretary; Assistant Secretary of
one other Legg Mason fund; employee of Legg Mason since 1994; Formerly: First
Line Manager, State Street Bank and Trust Company, 1989-1993.
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 an annual retainer and a per meeting fee based on the average net assets
of each Fund at December 31, as follows:
December 31 Annual Per Meeting
Avg. Net Assets Retainer Fee
------------------------------------------------------------------
Up to $250 million $600 $150
$250 mill - $1 billion $1,200 $300
Over $1 billion $2,000 $400
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 July 1, 1997, 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, 1997.
None of the Legg Mason funds has any retirement plan for its trustees.
COMPENSATION TABLE
- ------------------
<TABLE>
<CAPTION>
=================================================================================================================
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST AND FUND
NAME OF PERSON AND POSITION THE TRUST* 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 $23,600
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST AND FUND
NAME OF PERSON AND POSITION THE TRUST* COMPLEX PAID TO TRUSTEES**
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Charles F. Haugh -
Trustee $2,000 $25,600
- -----------------------------------------------------------------------------------------------------------------
Arnold L. Lehman -
Trustee $2,000 $25,600
- -----------------------------------------------------------------------------------------------------------------
Jill E. McGovern -
Trustee $2,000 $25,600
- -----------------------------------------------------------------------------------------------------------------
T. A. Rodgers -
Trustee $2,000 $23,600
=================================================================================================================
</TABLE>
* Represents fees paid to each trustee during the fiscal year ended March
31, 1997.
** Represents aggregate compensation paid to each trustee during the
calendar year ended December 31, 1996. There are nine open-end
investment companies in the Legg Mason Complex (with a total of
seventeen funds).
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. (a financial services holding company), 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 November
15, 1996. 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.
28
<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:
0.70% July 31, 1998 $200 million
0.65% December 31, 1996 $200 million
0.60% March 31, 1996 $200 million
0.55% July 31, 1995 $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:
0.45% July 31, 1998 $200 million
0.40% December 31, 1996 $200 million
0.35% March 31, 1996 $200 million
For the Pennsylvania Tax-Free Fund:
Primary Shares:
0.70% July 31, 1998 $125 million
0.65% December 31, 1996 $125 million
0.55% March 31, 1996 $125 million
0.50% July 31, 1995 $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:
0.45% July 31, 1998 $125 million
0.40% December 31, 1996 $125 million
0.30% March 31, 1996 $125 million
For the Tax-Free Intermediate Fund:
Primary Shares:
0.70% July 31, 1998 $100 million
0.65% December 31, 1996 $100 million
0.35% July 31, 1995 $100 million
0.30% June 30, 1994 $100 million
29
<PAGE>
0.30% December 31, 1993 $75 million
0.20% March 31, 1993 $75 million
Navigator Shares:
0.45% July 31, 1998 $100 million
0.40% December 31, 1996 $100 million
For the years ended March 31, 1997, 1996 and 1995, the Maryland
Tax-Free Fund paid advisory fees of $818,213, $809,671 and $778,739 (prior to
fees waived of $432,987, $541,013 and $569,982), respectively. For the year
ended March 31, 1997, 1996 and 1995, the Pennsylvania Tax-Free Fund paid
advisory fees of $365,484, $363,545 and $342,774 (prior to fees waived of
$244,013, $320,401 and $326,376), respectively. For the years ended March 31,
1997, 1996 and 1995, Tax-Free Intermediate Fund paid advisory fees of $313,749,
$300,560 and $280,013 (prior to fees waived of $252,670, $287,375 and $280,013),
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
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 financial advisors. 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").
30
<PAGE>
Continuation of the Plan was most recently approved on November 15,
1996 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 could outweigh 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 financial advisors
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 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, 1997, 1996 and 1995, the Maryland
Tax-Free Fund paid distribution and service fees of $371,914, $368,033 and
$353,972, respectively, to Legg Mason. For the years ended March 31, 1997, 1996
and 1995, the Pennsylvania Tax-Free Fund paid distribution and service fees of
$166,129, $165,248 and $155,806, respectively, to Legg Mason. For the years
ended March 31, 1997, 1996 and 1995, the Tax-Free Intermediate Fund paid
distribution and service fees of $142,613, $136,619 and $49,798, respectively,
to Legg Mason.
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 that Fund. Any change in the
31
<PAGE>
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, 1997, Legg Mason incurred the following
expenses:
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
Fund Fund Fund
------------------------------------------
<S> <C>
Compensation to sales
personnel $164,000 $ 75,000 $ 64,000
Advertising 16,000 16,000 16,000
Printing and mailing of
prospectuses to prospective
shareholders 47,000 43,000 56,000
Other 199,000 177,000 180,000
-------------------------------------------
Total expenses $426,000 $311,000 $316,000
===========================================
</TABLE>
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. Initial sales charges are waived on purchases of Primary Shares of
the Tax-Free Intermediate Fund made through July 31, 1998. Sales charges
received by Legg Mason from sales of each Fund are as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Maryland Tax-Free $315,000 $347,000 $475,000
- --------------------------------------------------------------------------------
Pennsylvania Tax-Free $152,000 $174,000 $117,000
- --------------------------------------------------------------------------------
Tax-Free Intermediate $0 $100,000 $102,000
- --------------------------------------------------------------------------------
32
<PAGE>
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 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 having the same 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.
33
<PAGE>
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, 1997 and
1996, the Maryland Tax-Free Fund's portfolio turnover rates were 6.0% and 14.1%,
respectively; the Pennsylvania Tax-Free Fund's portfolio turnover rates were
13.6% and 17.2%, respectively; and the Tax-Free Intermediate Fund's portfolio
turnover rates were 8.9% and 0.00%, 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.
34
<PAGE>
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, 1997; the Statements of
Operations for the year ended March 31, 1997; the Statements of Changes in Net
Assets for the years ended March 31, 1997 and 1996; 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
combined annual report of the Legg Mason Tax-Free Income Fund for the year ended
March 31, 1997, are hereby incorporated by reference in this Statement of
Additional Information.
35
<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 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 positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structures with moderate
A - 1
<PAGE>
reliance on debt and ample asset protection; (4) broad margins in earning
coverage of fixed financial charges and high internal cash generation; and (5)
well-established access to a range of financial markets and assured sources of
alternate liquidity.
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 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 - 2
<PAGE>
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
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 - 3
<PAGE>
LEGG MASON TAX-FREE INCOME FUND
TABLE OF CONTENTS
PAGE
----
Additional Information About Investment
Limitations and Policies
Additional Purchase and Redemption Information
Special Factors Affecting Maryland and
Pennsylvania Tax-Free Funds
Additional Tax Information
Valuation of Fund Shares
Performance Information
The Trust's Trustees and Officers
The Funds' Investment Adviser
The Funds' Distributor
Portfolio Transactions and Brokerage
The Trust's Custodian and Transfer and
Dividend-Disbursing Agent
Other Information
The Trust's Legal Counsel
The Trust's Independent Accountants
Financial Statements
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, 1997 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 Trust -- filed herewith
(b) Amendment dated January 31, 1991 to the
Declaration of Trust -- filed herewith
(c) Amendment dated March 11, 1991 to the
Declaration of Trust -- filed herewith
(d) Amendment dated July 30, 1992 to the
Declaration of Trust -- filed herewith
(2) By-Laws -- filed herewith
(3) Voting trust agreement - none
(4) Specimen security -- not applicable
(5) (a) Investment Advisory Contract with respect to
the Maryland, Pennsylvania and High Quality
Portfolios -- filed herewith
(b) Advisory Fee Agreement with respect
to the Tax-Free Intermediate-Term
Income Trust -- filed herewith
(6) (a) Amended Underwriting Agreement with respect
to the Maryland, Pennsylvania and Tax-Free
Intermediate-Term Income Portfolios -- filed
herewith
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement -- filed herewith
(9) Transfer Agency and Service Agreement -- filed
herewith
(10) (a) Opinion and consent of counsel with respect
to Registrant and the Maryland, Pennsylvania
and High Quality Portfolios -- filed
herewith
(b) Opinion and consent of counsel with respect
to the Tax-Free Intermediate-Term Income
Portfolio -- filed herewith
(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 Portfolios --
filed herewith
(b) Agreement for providing initial capital with
respect to the Tax-Free Intermediate-Term
Income Portfolio -- filed herewith
(14) Prototype Retirement Plan - none
(15) (a) Amended Plan pursuant to Rule 12b-1 with
respect to the Maryland, Pennsylvania and
Tax-Free Intermediate-Term Income Portfolios
-- filed herewith
<PAGE>
(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 as
Exhibit 27.
(18) Plan Pursuant to Rule 18f-3 -- none
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 July 15, 1997)
- -------------- ----------------------
Shares of Capital Stock,
($.001 par value)
Legg Mason Maryland Tax-Free Income Trust
Primary Shares 3,890
Navigator Shares 0
Legg Mason Pennsylvania Tax-Free Income Trust
Primary Shares 1,805
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 1,327
Navigator Shares 0
Item 27. Indemnification
Section 2 of "Indemnification in Article X of the Declaration of
Trust, as amended, provides that the appropriate series of the Registrant will
indemnify its trustees and officers to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Additionally, indemnification is not available in the event of a settlement,
unless there has been a determination that such Trustee or officer
<PAGE>
seeking indemnification did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Such determination is to be made by (a) the court or other body
approving the settlement; (b) by at least a majority of those Trustees who are
neither interested persons of the Trust nor are parties to the matter based upon
a review of readily available facts (as opposed to a full trial-type inquiry);
or (c) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry).
Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification. These rights of indemnification shall be severable, shall not
be exclusive of or affect any other rights to which any Trustee or officer of
the Registrant may now ceased to be a Trustee or officer of the Registrant and
shall inure to the benefit of the heirs, executors and administrators of such
person. Expenses in connection with the preparation and presentation of a
defense to any claim, action , suit or proceeding of the character for which
indemnification is sought may be paid by the appropriate Series of the
Registrant prior to final disposition thereof upon receipt of an undertaking by
or on behalf of the Trustee or officer of the Registrant seeking indemnification
that such amount will be paid over by him to the applicable Series if it is
ultimately determined, in the manner set forth above, that such individual is
not entitled to indemnification. Section 2 also requires as a condition to the
advance that (a) the Trustee or officer of the Registrant seeking such advance
shall have provided appropriate security for such, (b) the Registrant be insured
against losses arising out of any such advance payment, or (c) either a majority
of the Trustees who are neither interested persons of the Registrant nor parties
to the matter, or independent counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed to a
fully trial-type inquiry), that there is reason to believe that such person will
be found entitled to indemnification.
Additionally, "Limitation of Liability" in Article X of the
Declaration of Trust provides that the trustees or officers of the Registrant
shall not be personally liable to any person extending credit to, contracting
with or having a claim against the Registrant or a particular series thereof;
and that, provided they have exercised reasonable care and have acted under the
reasonable belief that their actions are in the best interest of the Registrant,
the trustees and officers shall not be liable for neglect or wrongdoing by them
or any officer, agent, employee or investment adviser of the Registrant, but
nothing contained within this section shall protect any Trustee or officer
agains any liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. Every note, bond, contract, instrument,
certificate or undertaking and every other act or thing whatsoever executed or
done by or on behalf of the Registrant, any Series, or the Trustees or any of
them in connection with the Registrant shall be conclusively deemed to have been
executed or done only in or with respect to their or his capacity as Trustees or
Trustee and neither such Trustees or Trustee shall be personally liable thereon.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that the
same was executed or made by them on behalf of the Registrant or by them as
Trustees or Trustee or as officers or officer and not individually and that the
obligation of such instrument are not binding only upon the assets and property
of the Registrant or the particular Series in question, as the case may be, but
the omission thereof shall not operate to bind any Trustees or Trustee or
officers or officer individually.
Section 2 of Article XI of the Declaration of Trust provides that,
subject to the provisions of Section 1 of Article XI and to Article X, trustees
shall not be liable for errors of judgment or mistakes of fact or law, or for
any act or omission in accordance with advice of counsel or other experts, or
failing to follow such advice, with respect to the meaning and operation of the
Declaration of Trust. The Trustees shall not be required to give any bond as
such, nor any surety if a bond is obtained.
Article IX of the By-Laws provides that the Registrant may purchase
and maintain insurance on behalf of any person who is or was a trustee, officer
or employee of the Registrant, or is or was serving at the request of the
Registrant as a trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him or her and incurred by him or her in any such capacity or arising out of his
or her status as such, whether or not the Registrant would have the
<PAGE>
power to indemnify him or her against such liability.
Section 7 of the Investment Advisory and Administration Agreement
between Legg Mason Fund Adviser, Inc. ("Adviser") and the Registrant with
respect to Legg Mason Tax-Free Income Fund provides that the Adviser assumes no
responsibility under the Agreement other than to render the serices called for
under the Agreement in good faith, and shall not be responsible for any action
of the Board of Trustees of the Registrant in following or declining to follow
any advice or recommendations of the Adviser. Nothing in the Agreement, however,
will protect the Adviser against any loss suffered by any Series or the
Registrant to which it would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence of the Adviser in the performance of
its duties under the Agreement. Section 14 of the Agreement provides that the
Trustees shall not be liable for any obligation of the Registrant under the
Agreement and that the Adviser shall look only to the assets and property of the
Registrant in settlement of such right or claim and not to the assets and
property of the Trustees.
Section 7 of the Underwriting Agreement between the Registrant and
Legg Mason Wood Walker, Inc. ("Legg Mason") with respect to Legg Mason Tax-Free
Income Fund provides that the Registrant that the Registrant will indemnify,
defend and hold Legg Mason, its officers, directors and controlling persons of
Legg Mason against all claims, demands, liabilities and expenses arising from
any alleged untrue statement of a material fact contained in the Registration
Statement or from any alleged omission to state in the Registration Statement a
material fact required to be stated in it or necessary to make the statements in
it, in light of the circumstances under which they were made, not misleading;
provided that this indemnity agreement shall not protect any such persons
against liabilities arising by reason of their bad faith, gross negligence or
willful misfeasance in the performance of their duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement. Section 8
also provides that Legg Mason agrees to indemnify, defend and hold the
Registrant, its officers, trustees and controlling persons of the Registrant
free and harmless from and against any and all claims, demands, liabilities and
expenses arising out of or based upon any alleged untrue statement of a material
fact contained in information furnished in writing by Legg Mason to the
Registrant for use in the Registration Statement or arising out of or based upon
any alleged omission to state a material fact contained in information furnished
by Legg Mason for use in the Registration Statement or necessary to make such
information not misleading.
Section 9 of the Distribution Plan for Legg Mason Tax-Free Income
Fund adopted by the Registrant and agreed and assented to by Legg Mason provides
that Legg Mason agrees that obligation assumed by the Registrant and each Series
pursuant to the Plan shall be limited in all cases to the Series and its assets.
Legg Mason also agrees that it shall not seek satisfaction of any such
obligation from the Trustees or any individual Trustee of the Registrant.
Registrant undertakes to carry out all indemnification provisions of
its Declaration of Trust, ByLaws, and the above-described contracts, in
accordance with Investment Company Act Release No. 11330 (September 4, 1980) and
successor releases.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided to trustees, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
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 28, 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
John F. Curley, Jr. Vice Chairman Chairman of the
of the Board oard and Trustee
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive President and Trustee
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice Trustee
President and
<PAGE>
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
<PAGE>
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
Seth J. Lehr Senior Vice None
1735 Market St. President
Philadelphia, PA 19103
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Cheryl Allen Vice President None
221 West Sixth St.
Austin, TX 78701
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
7 E. Redwood St.
<PAGE>
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
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Anne S. Morse Vice President None
1735 Market St.
Philadelphia, PA 19103
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Carl W. Riedy, Jr. Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
<PAGE>
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
F. James Tennies Vice President, None
Asst. Secretary &
Asst. General Counsel
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
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. 10 to its Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore and State of Maryland, on the 28th day of
July, 1997.
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. 10 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
- --------- ----- ----
/s/ John F. Curley, Jr. Chairman of the Board July 28, 1997
- -------------------------- and Trustee
John F. Curley, Jr.
/s/ Edmund J. Cashman, Jr. President and Trustee July 28, 1997
- --------------------------
Edmund J. Cashman, Jr.
/s/ Edward A. Taber, III Trustee July 28, 1997
- --------------------------
Edward A. Taber, III
/s/ Charles F. Haugh* Trustee July 28, 1997
- --------------------------
Charles F. Haugh*
/s/ Richard G. Gilmore* Trustee July 28, 1997
- --------------------------
Richard G. Gilmore*
/s/ Arnold L. Lehman* Trustee July 28, 1997
- --------------------------
Arnold L. Lehman*
/s/ Jill E. McGovern* Trustee July 28, 1997
- --------------------------
Jill E. McGovern*
/s/ T. A. Rodgers* Trustee July 28, 1997
- --------------------------
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President July 28, 1997
- -------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
May 18, 1992, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Trustee of Legg Mason Tax-Free Income Fund (the
"Fund") hereby severally constitute and appoint Marie K. Karpinski, Arthur J.
Brown, and Dana L. Platt and each of them singly my true and lawful
attorney-in-fact, with full power of substitution, and with full power to sign
for me and in my name in the appropriate capacity, any and all Post-Effective
Amendments to the Fund's registration statement, any registration statements on
Form N-14, any supplements or other instruments in connection therewith, and
generally to do all such things in my name and behalf in connection therewith as
said attorney-in-fact deems necessary or appropriate, to comply with the
provisions of the Securities Act of 1933 and the Investment Company Act of 1940,
and all related requirements of the Securities and Exchange Commission. I hereby
ratify and confirm all that said attorney-in-fact or their substitutes may do or
cause to be done by virtue hereof.
WITNESS my hand on the date set forth below.
Signature Date
- --------- ----
/s/Richard G. Gilmore May 18, 1992
- ------------------------
Richard G. Gilmore
/s/ Charles F. Haugh May 18, 1992
- ------------------------
Charles F. Haugh
/s/ Arnold L. Lehman May 18, 1992
- ------------------------
Arnold L. Lehman
/s/Jill E. McGovern May 18, 1992
- ------------------------
Jill E. McGovern
/s/T. A. Rodgers May 18, 1992
- ------------------------
T. A. Rodgers
LEGG MASON TAX-EXEMPT INCOME FUND
---------------------------------
DECLARATION OF TRUST
--------------------
DECLARATION OF TRUST, made at Boston, Massachusetts, this 21st day of November,
1990 by the Trustee:
WHEREAS, the Trustee desires to establish a trust fund for the
investment and reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustee declares that all money and property
contributed to the trust fund hereunder shall be held and managed in Trust under
this Declaration of Trust as herein set forth below.
ARTICLE I
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NAME AND DEFINITIONS
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NAME
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Section 1. This Trust shall be known as "Legg Mason Tax-Exempt Income
Fund." The resident agent for the Trust in Massachusetts shall be CT Corporation
System, whose address is 2 Oliver Street, Boston Massachusetts 02109 or such
other person as the Trustees may from time to time designate.
DEFINITIONS
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Section 2. Wherever used herein, unless otherwise required by the
context or specifically provided:
(a) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time;
(b) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Majority Shareholder Vote" (the 67% or 50% requirement of
the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) and "Principal Underwriter" shall have the meanings given them in
the 1940 Act;
(c) The "Trust" refers to Legg Mason Tax-Exempt Income Fund and
reference to the Trust, when applicable to one or more Series of the Trust,
shall refer to any such Series;
(d) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article IX, Section 3;
(e) "Shareholder" means a record owner of Shares of the Trust;
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(f) The "Trustees" means the person who has signed this Declaration of
Trust so long as he shall continue in office in accordance with the terms
hereof, and all other persons who may from time to time be duly elected or
appointed, qualified and serving as Trustees in accordance with the provisions
of Article IV hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in his capacity or their capacities as trustees
hereunder.
(g) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of each Series shall be divided from
time to time, and includes fractions of shares as well as whole shares
consistent with the requirements of Federal and/or other securities laws; and
(h) "Series" refer to series of Shares of the Trust established in
accordance with the provisions of Article III.
ARTICLE II
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PURPOSE OF TRUST
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The purpose of this Trust is to provide investors a continuous source
of managed investment in securities.
ARTICLE III
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BENEFICIAL INTEREST
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SHARES OF BENEFICIAL INTEREST
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Section 1. The beneficial interest in the Trust shall be divided into
such transferable Shares of one or more separate and distinct Series as the
Trustees shall from time to time create and establish. The number of Shares is
unlimited and each Share shall have a par value of $0.001 and shall be fully
paid and nonassessable. The Trustees shall have full power and authority, in
their sole discretion and without obtaining any prior authorization or vote of
the Shareholders, to create and establish (and to change in any manner) Shares
with such preferences, voting powers, rights and privileges as the Trustees may
from time to time determine, to divide or combine the Shares into a greater or
lesser number, to classify or reclassify any unissued Shares into one or more
Series of Shares, to abolish any one or fore Series, to combine any two or more
Series, to establish classes of Shares within any one or more Series and to take
such other action with respect to the Shares as the Trustees may deem desirable.
Without limiting the authority of the Trustees set forth in this Section 1 to
establish and designate any further Series, the Trustees hereby establish and
designate three Series to be known as the "Legg Mason Pennsylvania Tax-Exempt
Income Trust," the "Legg Mason Maryland Tax-Exempt Income Trust," and the "Legg
Mason High Quality Tax- Exempt Trust."
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ESTABLISHMENT OF SERIES
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Section 2. The establishment of any Series in addition to those
established in Section 1 above shall be effective upon the adoption of a
resolution by a majority of the then Trustees setting forth such establishment
and designation and the relative rights and preferences of the Shares of such
Series. At any time that there are no Shares outstanding of any particular
Series previously established and designated, the Trustees may be a majority
vote abolish that Series and the establishment and designation thereof.
OWNERSHIP OF SHARES
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Section 3. The ownership of Shares shall be recorded in the books of
the Trust. The Trustees may make such rules as they consider appropriate for the
transfer of Shares and similar matters. The record books of the Trust shall be
conclusive as to who are the holders of Shares and as to the number of Shares
held from time to time by each Shareholder.
INVESTMENT IN THE TRUST
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Section 4. The Trustees shall accept investments in the Trust from such
persons and on such terms as they may from time to time authorize. Such
investments may be in the form of cash or securities in which the appropriate
Series is authorized to invest, valued as provided in Article IX, Section 3.
After the date of the initial contribution of capital, the number of Shares to
represent the initial contribution may in the Trustees' discretion be considered
as outstanding and the amount received by the Trustees on account of the
contribution shall be treated as an asset of the Trust. Subsequent investments
in the Trust shall be credited to each Shareholder's account in the form of full
Shares at the Net Asset Value per Share next determined after the investment is
received; provided, however, that the Trustees may, in the sole discretion, (a)
impose a sales charge upon investments in the Trust and (b) issue fractional
Shares. The Trustees shall have the right to refuse to accept investments in the
Trust at any time without any cause or reason therefor whatsoever.
ASSETS AND LIABILITIES OF SERIES
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Section 5. All consideration received by the Trust for the issue or
sale of Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series. In addition,
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<PAGE>
any assets, income, earnings, profits, an proceeds thereof, funds, or payments
which are not readily identifiable as belonging to any particular Series shall
be allocated by the Trustees between and among one or more of the Series in such
manner as they, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the Shareholders of all Series
for all purposes, and shall be referred to as assets belonging to that Series.
The assets belonging to a particular Series shall be so recorded upon the books
of the Trust, and shall be held by the Trustees in Trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular Series
shall be charged with the liabilities of that Series and all expenses, costs,
charges and reserves attributable to that Series. Any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular Series shall be allocated and
charged by the Trustees between or among any one or more of the Series in such
manner as the Trustees in their sole discretion deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series for all purposes. Any creditor of any Series may look only to the assets
belonging to that Series to satisfy such creditor's debt. See Article X, Section
1.
NO PREEMPTIVE RIGHTS
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Section 6. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust or
the Trustees.
STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY
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Section 7. Shares shall be deemed to be personal property giving only
the rights provided in this Declaration of Trust. Every Shareholder by virtue of
having become a Shareholder shall be held expressly to have assented and agreed
to the terms of this Declaration of Trust and to have become a party hereto. The
death of a Shareholder during the continuance of the Trust shall not operate to
terminate the Trust nor entitle the representative of any decreased Shareholder
to an accounting or to take any action in court or elsewhere against the Trust
or the Trustees, but only to the rights of said decedent under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders partners. Neither the Trust nor the Trustees shall
have any power to bind any Shareholder personally or to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay by way of
subscription for any Shares or otherwise.
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<PAGE>
ARTICLE IV
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THE TRUSTEES
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MANAGEMENT OF THE TRUST
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Section 1. the business and affairs of the Trust shall be managed by
the Trustees, and they shall have all powers necessary and desirable to carry
out that responsibility. A Trustee shall not be required to be a Shareholder of
the Trust.
ELECTION OF TRUSTEES AND APPOINTMENT OF INITIAL TRUSTEE
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Section 2. On a date fixed by the Trustees, the Shareholders shall
elect the Trustees. Until such election, the Trustees shall be the initial
Trustee and such other persons as may be hereafter appointed pursuant to Section
4 of this Article IV. The initial Trustee shall be Warren D. Hutchison.
TERM OF OFFICE OF TRUSTEES
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Section 3. The Trustee shall hold office during the lifetime of this
Trust, and until its termination as hereinafter provided; except (a) that any
Trustee may resign his trust by written instrument signed by him and delivered
to the other Trustees or to any officer of the Trust, which shall take effect
upon such delivery or upon such later date as is specified therein; (b) that any
Trustee may be removed at any time by written instrument, signed by at least
two-thirds of the number of Trustees prior to such removal, specifying the date
when such removal shall become effective; (c) that any Trustee who requests in
writing to be retired or who has become incapacitated by illness or injury may
be retired by written instrument signed by a majority of other Trustees,
specifying the date of his retirement; and (d) that any Trustee may be removed
at any special meeting of Shareholder by a vote of at least two-thirds of the
outstanding Shares.
RESIGNATION AND APPOINTMENT OF TRUSTEES
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Section 4. In case of the declination, death, resignation, retirement,
removal, incapacity, or inability of any of the Trustees, or in case a vacancy
shall, by reason of an increase in number, or for any other reason, exist, the
remaining Trustees shall fill such vacancy by appointing such other person as
they in their discretion shall see fit consistent with the limitations under the
1940 Act. Such appointment shall be evidenced by a written instrument signed by
a majority of the Trustees in office or by recording in the records of the
Trust, whereupon the appointment shall take effect. An appointment of a Trustee
may be made by the Trustees then in office as aforesaid in anticipation of a
vacancy to occur by reason of retirement, resignation or increase in number of
Trustees effective at a
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later date, provided that said appointment shall become effective only at or
after the effective date of said retirement, resignation or increase in number
of Trustees. As soon as any Trustee so appointed shall have accepted this trust,
the trust estate shall vest in the new Trustee or Trustees, together with the
continuing Trustees, without any further act or conveyance, and he shall be
deemed a Trustee hereunder. The power of appointment is subject to the
provisions of Section 16(a) of the 1940 Act.
TEMPORARY ABSENCE OF TRUSTEE
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Section 5. Any Trustee may, by power of attorney, delegate his power
for a period not exceeding six months at any one time to any other Trustee or
Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder except as herein otherwise expressly
provided.
NUMBER OF TRUSTEES
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Section 6. The number of Trustees shall initially be one (1) and
thereafter shall be such number as shall be fixed from time to time by a written
instrument signed by a majority of the Trustees (or by an officer of the Trust
pursuant to a vote of the majority of such Trustees); provided, however, that
the number of Trustees shall in no event be less than one (1) nor more than
fifteen (15) serving hereunder at any time.
Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled, or while any Trustee is absent from the Commonwealth of
Massachusetts or, if not a domiciliary of Massachusetts, is absent from his
state of domicile, or is physically or mentally incapacitated by reason of
disease or otherwise, the other Trustees shall have all the powers hereunder and
the certificate of the other Trustees of such vacancy, absence or incapacity,
shall be conclusive.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
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Section 7. The death, declination, resignation, retirement, removal,
incapacity, or inability of the Trustees, or any one of them, shall not operate
to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust.
OWNERSHIP OF ASSETS OF THE TRUST
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Section 8. The assets of the Trust shall be held separate and apart
from any assets now or hereafter held in any capacity other than as Trustee
hereunder by the Trustees or any successor Trustees. All of the assets of the
Trust shall at all times be considered as vested in the Trustees.
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<PAGE>
ARTICLE V
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POWERS OF TRUSTEES
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POWERS
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Section 1. The Trustees in all instances shall act as principals, and
are and shall be fee from the control of the Shareholders. The Trustees shall
have full power and authority to do any and all acts and to make and execute any
and all contracts and instruments that they may consider necessary or
appropriate in connection with the management of the Trust. the Trustees shall
not in any way be bound or limited by present or future laws or customs in
regard to trust investments, but shall have full authority and power to make any
and all investments which they, in their uncontrolled discretion, shall deem
proper to accomplish the purpose of this Trust. Subject to any applicable
limitation in the Declaration of Trust or the By-laws of the Trust, the Trustees
shall have power and authority:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by Trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease
any or all of the assets of the Trust; to purchase and sell (or write) options
on securities, indices, futures contracts and other financial instruments and
enter into closing transactions in connection therewith; to enter into all types
of commodities contracts, including without limitation the purchase and sale of
futures contracts on securities, indices and other financial instruments; to
engage in forward commitment, "when issued" and delayed delivery transactions;
to enter into repurchase agreements and reverse repurchase agreements; and to
employ all kinds of hedging techniques and investment management strategies,
subject to the limitations in the paragraph below.
The Trustees have created a series of shares representing beneficial
interests in the assets allocated to the Legg Mason Pennsylvania Tax-Exempt
Income Trust ("Pennsylvania Trust") which invests in obligations which are free
from state taxation under the laws of the Commonwealth of Pennsylvania. So long
as the Pennsylvania Trust exists and the Commonwealth of Pennsylvania requires,
the Pennsylvania Trust may not vary its portfolio investments except to:
(i) Eliminate unsafe investments and investments
not consistent with the preservation of the
capital or the tax status of the investments
of the Pennsylvania Trust,
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(ii) Honor redemption orders, meet anticipated
redemption requirements, and negate gains
from discount purchases,
(iii) Reinvest the earnings from securities in
like securities, or
(iv) Defray normal administrative expenses;
provided, however, that in the event the Commonwealth of Pennsylvania revises,
amends or rescinds any of the requirements set forth above, upon action of the
Trustees, the provisions of this Section 1(a) shall be deemed to be amended to
conform to the requirements of the Commonwealth of Pennsylvania.
(b) To adopt By-Laws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders.
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate.
(d) To employ a bank or trust company as custodian of any assets of the
Trust subject to any conditions set forth in this Declaration of Trust or in the
By-Laws, if any.
(e) To retain a transfer agent and Shareholder servicing agent, or
both.
(f) To provide for the distribution of interests of the Trust either
through a Principal Underwriter in the manner hereinafter provided for or by the
Trust itself, or both.
(g) To set record dates in the manner hereinafter provided for.
(h) To delegate such authority as they consider desirable to any
officers of the Trust and to any agent, custodian or underwriter.
(i) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article XI, Section 4(b) hereof.
(j) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper.
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<PAGE>
(k) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities.
(l) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form; or either in
its own name or in the name of a custodian or a nominee or nominees, subject in
either case to proper safeguards according to the usual practice of
Massachusetts trust companies or investment companies.
(m) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article III.
(n) To allocate assets, liabilities and expenses of the Trust to a
particular Series or to apportion the same between or among two or more Series,
provided that any liabilities or expenses incurred by a particular Series shall
be payable solely out of the assets belonging to that Series as provided for in
Article III.
(o) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust.
(p) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes.
(q) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided for.
(r) To borrow money.
(s) To establish, from time to time, a minimum total investment for
Shareholders, and to permit the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder.
No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see the application
of any payments made or property transferred to the Trustees or upon their
order.
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<PAGE>
TRUSTEES AND OFFICERS AS SHAREHOLDERS
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Section 2. Any Trustee, officer or other agent of the Trust may
acquire, own and dispose of Shares to the same extent as if he were not a
Trustee, officer or agent; and the Trustees may issue and sell or cause to be
issued and sold Shares to and buy such Shares from any such person or any firm
or company in which he is interested, subject only to the general limitations
herein contained as to the sale and purchase of such Shares; ;and all subject to
any restrictions which may be contained in the ByLaws.
ACTION BY THE TRUSTEES
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Section 3. The Trustees shall act by majority vote at a meeting duly
called by or by unanimous written consent without a meeting or by telephone
consent provided a quorum of Trustees participate in any such telephonic
meeting, unless the 1940 Act requires that a particular action be taken only at
a meeting in person of the Trustees. At any meeting of the Trustees, a majority
of the Trustees shall constitute a quorum. Meetings of the Trustees may be
called orally or in writing by the Chairman of the Trustees or by any two other
Trustees. Notice of the time, date and place of all meetings of the Trustees
shall be given by the party calling the meeting to each Trustee by telephone,
telegram or telefax sent to his home or business address at least twenty-four
hours in advance of the meeting or by written notice mailed to his home or
business address at least seventy-two hours in advance of the meeting. Notice
need not be given to any Trustee who attends the meeting without objecting to
the lack of notice or who executes a written waiver of notice with respect to
the meeting. Subject to the requirements of the 1940 Act, the Trustees by
majority vote may delegate to any one of their number their authority to approve
particular matters or take particular actions on behalf of the Trust.
CHAIRMAN OF THE TRUSTEES
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Section 4. The Trustees may appoint one of their number to be Chairman
of the Board of Trustees. The Chairman shall preside at all meetings of the
Trustees, shall be responsible for the execution of policies established by the
Trustees and the administration of the Trust, and may be the chief executive,
financial and/or accounting officer of the Trust.
ARTICLE VI
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EXPENSES OF THE TRUST
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TRUSTEE REIMBURSEMENT
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Section 1. Subject to the provisions of Article III, Section 5, the
Trustees shall be reimbursed from the Trust estate
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<PAGE>
or the assets belonging to the appropriate Series for their expenses and
disbursements, including, without limitation, fees and expenses of the Trustees
who are not Interested Persons of the Trust, interest expense, taxes, fees and
commissions of every kind, expenses of pricing Trust portfolio securities,
expenses of issue, repurchase and redemption of Shares including expenses
attributable to a program of periodic repurchases or redemptions, expenses of
distributing Shares and providing services to Shareholders, expenses of
registering and qualifying the Trust and Shares under Federal and state laws and
regulations, charges of investment advisers, administrators, custodians,
transfer agents, and registrars, expenses of preparing and setting up in type
Prospectuses, expenses of printing and distributing Prospectuses and Statements
of Additional Information sent to existing Shareholders, auditing and legal
expenses, reports to Shareholders, expenses of meetings of Shareholders and
proxy solicitations therefor, insurance expenses, association membership dues
and for such non-recurring items as may arise, including litigation to which the
Trust is a party, and for all losses and liabilities by them incurred in
administering the Trust, and for the payment of such expenses, disbursements,
losses and liabilities and Trustees shall have a lien on the assets belonging to
the appropriate Series prior to any rights or interests of the Shareholders
thereto. This section shall not preclude the Trust from directly paying any of
the aforementioned fees and expenses.
ARTICLE VII
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INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
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INVESTMENT ADVISER
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Section 1. Subject to a Majority Shareholder Vote, the Trustees may in
their discretion from time to time enter into an investment advisory or
management contract(s) with respect to the Trust or any Series thereof whereby
the other party(ies) to such contract(s) shall undertake to furnish the Trustees
such management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions, as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize the investment adviser(s) (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of portfolio securities and other investment instruments of
the Trust on behalf of the Trustees or may authorize any officer, agent, or
Trustee to effect such purchases, sales or exchanges pursuant to recommendations
of the investment adviser (and all without further action by the Trustees). Any
such purchases, sales and exchanges shall be deemed to have been authorized by
all of the Trustees.
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<PAGE>
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to Shareholder approval, authorize the investment
adviser to employ one or more sub- advisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and
sub-adviser.
PRINCIPAL UNDERWRITER
- ---------------------
Section 2. The Trustees may in their discretion from time to time enter
into one or more contract(s) providing for the sale of the Shares, whereby the
Trust may either agree to sell the Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as may be prescribed in the
By-Laws, if any, and such further terms and conditions as the Trustees may in
their discretion determine not inconsistent with the provisions of this Article
VII, or of the By-Laws, if any; and such contract may also provide for the
repurchase or sale of Shares by such other party as principal or as agent of the
Trust. The Trustees may in their discretion adopt a plan or plans of
distribution and enter into any related agreements whereby the Trust finances
directly or indirectly any activity with is primarily intended to result in
sales of Shares. Such plan or plans of distribution and any related agreements
may contain such terms and conditions as the Trustees may in their discretion
determine subject to the requirements of Section 12 of the 1940 Act, Rule 12b-1
thereunder and any other applicable rules and regulations.
TRANSFER AGENT
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Section 3. The Trustees may in their discretion from time to time enter
into a transfer agency and Shareholder service contract whereby the other party
shall undertake to furnish the Trustees and Trust with transfer agency and
Shareholder services. The contract shall be on such terms and conditions as the
trustees may in their discretion determine not inconsistent with the provisions
of this Declaration of Trust or of the By-Laws, if any. Such services may be
provided by one or more entities, including one or more agents of such other
party.
PARTIES TO CONTRACT
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Section 4. Any contract of the character described in Sections 1,2, and
3 of this Article VII or which relates to the provisions of custodian services
to the Trust may be entered into with any corporation, firm, partnership, trust
or association, although one or more of the Trustees or officers of the Trust
may be an officer, director, trustee, partner, shareholder, or member of such
other party to the contract, and no such contract shall
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<PAGE>
be invalidated or rendered voidable by reason of the existence of any
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article VII
or the By-Laws, if any. The same person (including a firm, corporation,
partnership, trust, or association) may be the other party to contracts entered
into pursuant to Sections 1, 2, and 3 above or with respect to the provision of
custodian services to the Trust, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 4.
PROVISIONS AND AMENDMENTS
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Section 5. Any contract entered into pursuant to Sections 1 and 2 of
this Article VII shall be consistent with an subject to the requirements of
Sections 12 and 15 of the 1940 Act (including any amendments thereof or other
applicable Act of Congress hereafter enacted) with respect to its continuance in
effect, its termination, and the method of authorization and approval of such
contract or renewal thereof.
ARTICLE VIII
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SHAREHOLDERS' VOTING POWER AND MEETINGS
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VOTING POWERS
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Section 1. The Shareholders shall have power to vote (i) for the
election of Trustees as provided in Article IV, Section 2, (ii) for the removal
of Trustees as provided in Article IV, Section 3(d), (iii) with respect to any
investment advisory or management contract as provided in Article VII, Section
1, (iv) with respect to any termination or reorganization of the Trust as
provided in Article XI, Section 4, (v) with respect to the amendment of this
Declaration of Trust to the extent and as provided in Article XI, Section 7,
(vi) to the same extent as the shareholders of a Massachusetts business
corporation, as to whether or not a court action, proceeding or claim should be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, provided, however, that a Shareholder of a particular
Series shall not be entitled to bring any derivative or class action on behalf
of any other Series, and (vii)with respect to such additional matters relating
to the Trust as may be required or authorized by law, by this Declaration of
Trust, or the By-Laws, if any, or any registration of the Trust with the
Securities and Exchange Commission (the "Commission")or any State, or as the
Trustees may consider desirable. On any matter submitted to a vote of the
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Shareholders, shares of all Series shall be voted in the aggregate, except (i)
when required by the 1940 Act, Shares shall be voted by individual Series and
not in the aggregate; and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Series, then only the Shareholders of
such Series shall be entitled to vote thereon. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote, and each
fractional Share shall be entitled to a proportionate fractional vote. There
shall be no cumulative voting in the election of Trustees. Shares may be voted
in person or by proxy. Until Shares are issued, the Trustees may exercise all
rights of Shareholders and may take any action required or permitted by law,
this Declaration of Trust or any By-Laws to be taken by Shareholders.
MEETINGS
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Section 2. The first Shareholders' meeting shall be held as specified
in Section 2 of Article IV at the principal office of the Trust or such other
place as the Trustees may designate. Special meetings of the Shareholders of any
Series may be called by the Trustees and shall be called by the Trustees upon
the written request of Shareholders owning at least one-tenth of the outstanding
Shares of that Series entitled to vote. Whenever ten or more Shareholders
meeting the qualifications set forth in Section 16(c) of the 1940 Act, seek the
opportunity of furnishing materials to the other Shareholders with a view to
obtaining signatures on such a request for a meeting, the Trustees shall comply
with the provisions of said Section 16(c) with respect to providing such
Shareholders access to the list of the Shareholders of record of the Trust or
the mailing of such materials to such Shareholders of record. Shareholders shall
be entitled to at least fifteen days' notice of any meeting.
QUORUM AND REQUIRED VOTE
- ------------------------
Section 3. A majority of Shares entitled to vote in person or by proxy
shall be a quorum for the transaction of business at a Shareholders' meeting,
except that where any provision of law or of this Declaration of Trust permits
or requires that holders of any Series shall vote as a Series, then a majority
of Shares of that Series entitled to vote shall be necessary to constitute a
quorum for the transaction of business by that Series. Any lesser number shall
be sufficient for adjournments. Any adjourned session or sessions may be held,
within a reasonable time after the date set for the original meeting, without
the necessity of further notice. Except when a larger vote is required by any
provision of this Declaration of Trust or the ByLaws, a majority of the Shares
voted in person or by proxy shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of this Declaration
of Trust permits or requires that the holders of any Series shall
- 14 -
<PAGE>
vote as a Series, then a majority of the Shares of that Series voted in person
or by proxy on the matter shall decide that matter insofar as that Series is
concerned.
ARTICLE IX
----------
DISTRIBUTION AND REDEMPTIONS
----------------------------
DISTRIBUTIONS
- -------------
Section 1.
(a) The Trustees may from time to time declare and pay dividends and
other such distributions (collectively, "dividends". The amount of such
dividends and the payment of them shall be wholly in the discretion of the
Trustees.
(b) The Trustees shall have power, to the fullest extent permitted by
the laws of the Commonwealth of Massachusetts, at any time to declare and cause
to be paid dividends on Shares of a particular Series, from the assets belonging
to that Series, which dividends, at the election of the Trustees, may be paid
daily or otherwise pursuant to a standing resolution or resolutions adopted only
once or with such frequency as the Trustees may determine, and may be payable in
Shares of that Series at the election of each Shareholder of that Series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute one or more "stock dividends"
pro rata among the Shareholders of a particular Series as of the record date of
that Series (fixed as provided in Section 3 of Article XI hereof).
REDEMPTIONS
- -----------
Section 2. In case any holder of record of Shares of a particular
Series desires to dispose of his Shares, he may deposit at the office of the
transfer agent or other authorized agent of that Series a written request or
such other form of request as the Trustees may from time to time authorize,
requesting that the Series purchase the Shares in accordance with this Section
2; and the Shareholder so requesting shall be entitled to require the Series to
purchase, and the Series or the Principal Underwriter of the Series shall
purchase his said Shares, but only at the Net Asset Value thereof (as described
in Section 3 hereof) minus any applicable sales charge or redemption or
repurchase fee payable to the Trust or principal underwriter and any withholding
required by law. The Series shall make payment for any such Shares to be
redeemed, as aforesaid, in cash or property from the assets belonging to that
Series and payment for such Shares shall be made to the holder of record within
seven (7) days after the date upon which the request is effective; provided,
however, that if Shares being redeemed have
- 15 -
<PAGE>
been purchased by check, the Trust may postpone payment until the Trust has
assurance that good payment has been collected for the purchase of the Shares.
The Trust may require Shareholders to pay a sales charge to the Trust, the
principal underwriter or any other person designated by the Trustees upon
redemption or repurchase of Shares of any Series in such amount as shall be
determined from time to time by the Trustees. The amount of such sales charge
may but need not vary depending on various factors, including without limitation
the holding period of the redeemed or repurchased Shares. The Trustees may also
charge a redemption or repurchase fee in such amount as may be determined from
time to time by the Trustees.
DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS
- ------------------------------------------------------------------
Section 3. The term "Net Asset Value" of any Series shall mean that
amount by which the assets belonging to that Series exceed its liabilities, all
as determined by or under the direction of the Trustees. Such value per Share
shall be determined separately for each Series and shall be determined on such
days and at such times as the Trustees may determine. Such determination shall
be made with respect to securities for which market quotations are readily
available, at the market value of such securities; and with respect to other
securities and assets, at the fair value as determined in good faith by the
Trustees, provided, however, that the Trustees, without Shareholder approval,
may alter the method of appraising portfolio securities insofar as permitted
under the 1940 Act and the rules, regulations and interpretations thereof
promulgated or issued by the Commissioner or insofar as permitted by any Order
of the Commission applicable to the Series. The Trustees may delegate any of
their powers and duties under this Section 3 with respect to appraisal of assets
and liabilities. At any time the Trustees may cause the Net Asset Value per
Share last determined to be determined again in a similar manner and may fix the
time when such redetermined values shall become effective.
SUSPENSION OF THE RIGHT OF REDEMPTION
- -------------------------------------
Section 4. The Trustees may declare a suspension of the right of
redemption or postpone the date of payment as permitted under the 1940 Act. Such
suspension shall take effect at such time as the Trustees shall specify but not
later than the close of business on the business day next following the
declaration of suspension, and thereafter there shall be no right of redemption
or payment until the Trustees shall declare the suspension at an end. In the
case of a suspension of the right of redemption, a Shareholder may either
withdraw his request for redemption or receive payment based on the Net Asset
Value per Share existing after the termination of the suspension.
- 16 -
<PAGE>
ARTICLE X
---------
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
LIMITATION OF LIABILITY
- -----------------------
Section 1. All persons extending credit to, contracting with or having
any claim against the Trust or a particular Series shall look only to the assets
of the Trust or such Series, as the case may be, for payment under such credit,
contract or claim; and neither the Shareholders nor the Trustees, nor any of the
Trust's officers, employers or agents, whether past, present or future, nor any
other Series shall be personally liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust, any Series, or the Trustees or any of them in connection with the Trust
shall be conclusively deemed to have been executed or done only in or with
respect to their or his capacity as Trustees or Trustee and neither such
Trustees or Trustee nor the Shareholders shall be personally liable thereon.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall given notice that the
same was executed or made by them on behalf of the Trust or by them as
individually and that the obligations of such instrument are not binding upon
any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust or the particular Series in question, as the
case may be, but the omission thereof shall not operate to bind any Trustees or
Trustee or officers or officer of Shareholders or Shareholder individually.
Provided they have exercised reasonable care and have acted under the
reasonable belief that their actions are in the best interest of the Trust, the
Trustees and officers shall not be responsible for or liable in any event for
neglect or wrongdoing of them or any agent, employee or investment adviser of
the Trust, but nothing contained herein shall protect any Trustee or officer
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
INDEMNIFICATION
- ---------------
Section 2.
(a) Subject to the exceptions and limitations contained in Section 2(b)
below:
- 17 -
<PAGE>
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be indemnified
by the appropriate Series to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal, or
other, including appeals), actual or threatened while in office or thereafter,
and the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgements, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office,
(A) by the court or other body approving the
settlement;
(B) by the least a majority of those Trustees who are
neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type
inquiry); or
(C) by written opinion of independent legal counsel
based upon a review of readily available facts (as
opposed to a full trial-type inquiry);
provided, however, that any Shareholder may, by appropriate legal proceedings,
challenge any such determination by the Trustees, or by independent counsel.
- 18 -
<PAGE>
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now of
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Series from time
to time prior to final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid over by him to
the applicable Series if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such advance payments
or (c) either a majority of the Trustees who are neither Interested Persons of
the Trust nor parties to the matter, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily available facts
(as opposed to a full trial-type inquiry), that there is reason to believe that
such Covered Person will be found entitled to indemnification under this Section
2.
SHAREHOLDERS
- ------------
Section 3. In case any Shareholder or former Shareholder of any Series
shall be held to be personally liable solely by reason of his being or having
been a Shareholder and not because of his acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Series
shall, upon request by the Shareholder, assume the defense of any claim made
against the Shareholder for any act or obligation of the Series and satisfy any
judgement thereon.
- 19 -
<PAGE>
ARTICLE XI
----------
MISCELLANEOUS
-------------
TRUST NOT A PARTNERSHIP
- -----------------------
Section 1. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustees hereunder shall have any power to
bind personally either the Trust's officers or any Shareholder. Nothing in this
Declaration of Trust shall protect a Trustee or officer against liability to
which the Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office hereunder.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
- -------------------------------------------------------------
Section 2. The exercise by the Trustees of their powers and discretions
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the provisions
of Section 1 of this Article XI and to Article X, the Trustees shall not be
liable for errors of judgment or mistakes of fact or law. the Trustees may take
advice of counsel or other experts with respect to the meaning and operation of
this Declaration of Trust, and subject to the provisions of Section 1 of this
Article XI and to Article X, shall be under no liability for any act or omission
in accordance with such advice or for failing to follow such advice. The
Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
ESTABLISHMENT OF RECORD DATES
- -----------------------------
Section 3. The Trustees may close the stock transfer books of the Trust
for a period not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividends, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may fix in advance a date, not exceeding sixty (60) days
preceding the date of any meeting of Shareholders, or the date for payment of
any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend,
or to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of Shares, and in such case such
Shareholders and only such Shareholders as shall be Shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive
- 20 -
<PAGE>
payment of such dividend, or to receive such allotment of rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of any Shares on
the books of the Trust after any such record date fixed as aforesaid.
TERMINATION OF TRUST
- --------------------
Section 4.
(a) This Trust shall continue without limitation of time but subject to
the provisions of sub-section (b) of this Section 4.
(b) Subject to a Majority Shareholder Vote of each Series affected
by the matter or, if applicable, to a Majority Shareholder Vote of the Trust,
the Trustees may
(i) sell, convey, merge and/or transfer all or substantially
all of the assets of the Trust or any affected Series to another trust,
partnership, association or corporation organized under the laws of any state
which is a diversified open-end management investment company as defined in the
1940 Act, for adequate consideration which may include the assumption of all
outstanding obligations, taxes and other liabilities, accrued or contingent, of
the Trust or any affected Series, and which may include shares of beneficial
interest or stock of such trust, partnership, association or corporation; or
(ii) at any time sell and convert into money all or
substantially all of the assets of the Trust or any affected Series.
Upon making provisions for the payment of all liabilities of the Trust
or any affected Series in the circumstances described in either (i) or (ii), by
such assumption or otherwise, the Trustees shall distribute the remaining
proceeds or assets (as the case may be) ratably among the holders of the Shares
of the Trust or any affected Series then outstanding.
The Trustees may take any of the actions specified in clauses (i) and
(ii) above without obtaining a Majority Shareholder Vote of any Series or the
Trust if a majority of the Trustees makes a determination that the continuation
of a Series or the Trust is not in the best interests of such Series, the Trust
or their respective Shareholders as a result of factors or events adversely
affecting the ability of such Series or the Trust to conduct its business and
operations in an economically viable manner. Such factors and events may include
the inability of a Series or the Trust to maintain its assets at an appropriate
size, changes in laws or regulations governing the Series or Trust or affecting
assets of the type in which such Series or the Trust invests or economic
developments or trends having a
- 21 -
<PAGE>
significant adverse impact on the business or operations of such Series or the
Trust.
(c) Upon completion of the distribution of the remaining proceeds or
the remaining assets as provided in sub-section (b), the Trust or any affected
Series shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder with respect thereto and the right,
title and interest of all parties shall be cancelled and discharged.
FILING OF COPIES, REFERENCES, HEADINGS
- --------------------------------------
Section 5. The original or a copy of this instrument and of each
amendment hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. A copy of this instrument and of each amendment
hereto shall be filed by the Trustees with the Secretary of the Commonwealth of
Massachusetts and the Boston City Clerk, as well as any other governmental
office where such filing may from time to time be required. Anyone dealing with
the Trust may rely on a certificate by an officer or Trustee of the Trust as to
whether or not any such amendments to this Declaration of Trust have been made
and as to any matters in connection with the Trust hereunder, and with the same
effect as if it were the original, may rely on a copy certified by an officer or
Trustee of the Trust to be a copy of this instrument or of any such amendments.
In this instrument or in any such amendments, references to this instrument, and
all expressions like "herein," "hereof" and "hereunder," shall be deemed to
refer to this instrument as amended from time to time. The masculine gender
shall include the feminine and neuter genders. Headings are placed herein for
convenience of reference only and in case of any conflict, the text of this
instrument, rather than the headings, shall control. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
APPLICABLE LAW
- --------------
Section 6. The trust set forth in this instrument is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
AMENDMENTS
- ----------
Section 6. All rights granted to the Shareholders under this
Declaration of Trust are granted subject to the reservation of the right to
amend this Declaration of Trust as herein provided, except that no amendment
shall repeal the limitations
- 22 -
<PAGE>
on personal liability of any Shareholder or Trustee or repeal the prohibition of
assessment upon the Shareholders without the express consent of each Shareholder
or Trustee involved. Subject to the foregoing, the provisions of this
Declaration of Trust (whether or not related to the right of Shareholders) may
be amended at any time, so long as such amendment does not adversely affect the
rights of any Shareholder with respect to which such amendment is or purports to
be applicable and so long as such amendment is not in contravention of
applicable law, including the 1940 Act, by an instrument in writing signed by a
majority of the then Trustees (or by an officer of the Trust pursuant to the
vote of a majority of such Trustees). Any amendment to this Declaration of Trust
that adversely affects the rights of Shareholders may be adopted at any time by
an instrument signed in writing by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees) when
authorized to do so by the vote of the Shareholders holding a majority of the
Shares entitled to vote. Subject to the foregoing, any such amendment shall be
effective as provided in the instrument containing the terms of such amendment
or, if there is no provision therein with respect to effectiveness, upon the
execution of such instrument and of a certificate (which may be a part of such
instrument) executed by a Trustee or officer of the Trust to the effect that
such amendment has been duly adopted. Copies of each amendment to this
Declaration of Trust shall be filed as specified in Section 5 of this Article
XI. A restated Declaration of Trust, integrating into a single instrument all of
the provisions of the Declaration of Trust which are then in effect and
operative, may be executed from time to time by a majority of the Trustees and
shall be effective upon filing as specified in Section 5.
FISCAL YEAR
- -----------
Section 8. The fiscal year of the Trust shall end on a specified date
as set forth in the By-Laws, provided however, that the Trustees may, without
Shareholder approval, change the fiscal year of the Trust.
- 23 -
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the initial Trustee of the
Trust, has executed this instrument as of the day and year first above written.
(SEAL)
____________________________
Address:
County of Suffolk, ss
Then personally appeared the above-named _________________________
who acknowledged the foregoing instrument to be his free act and deed, before me
this ____ day of November, 1990.
_____________________________
Notary Public
My Commission expires _________________________________________________
Exhibit 1(b)
AMENDMENT TO DECLARATION OF TRUST
OF LEGG MASON TAX-EXEMPT INCOME FUND
AND CERTIFICATE OF VICE PRESIDENT AND SECRETARY
We, Marie K. Karpinski, Vice President, and Susan T. Lind, Secretary, of
LEGG MASON TAX-EXEMPT INCOME FUND
111 SOUTH CALVERT STREET
BALTIMORE, MARYLAND 21202
do certify that, in accordance with Article V, Section 3 of the Declaration of
Trust of Legg Mason Tax-Exempt Income Fund, dated November 21, 1990, the
following Amendment to said Declaration of Trust was duly adopted by the Board
of Trustees pursuant to a unanimouse written consent dated January 30, 1991;
RESOLVED: That, pursuant to the authority granted to the Board of
Trustees in Article V, Section 1 of the Trust's Declaration of Trust, the name
of the Trust, "Legg Mason Tax-Exempt Income Fund" be, and it hereby is, changed
to "Legg Mason Tax-Free Income Fund";
FURTHER RESOLVED: That, pursuant to the authority granted to the Board
of Trustees in Article V, Section 1 of the Trust's Declaration of Trust, the
first sentence of Article I, Section 1 is changed to read as follows:
"This Trust shall be known as 'Legg Mason Tax-Free Income Fund.'";
FURTHER RESOLVED: That, pursuant to the authority granted to the Board
of Trustees in Article V, Section 1 of the Declaration of Trust, the last
sentence of Article III, Section 1 is changed to read as follows:
"Without limiting the authority of the Trustees set forth in this
Section 1 to establish and designate any further Series, the Trustees
hereby establish and designate three Series to be known as the 'Legg
Mason Pennsylvania Tax-Free Income Trust,' the 'Legg Mason Maryland
Tax-Free Income Trust,' and the 'Legg Mason High Quality Tax-Free
Income Trust.'";
FURTHER RESOLVED: That, pursuant to the authority granted to the Board
of Trustees in Article V, Section 1 of the Declaration of Trust, the reference
in Article V, Section 1(a) to the "Legg Mason Pennsylvania Tax-Exempt Income
Trust" is changed to read "Legg Mason Pennsylvania Tax-Free Income Trust."
<PAGE>
The foregoing Amendment to the Declaration of Trust will become
effective January 31, 1991 so long as this Amendment is filed in accordance with
Chapter 182, Section 2 of the General Laws.
IN WITNESS WHEREOF and under the penalties of perjury, we have hereunto
signed our names this 31st day of January in the year 1991.
/s/ Marie K. Karpinski /s/ Susan T. Lind
- --------------------------------- ---------------------------------
Marie K. Karpinski Susan T. Lind
Vice President Secretary
Baltimore, MD (ss)
Subscribed and sworn to before me this 31st day of January 1991.
/s/ Loretta A. Paone
- ----------------------------------
Notary Public
MY COMMISSION EXPIRES NOVEMBER 15, 1993
Exhibit 1(c)
AMENDMENT TO DECLARATION OF TRUST
OF LEGG MASON TAX-FREE INCOME FUND
AND
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
We, Marie K. Karpinski, Vice President, and Susan T. Lind, Secretary, of
LEGG MASON TAX-FREE INCOME FUND
111 SOUTH CALVERT STREET
BALTIMORE, MARYLAND 21202
do certify that, in accordance with Article V, Section 3, Article VIII, Section
1 and Article X, Section 7 of the Declaration of Trust of Legg Mason Tax-Free
Income Fund ("Trust"), dated November 21, 1990, and amended on January 31, 1991
and Section 2.06 of the Trust's by-laws, the following Amendment to said
Declaration of Trust was duly adopted by the Board of Trustees and by the Sole
Shareholder pursuant to unanimous written consents dated March 11, 1991:
RESOLVED: That, pursuant to the authority granted to the Board of
Trustees in Article XI, Section 7 of the Trust's Declaration of Trust, and to
the Shareholders in Article VIII, Section 1 and Article XI, Section 7 of the
Trust's Declaration of Trust, Article X, Section 2(b)(i) of the Trust's
Declaration of Trust is changed to read as follows:
"who shall have been adjudicated by a court or body before which the
proceeding was brought to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office; or"
The foregoing Amendment to the Declaration of Trust will become
effective March 11, 1991 so long as this Amendment is filed in accordance with
Chapter 182, Section 2 of the General Laws.
<PAGE>
IN WITNESS WHEREOF and under the penalties of perjury, we have hereunto
signed our names this 11th day of March in the year 1991.
/s/ Marie K. Karpinski /s/ Susan T. Lind
- ---------------------------------- ------------------------------------
Marie K. Karpinski Susan T. Lind
Vice President Secretary
Baltimore, MD (ss)
Subscribed and sworn to before me this 12th day of March, 1991.
/s/ Loretta A. Paone
- -----------------------------------
Notary Public
MY COMMISSION EXPIRES NOVEMBER 15, 1993
EXHIBIT 1(d)
LEGG MASON TAX-FREE INCOME FUND
AMENDMENT TO DECLARATION OF TRUST
AND
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
We Marie K. Karpinski, Vice President and Susan T. Lind, Secretary of
Legg Mason Tax-Free Income Fund ("Trust"), hereby certify that a majority of the
Board of Trustees ("Board") of the Trust adopted the following resolutions, all
of which became effective on June 26, 1992:
RESOLVED, that pursuant to Section 2 of Article III of the Trust's
Declaration of Trust there is hereby established and designated a new series of
shares of beneficial interest of the Trust, having the rights and privileges
specified in the Trust's Declaration of Trust, to be known as Legg Mason
Tax-Free Intermediate-Term Income Trust; and be it further
RESOLVED, that pursuant to the authority granted to the Board in
Section 1 of Article V of the Trust's Declaration of Trust, Section 1 of Article
III of the Trust's Declaration of Trust be, and it hereby is, amended to reflect
the addition of this new Series of the Trust, the amended Section to read, in
relevant part, as follows:
Section 1. . . . Without limiting the authority of the Trustees
set forth in this Section 1 to establish and designate any further
Series, the Trustees hereby established and designated four Series
of Shares to be known as the "Legg Mason Pennslyvania Tax-Free
Income Trust," the "Legg Mason Maryland Tax-Free Income Trust,"
the "Legg Mason High Quality Tax-Free Income Trust," and the "Legg
Mason Tax-Free Intermediate-Term Income Trust."
<PAGE>
IN WITNESS WHEREOF and under penalties of perjury, we have hereunto
signed our names this 30 day of July, 1992.
By: /s/ Marie K. Karpinski By: /s/ Susan T. Lind
--------------------------------- -----------------------------
Marie K. Karpinski Susan T. Lind
Vice President Secretary
Legg Mason Tax-Free Legg Mason Tax-Free
Income Fund Income Fund
Baltimore, MD (ss)
Subscribed and sworn before me this 30 day of July, 1992.
/s/ Loretta A. Paone
- --------------------------------------
Notary Public
MY COMMISSION EXPIRES NOVEMBER 15, 1993
LEGG MASON TAX-EXEMPT INCOME FUND
A Massachusetts Business Trust
BY-LAWS
,
_______________________________, __________
<PAGE>
BY-LAWS OF LEGG MASON TAX-EXEMPT INCOME FUND
--------------------------------------------
ARTICLE I
---------
DECLARATION OF TRUST,
---------------------
LOCATION OF OFFICES AND SEAL
----------------------------
Section 1.01. Declaration of Trust: These By-Laws shall be subject to
the Declaration of Trust, as from time to time in effect (the "Declaration of
Trust"), of Legg Mason Tax-Exempt Income Fund, the Massachusetts business trust
established by the Declaration of Trust (the "Trust").
Section 1.02. Principal Office of the Trust: The principal office of
the Trust shall be located in the City of Baltimore, Maryland. The Trust may
establish and maintain such other offices and places of business as the trustees
of the Trust (collectively "Trustees") may, from time to time, determine.
Section 1.03. Seal: The seal of the Trust shall be circular in form and
shall bear the name of the Trust. The form of the seal shall be subject to
alteration by the Trustees and the seal may be used by causing it or a facsimile
to be impressed or affixed or printed or otherwise reproduced. Any officer or
Trustee of the Trust shall have authority to affix the seal of Trust to any
document, instrument or other paper executed and delivered by or on behalf of
the Trust; however, unless otherwise required by the Trustees, the seal shall
not be necessary to be placed on and its absence shall not impair the validity
of any document, instrument, or other paper executed by or on behalf of the
Trust.
ARTICLE II
----------
SHAREHOLDERS
------------
Section 2.01. Shareholder Meetings: Meetings of the holders of shares
of beneficial interest in the Trust (collectively "Shareholders") may be called
at any time by the Trustees or, if the Trustees shall fail to call any meeting
for a period of 30 days after written request of Shareholders owning at least
one-tenth of the outstanding shares entitled to vote, then such Shareholders may
call such meeting. Each call of a meeting shall state the place, date, hour and
purposes of the meeting.
Section 2.02. Place of Meetings: All meetings of the Shareholders shall
be held at the principal office of the Trust, except that the Trustees may
designate a different place of meeting within the United States.
Section 2.03 Notice of Meeting: The secretary or an assistant secretary
or such other officer as may be designated by
<PAGE>
the Trustees shall cause notice of the place, date and hour, and purpose or
purposes for which the meeting is called, to be mailed, not less than fifteen
days before the date of the meeting, to each Shareholder entitled to vote at
such meting, at his address as it appears on the records of the Trust at the
time of such mailing. Notice of any Shareholders' meeting need not be given to
any Shareholder if a written waiver of notice, executed before or after such
meeting, is filed with the record of such meeting, or to any Shareholder who
shall attend such meeting in person or by proxy. Notice of adjournment of a
Shareholders' meeting to another time or place need not be given, if such time
and place are announced at the meeting.
Section 2.04 Ballots: The vote upon any question shall be by ballot
whenever requested by any person entitled to vote, but, unless such a request is
made, voting may be conducted in any way approved by the meeting.
Section 2.05. Voting-Proxies: Shareholders entitled to vote may vote
either in person or by proxy, provided that an instrument authorizing such proxy
to act is executed by the Shareholder in writing and dated not more than eleven
months before the meeting, unless the instrument specifically provides for a
longer period. Proxies shall be delivered to the secretary of the Trust or other
person responsible for recording the proceedings before being voted. A proxy
with respect to units of beneficial interest in the Trust ("shares") held in the
name of two or more persons shall be valid if executed by one of them unless at
or prior to exercise of such proxy the Trust receives a specific written notice
to the contrary from any one of them. Unless otherwise specifically limited by
their terms, proxies shall entitle the holder thereof to vote at any adjournment
of a meeting. A proxy purporting to be exercised by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. At all
meetings of the Shareholders, unless the voting is conducted by inspectors, all
questions relating to the qualifications of voters, the validity of proxies, and
the acceptance or rejection of votes shall be decided by the chairman of the
meeting.
Section 2.06. Action Without a Meeting: Any action to be taken by
Shareholders may be taken without a meeting if all Shareholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of meetings of Shareholders of the Trust. Such consent
shall be treated for all purposes as a vote at a meeting.
- 2 -
<PAGE>
ARTICLE III
-----------
TRUSTEES
--------
Section 3.01. Regular Meetings: Regular meetings of the Trustees may be
held without call or notice at such places and at such times as the Trustees may
from time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees. A regular
meeting of the Trustees may be held without call or notice immediately after and
at the same place as any meeting of the Shareholders.
Section 3.02. Special Meetings: Special meetings of the Trustees may be
held at any time and at any place designated in the call of the meeting, when
called by the chairman of the Board of Trustees or by two or more Trustees,
provided that notice thereof shall be given to each Trustee as set forth in the
Declaration of Trust.
Section 3.03. Committees: The Trustees, by vote of a majority of the
Trustees then in office, may elect from their number an executive committee or
other committees and may delegate thereto some or all of their powers except
those which by law, by the Declaration of Trust, or by these ByLaws may not be
delegated. Except as the Trustees may otherwise determine, any such committee
may make rules for the conduct of its business, but unless otherwise provided by
the Trustees or in such rules, its business shall be conducted so far as
possible in the same manner as is provided by these ByLaws for the Trustees
themselves. All members of such committees shall hold such offices at the
pleasure of the Trustees. The Trustees may abolish any such committee at any
time. Any committee to which the Trustees delegate any of their powers or duties
shall keep records of its meetings and shall report its actions to the Trustees.
The Trustees shall have power to rescind any action of any committee, but no
such rescission shall have retroactive effect.
Section 3.04. Other Committees: The Trustees may appoint other
committees, each consisting of one or more persons, who need not be Trustees.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Trustees, but shall not exercise any
power which may lawfully be exercised only by the Trustees or a committee of
Trustees.
Section 3.05. Compensation: Each Trustee and each committee member may
receive such compensation for his services and reimbursement for his expenses as
may be fixed from time to time by resolution of the Trustees.
- 3 -
<PAGE>
ARTICLE IV
----------
OFFICERS
--------
Section 4.01. General: The officers of the Trust shall be a president,
a treasurer, a secretary and such other officers, if any, including a chairman
of the Board of Trustees, as the Trustees from time to time may in their
discretion elect or appoint. The Trust may also have such agents, if any, as the
Trustees from time to time may in their discretion appoint. Any officer may be,
but none need be, a Trustee or Shareholder. Any two or more offices may be held
by the same person.
Section 4.02. Election and Term of Office: The president, the treasurer
and the secretary shall be elected annually by the Trustees at their first
meeting in each calendar year or at such later meeting in such year as the
Trustees shall determine. Other officers or agents, if any, may be elected or
appointed by the Trustees at said meeting or at any other time. The president,
treasurer and secretary shall hold office until the first meeting of the
Trustees in each calendar year and until their respective successors are chosen
and qualified, or in each case until he dies, resigns, is removed or become
disqualified. Each other officer shall hold office and each agent shall retain
his authority at the pleasure of the Trustees.
Section 4.03. Powers: Subject to the other provisions of these ByLaws,
each officer shall have, in addition to the duties and powers set forth herein
and in the Declaration of Trust, such duties and powers as are commonly incident
to his office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate.
Section 4.04. Chairman of the Board: The chairman of the Board of
Trustees, if one is so appointed, shall be chosen from among the Trustees and
may hold office only so long as he continues to be a Trustee. Unless the
Trustees otherwise provide, the chairman, if any is so appointed, shall preside
at all meetings of the Shareholders and of the Trustees at which he is present;
may be ex officio a member of all committees established by the Trustees; and
shall have such other duties and powers as specified herein and as may be
assigned to him by the Trustees.
Section 4.05. President: The president shall be the chief executive
officer of the Trust and, subject to the supervision of the Trustees, shall have
general charge of the business, affairs and property of the Trust and general
supervision over its officers, employees and agents. He shall exercise such
other powers and perform such other duties as from time to time may be assigned
to him by the Trustees.
- 4 -
<PAGE>
Section 4.06. Vice Presidents: The Trustees may from time to time
designate and elect one or more vice presidents who shall have such powers and
perform such duties as from time to time may be assigned to them by the Trustees
or the president. At the request or in the absence or disability of the
president, the vice president (or, if there are two or more vice presidents,
then the senior of the vice presidents present and able to act) shall have all
the powers of and be subject to all the restrictions upon the president.
Section 4.07. Treasurer and Assistant Treasurers: The treasurer shall
be the principal financial and accounting officer of the Trust and shall have
general charge of the finances and books of account of the Trust. Except as
otherwise provided by the Trustees, he shall have general supervision of the
funds and property of the Trust and of the performance by the custodian of its
duties with respect thereto. He shall render to the Trustees, whenever directed
by the Trustees, an account of the financial condition of the Trust and of all
his transactions as treasurer; and as soon as possible after the close of each
fiscal year he shall make and submit to the Trustees a like report for such
fiscal year. He shall perform all the acts incidental to the office of
treasurer, subject to the control of the Trustees.
Any assistant treasurer may perform such duties of the treasurer as the
treasurer or the Trustees may assign, and, in the absence of the treasurer, may
perform all the duties of the treasurer.
Section 4.08. Secretary and Assistant Secretaries: The secretary shall
attend to the giving and serving of all notices of the Trust and shall record
all proceedings of the meetings of the Shareholders and Trustees in books to be
kept for that purpose. He shall keep in safe custody the seal of the Trust and
shall have charge of the records of the Trust, all of which shall at all
reasonable times be open to inspection by the Trustees. He shall perform such
other duties as appertain to his office or as may be required by the Trustees.
As assistant secretary may perform such duties of the secretary as the
secretary or the Trustees may assign, and, in the absence of the secretary, may
perform all the duties of the secretary.
Section 4.09. Subordinate Officers: the Trustees from time to time may
appoint such other officers or agents as they may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Trustees may determine. The Trustees from time to
time may delegate to one or more officers or agents the power to appoint
- 5 -
<PAGE>
any such subordinate officers or agents and to prescribe their respective
rights, terms of office, authorities and duties.
Section 4.10. Remuneration: the salaries or other compensation of the
officers of the Trust shall be fixed from time to time by resolution of the
Trustees, except that the Trustees may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 4.08 hereof.
Section 4.11. Surety Bonds: The Trustees may require any officer or
agent of the Trust to execute a bond (including, without limitation, any bond
required by the Investment Company Act of 1940, as amended ("1940 Act"), and the
rules and regulations of the Securities and Exchange Commission ("Commission"))
to the Trust in such sum and with such surety or sureties as the Trustees may
determine, conditioned upon the faithful performance of his duties to the Trust
including responsibility for negligence and for the accounting of any of the
Trust's property, funds or securities that may come into his hands.
Section 4.12. Resignation: Any officer may resign his office at any
time by delivering a written resignation to the Trustees, the president, the
secretary, or any assistant secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 4.13. Removal: Any officer may be removed from office whenever
in the judgment of the Trustees the best interest of the Trust will be served
thereby, by the vote of a majority of the Trustees given at the regular meeting
or any special meeting called for such purpose. In addition, any officer or
agent appointed in accordance with the provisions of Section 4.09 hereof may be
removed, either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the Trustees.
Section 4.14. Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Trustees at any regular or special meeting
or, in the case of any office created pursuant to Section 4.09 hereof, by any
officer upon whom such power shall have been conferred by the Trustees.
- 6 -
<PAGE>
ARTICLE V
---------
CUSTODIAN
---------
Section 5.01. Employment of Custodian: The Trustees shall at all times
employ a bank or trust company organized under the laws of the U.S. or one of
the states thereof and having capital, surplus and undivided profits of at least
two million dollars ($2,000,000) as custodian with authority as its agent, but
subject to such restrictions, limitations and other requirements, if any, as may
be contained in these By-Laws:
(1) to hold the securities owned by the Trust and deliver the same upon
written order or oral order, if confirmed in writing, or by such
electro-mechanical or electronic devices as are agreed to by the Trust
and the custodian, if such procedures have been authorized in writing
by the Trust;
(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may
direct; and
(3) to disburse such moneys upon orders or vouchers; and the Trust may
also employ such custodian as its agent:
(1) to keep the books and accounts of the Trust and furnish clerical
and accounting services thereto; and
(2) to compute, if authorized to do so by the Trustees, the Net Asset
Value of any Series (both terms as defined in the Declaration of Trust)
in accordance with the provisions of the Declaration of Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a vote of a majority of the outstanding
shares of the Trust entitled to vote, the custodian shall deliver and pay over
all property of the Trust held by it as specified in such vote.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least two million dollars ($2,000,000) or
such other person as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act.
Section 5.02. Use of Central Securities Handling System: Subject to
such rules, regulations and orders as the Commission
- 7 -
<PAGE>
may adopt, the Trustees may direct the custodian to deposit all or any part of
the securities owned by the Trust in a system for the central handling of
securities established by a national securities exchange or a national
securities association registered with the Commission under the Securities
Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 act, pursuant to which
system all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust.
ARTICLE VI
----------
EXECUTION OF PAPERS
-------------------
Section 6.01. General: Except as the Trustees may generally or in
particular cases authorize the execution thereof in some other manner, all
deeds, leases, transfers, contracts, bonds, notes, checks, drafts, and other
obligations made, accepted, or endorsed by the Trust shall be executed by the
president, any vice president, or by the treasurer, or by whomever else shall be
designated for that purpose by the Trustees and need not bear the seal of the
Trust.
ARTICLE VII
-----------
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 7.01 Share Certificates: No certificates certifying the
ownership of shares shall be issued except as the Trustees may otherwise
authorize. In the event that the Trustees authorize the issuance of share
certificates, then, subject to the provisions of Section 7.03, each Shareholder
shall be entitled to a certificate stating the number of shares owned by him, in
such form as shall be prescribed from time to time by the Trustees. Such
certificate shall be signed by the president or a vice president and by the
treasurer, assistant treasurer, secretary or assistant secretary. Such
signatures may be facsimiles if the certificate is signed by a transfer or
shareholder services agent or by a registrar, other than a Trustee, officer or
employee of the Trust. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Trust with
the same effect as if he or she were such officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the
transfer or shareholder services agent may either issue receipts therefor or may
keep accounts upon the books of the Trust for the record holders of such shares,
who shall in either
- 8 -
<PAGE>
case be deemed, for all purposes hereunder, to be the holders of certificates
for such shares as if they had accepted such certificates and shall be held to
have expressly assented and agreed to the terms hereof.
Section 7.02. Loss of Certificates: In the case of the alleged loss or
destruction or the mutilation of a share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
Section 7.03. Discontinuance of Issuance of Certificates: The Trustees
may at any time discontinue the issuance of share certificates and may, by
written notice to each Shareholder, require the surrender of share certificates
to the Trust for cancellation. Such surrender and cancellation shall not affect
the ownership of shares.
Section 7.04. Equitable Interest Not Recognized: the Trust shall be
entitled to treat the holder of record of any share or shares as the holder in
fact thereof and shall not be bound to recognize any equitable or other claim of
interest in such share or shares on the part of any other person except as may
be otherwise expressly provided by law.
Section 7.05. Transfer of Shares: The shares shall be transferable only
by transfer recorded on the books of the Trust, in person or by attorney.
ARTICLE VIII
------------
FISCAL YEAR; ACCOUNTANT
-----------------------
Section 8.01. Fiscal Year: The fiscal year of the Trust shall end on
such date in each year as the Trustees shall from time to time determine.
Section 8.02. Accountant:
(a) The Trust shall employ an independent public accountant or firm of
independent public accountants as its accountant to examine the accounts of the
Trust and to sign and certify the financial statements of the Trust. The
accountant's certificates and reports shall be addressed both to the Trustees
and to the shareholders of the Trust.
(b) Any vacancy occurring due to the death or resignation of the
accountant may be filled by a majority vote of the Trustees who are not
"interested persons" of the Trust, as defined in the 1940 Act.
- 9 -
<PAGE>
ARTICLE IX
----------
INSURANCE
---------
Section 9.01. Insurance of Officers, Trustees, and Employees: The Trust
may purchase and maintain insurance on behalf of any person who is or was a
Trustee, officer or employee of the Trust, or is or was serving at the request
of the Trust as a Trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Trustees would have the power to indemnify him against
such liability.
ARTICLE X
---------
AMENDMENTS; REPORTS; MISCELLANEOUS
----------------------------------
Section 10.1. Amendments: These By-Laws may be amended or repealed, in
whole or in part, by a majority of the Trustees then in office at any meeting of
the Trustees, or by one or more writings signed by such majority.
Section 10.2 Reports: The Trustees shall at least semi-annually submit
to the Shareholders a written report of the business of the Trust, including
financial statements which shall at least annually be certified by independent
public accountants.
Section 10.3. Gender: As used in these By-Laws, the masculine gender
shall include the feminine and neuter genders.
Section 10.4. Headings: Headings are placed in these By-Laws for
convenience of reference only, and in case of any conflict, the text of these
By-Laws rather than the headings shall control.
Section 10.5. Inspection of Books: The Trustees shall from time to time
determine whether and to what extent, and at what times and places, and under
what conditions and regulations, the accounts and books of the Trust or any of
them shall be open to the inspection of the Shareholders. No Shareholder shall
have any right to inspect any account or book or document of the Trust except as
conferred by law or otherwise by the Trustees.
Section 10.6. Applicable Federal Law: No provision of these By-Laws an
no provision of the Declaration of Trust authorizes the Trustees or officers of
the Trust to take any action that would otherwise be prohibited under applicable
provisions of the 1940 Act.
- 10 -
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT, made this 25th day
of March, 1991, by and between Legg Mason Tax-Free Income Fund, a Massachusetts
business trust (the "Trust"), and Legg Mason Fund Adviser, Inc., a Maryland
corporation (the "Adviser").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act") and has
registered distinct series of shares of beneficial interest ("Series") for sale
to the public under the Securities Act of 1933 and various state securities
laws, each Series corresponding to a distinct portfolio; and
WHEREAS, the Trust wishes to retain the Adviser to provide investment
advisory, management, and administrative services to the Trust and each Series
as now exists and as hereafter may be established; and
WHEREAS, the Adviser is willing to furnish such services on the terms
and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Trust hereby appoints the Adviser as investment adviser and
manager of each Series for the period and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Each Series shall at all times keep the Adviser fully informed with
regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Adviser with such other documents and information with regard
to its affairs as the Adviser may from time to time reasonably request.
3. (a) Subject to the supervision of the Trust's Board of Trustees, the
Adviser shall regularly provide each Series with investment research, advice,
management and supervision and shall furnish a continuous investment program for
each Series' portfolio of securities consistent with each Series' investment
goals and policies. The Adviser shall determine from time to time what
securities will be purchased, retained or sold by each Series, and shall
implement those decisions, all subject to the provisions of the Trust's
Declaration of Trust and By-laws, the 1940 Act, the applicable rules and
regulations of the Securities and Exchange Commission, and other applicable
federal and state law, as well as the investment goals and policies of each
Series. The Adviser will place orders pursuant to its investment determinations
for each Portfolio either directly with the issuer
<PAGE>
or with any broker or dealer. In placing orders with brokers and dealers the
Adviser will attempt to obtain the best net price and the most favorable
execution of its orders; however, the Adviser may, in its discretion, purchase
and sell portfolio securities to and from brokers and dealers who provide the
Fund with research, analysis, advice and similar services, and the Adviser may
pay to these brokers, in return for research and analysis, a higher commission
or spread than may be charged by other brokers. In no instance will portfolio
securities be purchased from or sold to the Adviser, or any affiliated person
thereof except in accordance with the rules and regulations promulgated by the
Securities and Exchange Commission pursuant to the 1940 Act. The Adviser shall
also provide advice and recommendations with respect to other aspects of the
business and affairs of the Trust and each Series, and shall perform such other
functions of management and supervision as may be directed by the Board of
Trustees of the Trust.
(b) The Trust hereby authorizes any entity or person associated with
the Adviser which is a member of a national securities exchange to effect any
transaction on the exchange for the account of the Trust which is permitted by
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Trust hereby consents to the retention of compensation by
such entity or person for such transactions in accordance with Rule 11a2-
2(T)(a)(2)(iv).
4. (a) The Adviser, at its expense, shall supply the Board of Trustees
and officers of the Trust with all statistical information and reports
reasonably required by them and reasonably available to the Adviser and shall
furnish the Trust with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Trust
and each Series. The Adviser shall oversee the maintenance of all books and
records with respect to the Trust's and each Series' securities transactions and
the keeping of the Trust's and each Series' books of account in accordance with
all applicable federal and state laws and regulations. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Adviser hereby agrees that
any records which it maintaines for the Trust or any Series are the property of
the Trust and further agrees to surrender promptly to the Trust any of such
records upon the Trust's request. The Adviser further agrees to arrange for the
preservation of the records required to be maintained by Rule 31a-1 under the
1940 Act for the periods prescribed by Rule 31a-2 under the 1940 Act. The
Adviser shall authorize and permit any of its directors, officers and employees,
who may be elected as directors or officers of the Trust, to serve in the
capacities in which they are elected.
(b) Other than as herein specifically indicated, the Adviser shall
not be responsible for the expenses of the Trust or any Series. Specifically,
the Adviser will not be responsible, except to the extent of the reasonable
compensation of employees of the Trust and each Series whose services may be
used by the Adviser hereunder, for any of the following expenses of the Trust
<PAGE>
and each Series, which expenses shall be borne by the Trust and each Series:
advisory fees, distribution fees, interest, taxes, governmental fees, fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations; the cost (including brokerage commissions
or charges, if any) of securities purchases or sold by any Series and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents, legal expenses; expenses of preparing share
certificates; expenses relating to the redemption or repurchase of the each
Series' shares; expenses of registering and qualifying each Series' shares for
sale under applicable federal and state law and maintaining such registrations
and qualifications; expenses of preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports, notices and dividends to
each Series' shareholders; cost of stationery; costs of stockholders' and other
meetings of the Trust and each Series; trustees fees; audit fees; traveling
expenses of officers, trustees and employees of the Trust and each Series, if
any; and the Trust's pro rata portion of premiums on any fidelity bond and other
insurance covering the Trust and its officers and trustees.
5. No trustee, officer or employee of the Trust and each Series shall
receive from the Trust any salary or other compensation as such trustee, officer
or employee while he is at the same time a director, officer or employee of the
Adviser or any affiliated company of the Adviser, This paragraph shall not apply
to directors, executive committee members, consultants and other persons who are
not regular members of the Adviser's or any affiliated company's staff.
6. As compensation for the services performed and the facilities
furnished and expenses assumed by the Adviser, including the services of any
consultants retained by the Adviser, each Series shall pay the Adviser as
promptly as possible after the last day of each month, a fee, computed daily, at
an annual rate of 0.55% of such Series' average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Adviser for all services prior to that date. If
this Agreement is terminated as to any or all Series as of any date not the last
day of a month, such fee shall be paid as promptly as possible after such date
of termination, shall be based on the average daily net assets of such Series in
that period from the beginning of such month to such date of termination, and
shall be that proportion of such average daily net assets as the number of
business days in such period bears to the number of business days in such month.
The average daily net assets of each Series shall in all cases be based only on
business days and be computed as of the time of the regular close of business of
the New York Stock Exchange, or such other time as may be determined by the
Board of Trustees of the Trust. Each such payment shall be accompanied by
<PAGE>
a report of the Trust and each Series prepared either by the Trust and each
Series or by a reputable form of independent accountants which shall show the
amount properly payable to the Adviser under this Agreement and the detailed
computation thereof.
7. The Adviser assumes no responsibility under this Agreement other
than to render the services called for hereunder in good faith, and shall not be
responsible for any action of the Board of Trustees of the Trust in following or
declining to follow any advice or recommendations of the Adviser; provided that
nothing in this Agreement shall protect the Adviser against any liability to the
Trust or its stockholders to which it would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence of the performance of its
duties or by reason of its reckless disregard of its obligations and duties
hereunder.
8. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Adviser who may also be a trustee,
officer, or employee of the Trust or any Series, to engage in any other business
or to devote his time and attention in part to the management or other aspects
of any other business, whether of a similar nature or a dissimilar nature, nor
to limit or restrict the right of the Adviser to engage in any other business or
to render services of any kind, including investment advisory and management
services, to any other corporation, firm, individual or association.
9. As used in this Agreement, the term "net assets" shall have the
meaning ascribed to it in the Declaration of Trust of the Trust and 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.
10. Subject to the provisions of paragraphs 11 and 13 below, this
Agreement will remain in effect for one year from the date of its execution and
from year to year thereafter, provided that the Adviser does not notify the
Trust in writing at least sixty (60) days prior to the expiration date in any
year that it does not wish continuance of the Agreement for an additional year.
11. This Agreement shall terminate automatically in the event of its
assignment by the Adviser and shall not be assignable by the Trust without the
consent of the Adviser. This Agreement may also be terminated as to any Series
at any time, without the payment of any penalty, by the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the Trust
by sixty (60) days' written
<PAGE>
notice addressed to the Adviser at its principal place of business.
12. In the event this Agreement is terminated by either party or upon
written notice from the Adviser 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 so long as this Agreement is effective or until such notice is
given.
13. This Agreement shall continue in effect only so long as
specifically approved annually by vote of a majority of the trustees of the
Trust who are not parties to this Agreement or interested persons of such
parties, cast in personal at a meeting called for that purpose, and either by
vote of the holders of a majority of the outstanding voting securities of the
Trust or by majority vote of the Trust's Board of Trustees.
14. The Adviser is hereby expressly put on notice of the limitation of
shareholder liability as set forth in the Declaration of Trust of the Trust and
agrees that obligations assumed by the Trust and each Series pursuant to this
Agreement shall be limited in all cases to the Series and its assets. The
Adviser agrees that it shall not seek satisfaction of any such obligation from
the shareholders or any individual shareholder of the Trust, nor from the
Trustees or any individual Trustee of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON TAX-FREE INCOME FUND
By: /s/ Susan T. Lind By: /s/ John F. Curley
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Susan T. Lind By: /s/ Marie K. Karpinski
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of August 29, 1992, between Legg Mason Tax-Free
Income Fund, a Massacusetts business trust ("Trust"), on behalf of Legg Mason
Tax- Free Intermediate-Term Income Trust, a series of shares of beneficial
interest of the Trust ("Fund"), and Legg Mason Fund Adviser, Inc. ("Fund
Adviser"), a Maryland corporation registered as an investment adviser under the
Investment Advisers Act of 1940, as amended.
WHEREAS the Trust has appointed Fund Adviser as investment adviser and
administrator for each series of shares of beneficial interest of the Trust as
now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated March 25, 1991 between the Trust and
Fund Adviser ("Advisory Contract"); and
WHEREAS the Fund has been established as a new series of shares of the
Trust;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Fund, the Fund will pay to Fund Adviser a
fee, computed daily and paid monthly, at an annual rate of 0.55% of the Fund's
average daily net assets.
2. This Fee Agreement shall be subject to all terms and conditions of
the Advisory Contract.
3. This Fee Agreement shall become effective upon the date hereabove
written, provided that it shall not take effect unless it has first been
approved (i) by a vote of a majority of those Trustees of the Trust who are not
parties to this Fee Agreement or the Advisory Contract or interested persons of
any such persons at a meeting called for the purpose of such approval and (ii)
by vote of a majority of the Fund's outstanding voting securities.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
Legg Mason Tax-Free Income Fund
By: /s/ Marie K. Karpinski
Legg Mason Fund Adviser, Inc.
By: /s/ John F. Curley
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
-------------- ------------------
- 7 -
CUSTODIAN CONTRACT
Between
LEGG MASON TAX-FREE INCOME FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Employment of Custodian and Property to be Held By
It....................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian.....................................1
2.1 Holding Securities...........................................1
2.2 Delivery of Securities.......................................2
2.3 Registration of Securities...................................4
2.4 Bank Accounts................................................4
2.5 Payments for Shares..........................................5
2.6 Availability of Federal Funds................................5
2.7 Collection of Income.........................................5
2.8 Payment of Fund Monies.......................................5
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased..............................6
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund........................................7
2.11 Appointment of Agents........................................7
2.12 Deposit of Fund Assets in Securities System..................7
2.12A Fund Assets Held in the Custodian's Direct
Paper System.................................................8
2.12A Segregated Account...........................................9
2.14 Ownership Certificates for Tax Purposes.....................10
2.15 Proxies.....................................................10
2.16 Communications Relating to Portfolio
Securities..................................................10
2.17 Proper Instructions.........................................10
2.18 Actions Permitted Without Express Authority.................11
<PAGE>
2.19 Evidence of Authority.......................................11
3. Duties of Custodian With Respect to the Books of
Account and Calculation of Net Asset Value and
Net Income...........................................................11
4. Records..............................................................12
5. Opinion of Fund's Independent Accountants............................12
6. Reports to Fund by Independent Public Accountants....................12
7. Compensation of Custodian............................................12
8. Responsibility of Custodian..........................................13
9. Effective Period, Termination and Amendment..........................13
10. Successor Custodian..................................................14
11. Interpretive and Additional Provisions...............................15
12. Additional Funds.....................................................15
13. Massachusetts Law to Apply...........................................15
14. Prior Contracts......................................................15
15. Miscellaneous........................................................15
16. Limitations of Liability of the Trustees and Shareholders, Officers
Employees and Agent..................................................15
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Legg Mason Tax-Free Income Fund, a business trust
organized and existing under the laws of the Commonwealth of Massachusetts,
having its principal place of business at 111 South Calvert Street, Baltimore,
Maryland, 21202 hereinafter called the "Fund", and State Street Bank and Trust
Company, a Massachusetts trust company, having its principal place of business
at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in series, the Legg
Mason Maryland Tax-Free Income Trust, Legg Mason Pennsylvania Tax-Free Income
Trust, Legg Mason High Quality Tax-Free Income Trust (such series together with
all other series subsequently established by the Fund and made subject to this
Contract in accordance with paragraph 12, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian
all securities and cash of the Portfolios, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock of
the Fund representing interests in the Portfolios, ("Shares") as may be issued
or sold from time to time. The Custodian shall not be responsible for any
property of a Portfolio held or received by the Portfolio and not delivered to
the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, but only in accordance with an
applicable vote by the Board of Trustees of the Fund on behalf of the applicable
Portfolio(s), and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian
--------------------------------------------------------------------
<PAGE>
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, including all
securities owned by such Portfolio, other than (a) securities which are
maintained pursuant to Section 2.12 in a clearing agency which acts as
a securities depository or in a book-entry system authorized by the
U.S. Department of the Treasury, collectively referred to herein as
"Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct
Paper System of the Custodian pursuant to Section 2.12A.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by a Portfolio held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Portfolio;
3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.11 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
<PAGE>
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for
<PAGE>
delivery to such Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be described
from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to
the Portfolio ("Prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund on behalf
of the applicable Portfolio, a certified copy of a resolution
of the Board of Trustees or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as
the Portfolio, or in the name or nominee name of any agent appointed
pursuant to Section 2.11 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Portfolio under the terms of this
Contract shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts only to
timely collect income due the Fund on such securities and to notify the
Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Portfolio of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to
the provisions hereof, all cash received by it from or for the account
of the Portfolio, other than cash maintained by the Portfolio in a bank
account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the
Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of the Board of
Trustees of the Fund. Such funds shall be deposited by the Custodian in
its capacity as Custodian and shall be withdrawable by the Custodian
only in that capacity.
<PAGE>
2.5 Payments for Shares. The Custodian shall receive from the distributor
for the Shares or from the Transfer Agent of the Fund and deposit into
the account of the appropriate Portfolio such payments as are received
for Shares of that Portfolio issued or sold from time to time by the
Fund. The Custodian will provide timely notification to the Fund on
behalf of each such Portfolio and the Transfer Agent of any receipt by
it of payments for Shares of such Portfolio.
2.6 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
such Portfolio which are deposited into the Portfolio's account.
2.7 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the responsibility of the
Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data
as may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Portfolio is
properly entitled.
2.8 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Portfolio
but only (a) against the delivery of such securities or
evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the
name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance
with the conditions set forth in Section 2.12 hereof; (c) in
the case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.12A; (d)
in the case of repurchase agreements entered into between the
Fund on behalf of the Portfolio and the
<PAGE>
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Portfolio of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Section 2.17;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be
made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of securities for the account of
a Portfolio is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions
from the Fund on behalf of such Portfolio to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities to
the same extent as if the securities had been received by the
Custodian.
<PAGE>
2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From
such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the
Board of Trustees of the Fund pursuant thereto, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the
Transfer Agent a request for redemption or repurchase of their Shares.
In connection with the redemption or repurchase of Shares of a
Portfolio, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial bank
designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian shall
honor checks drawn on the Custodian by a holder of Shares, which checks
have been furnished by the Fund to the holder of Shares, when presented
to the Custodian in accordance with such procedures and controls as are
mutually agreed upon from time to time between the Fund and the
Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of
the Portfolio which are maintained in a Securities System
shall identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i)
receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the
Portfolio. Copies of all advices from the Securities
<PAGE>
System of transfers of securities for the account of the
Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund on
behalf of the Portfolio confirmation of each transfer to or
from the account of the Portfolio in the form of a written
advice or notice and shall furnish to the Fund on behalf of
the Portfolio copies of daily transaction sheets reflecting
each day's transactions in the Securities System for the
account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio
with any report obtained by the Custodian on the
Securities System's accounting system, internal accounting
control and procedures for safeguarding securities deposited
in the Securities System;
5) The Custodian shall have received from the Fund on behalf
of the Portfolio the initial or annual certificate, as the
case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting
from use of the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against
the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to
the extent that the Portfolio has not been made whole for any
such loss or damage.
2.12A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of Proper
Instructions from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of
the Portfolio which are maintained in the Direct Paper
System shall identify by book-entry those securities
belonging to the Portfolio;
<PAGE>
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio, in the form of a written advice or notice,
of Direct Paper on the next business day following such
transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account of
the Portfolio;
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.12 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a certified copy of a resolution of
the Board of Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of each Portfolio held by it and in
connection with transfers of securities.
<PAGE>
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be voted,
and shall promptly deliver to the Portfolio such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.16 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Portfolio shall notify the
Custodian at least three business days prior to the date on which the
Custodian is to take such action.
2.17 Proper Instructions. Proper Instructions as used throughout this
Article 2 means a writing signed or initialed by one or more person or
persons as the Board of Trustees shall have from time to time
authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the
purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall
cause all oral instructions to be confirmed in writing. Upon receipt of
a certificate of the Secretary or an Assistant Secretary as to the
authorization by the Board of Trustees of the Fund accompanied by a
detailed description of procedures approved by the Board of Trustees,
Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the
Board of Trustees and the Custodian are satisfied that such procedures
afford adequate safeguards for the Portfolios' assets. For purposes of
this Section, Proper Instructions shall include instructions received
by the Custodian pursuant to any three-party agreement which requires a
segregated asset account in accordance with Section 2.13.
2.18 Actions Permitted without Express Authority. The Custodian may in
its discretion, without express authority from the Fund on behalf of
each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such
payments shall be accounted for to the Fund on behalf of the
Portfolio;
<PAGE>
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Portfolio except as otherwise directed by the Board of
Trustees of the Fund.
2.19 Evidence of Authority. The Custodian shall be protected in acting upon
any instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The Custodian may
receive and accept a certified copy of a vote of the Board of Trustees
of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of
any action by the Board of Trustees pursuant to the Declaration of
Trust as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written notice
to the contrary.
3. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
----------------------------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
4. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such
<PAGE>
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
5. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
6. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
7. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
8. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
<PAGE>
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, to advance cash or securities for
any purpose for the benefit of a Portfolio or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's assets to
the extent necessary to obtain reimbursement.
9. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.12 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.12A
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Trustees has approved the initial use
of the Direct Paper System by such Portfolio; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
10. Successor Custodian
-------------------
<PAGE>
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
11. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of the
Fund. No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
12. Additional Funds
----------------
<PAGE>
In the event that the Fund establishes one or more series of Shares in
addition to Legg Mason Maryland Tax-Free Income Trust, Legg Mason Pennsylvania
Tax-Free Income Trust and Legg Mason High Quality Tax-Free Income Trust with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such series of Shares
shall become a Portfolio hereunder.
13. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
14. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
15. Miscellaneous
-------------
15.1 The Custodian agrees to treat all records and other information
relative to the Fund and its prior, present or potential Shareholders
confidentially and the Custodian on behalf of itself and its employees
agrees to keep confidential all such information, except after prior
notification to an approval in writing by the Fund, which approval
shall not be unreasonably withheld. The preceding notwithstanding, in
the event legal process is served upon the Custodian requiring certain
disclosure, the Custodian may divulge such information. In such event,
the Custodian shall, if legally permissible, advise the Fund of its
receipt of such legal process.
15.2 Notwithstanding any other provision in this Agreement, the parties
agree that the assets and liabilities of each Portfolio of the Fund are
separate and distinct from the assets and liabilities of each other
Portfolio and that no Portfolio shall be liable or shall be charged for
any debt, obligation or liability of any other Portfolio, whether
arising under the Agreement or otherwise.
16. Limitations of Liability of the Trustees and Shareholders, Officers,
Employees and Agents
--------------------------------------------------------------------
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts. The parties agree that neither
the Shareholders, Trustees, Officers, employees nor any agent of the Fund shall
be liable hereunder and that the parties to this Agreement other than the Fund
shall look solely to the Fund property for the performance of this Agreement or
payment of any claim under this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its
<PAGE>
name and behalf by its duly authorized representative and its seal to be
hereunder affixed as of the 27th day of November, 1991.
ATTEST LEGG MASON TAX-FREE INCOME FUND
/s/ Stefanie L. Wong By /s/ Marie K. Karpinski
- -------------------- ----------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ A. Curley By /s/ Phyllis A. Schroder
- ------------- -----------------------
Assistant Secretary Vice President
TRANSFER AGENCY AND SERVICE AGREEMENT
between
LEGG MASON TAX-FREE INCOME FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article 1 Terms of Appointment; Duties of the Bank............ 1
Article 2 Fees and Expenses................................... 4
Article 3 Representations and Warranties of the Bank.......... 5
Article 4 Representations and Warranties of the Fund.......... 5
Article 5 Indemnification..................................... 7
Article 6 Covenants of the Fund and the Bank.................. 9
Article 7 Termination of Agreement............................ 10
Article 8 Additional Funds.................................... 11
Article 9 Assignment.......................................... 11
Article 10 Amendment........................................... 11
Article 11 Massachusetts Law to Apply.......................... 11
Article 12 Merger of Agreement................................. 12
Article 13 Limitation of Liability of the Trustees
Shareholders, Officers, Employees and Agents ....... 12
Article 14 Miscellaneous....................................... 12
Article 15 Counterparts........................................ 12
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 9th day of July, 1991, by and between LEGG
MASON TAX-FREE INCOME FUND, a Massachusetts business trust, having its principal
office and place of business at 111 South Calvert Street, Baltimore, Maryland
21202 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts
trust company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in series, the
Legg Mason Maryland Tax-Free Income Trust, Legg Mason Pennsylvania Tax-Free
Income Trust, Legg Mason High Quality Tax-Free Income Trust (each such series,
together with all other series subsequently established by the Fund and made
subject to this Agreement in accordance with Article 8, being herein referred
to, as a "Portfolio", and collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the
Bank as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank
----------------------------------------
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
Fund's authorized and issued shares of beneficial interest of the Fund,
representing interests in each of the respective Portfolios ("Shares"), dividend
disbursing agent, custodian of certain retirement plans and agent in connection
with any accumulation, open-account or similar plans provided to the
shareholders of the each of the respective Portfolios of the Fund
("Shareholders") and set out in the currently effective prospectus and statement
of additional information ("prospectus") of the Fund, including without
limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the
purchase of Shares, and promptly deliver payment and
appropriate documentation thereof to the Custodian of
the Fund authorized pursuant to the Declaration of Trust
of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the
appropriate number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests
and redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in items
(i), (ii) and (iii)
<PAGE>
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund who shall thereby
be deemed to be acting on behalf of the Fund;
(v) At the appropriate time as and when it
receives monies paid to it by the Custodian with respect
to any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by the
redeeming Shareholders;
(vi) Effect transfers of Shares by the
registered owners thereof upon receipt of appropriate
instructions;
(vii) Prepare and transmit payments for
dividends and distributions declared by the Fund;
(viii) Issue replacement certificates for those
certificates alleged to have been lost, stolen or
destroyed upon receipt by the Bank of indemnification
satisfactory to the Bank and protecting the Bank and the
Fund, and the Bank at its option, may issue replacement
certificates in place of mutilated stock certificates
upon presentation thereof and without such indemnity;
(ix) Report abandoned property to the various
states as authorized by the Fund per policies and
principles agreed upon by the Fund and the Bank;
(x) Maintain records of account for and
advise the Fund and its Shareholders as to the
foregoing; and
(xi) Record the issuance of Shares of the Fund
and maintain pursuant to SEC Rule 17Ad-10(e) a record of
the total number of Shares of the Fund which are
authorized, based upon data provided to it by the Fund,
and issued and outstanding. The Bank shall also provide
the Fund on a regular basis with the total number of
Shares which are authorized and issued and outstanding
and shall have no obligation, when recording the
issuance of Shares, to monitor the issuance of such
Shares or to take cognizance of any laws relating to the
issue or sale of such Shares, which functions shall be
the sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a), the Bank shall: (i)
perform all of the customary services of a transfer agent, dividend disbursing
agent, custodian of certain retirement plans and, as relevant, agent in
connection with accumulation, open-account or similar plans (including without
limitation any periodic investment plan or periodic withdrawal program),
including but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, mailing Shareholder reports and
prospectuses to current Shareholders, withholding taxes on U.S. resident and
non-resident alien accounts, preparing and filing U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for all purchases
and redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total
<PAGE>
number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
(d) Procedures as to who shall provide certain of these
services in Article 1 may be established from time to time by agreement between
the Fund and the Bank per the attached service responsibility schedule. The Bank
may at times perform only a portion of these services and the Fund or its agent
may perform these services on the Fund's behalf.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and the Bank.
Article 2 Fees and Expenses
-----------------
2.01 For the performance by the Bank pursuant to this
Agreement, the Fund agrees on behalf of each of the Portfolios to pay the Bank
an annual maintenance fee for each Shareholder account as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above,
the Fund agrees on behalf of each of the Portfolios to reimburse the Bank for
out-of-pocket expenses or advances incurred by the Bank for the items set out in
the fee schedule attached hereto. In addition, any other expenses incurred by
the Bank at the request or with the consent of the Fund, which are not properly
borne by the Bank as part of its duties and obligations under the Agreement,
will be reimbursed by the Fund on behalf of the applicable Portfolio.
2.03 The Fund agrees on behalf of each of the Portfolios to
pay all fees and reimbursable expenses within five days following the mailing of
the respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank by the Fund at least seven (7) days prior to the mailing date of such
materials.
Article 3 Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and
in good standing under the laws of The Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in The
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its
Charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
<PAGE>
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and
in good standing under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its
Declaration of Trust and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration
of Trust and By-Laws have been taken to authorize it to enter into and perform
this Agreement.
4.04 It is an open-end and diversified management investment
company registered under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of
1933, as amended on behalf of each of the Portfolios is currently effective and
will remain effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares of the Fund being
offered for sale.
Article 5 Indemnification
---------------
5.01 The Bank shall not be responsible for, and the Fund
shall on behalf of the applicable Portfolio indemnify and hold the Bank harmless
from and against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents which (i) are received by
the Bank or its agents or subcontractors, and (ii) have been prepared,
maintained or performed by the Fund or any other person or firm on behalf of the
Fund including but not limited to any previous transfer agent or registrar.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
5.02 The Bank shall indemnify and hold the Fund harmless
from and against any and all losses and damages, and any and all reasonable
costs, charges, counsel fees, payments, expenses and liability arising out of or
attributable to a breach of this Agreement by the Bank, or to any action or
failure or omission to act by the Bank as a result of the Bank's lack of good
faith, negligence or willful misconduct.
5.03 At any time the Bank may apply to any officer of the
Fund for instructions,
<PAGE>
and may consult with legal counsel with respect to any matter arising in
connection with the services to be performed by the Bank under this Agreement,
and the Bank and its agents or subcontractors shall not be liable and shall be
indemnified by the Fund on behalf of the applicable Portfolio for any action
taken or omitted by it in reliance upon such instructions or upon the opinion of
such counsel that such actions or omissions comply with the terms of the
Agreement and with all applicable laws, provided the Bank acts in good faith and
without negligence or willful misconduct. The Bank, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund, reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided the Bank or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. The Bank, its agents and subcontractors shall also be
protected and indemnified in recognizing stock certificates which are reasonably
believed to bear the proper manual or facsimile signatures of the officers of
the Fund, and the proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of the Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes. In addition, the Bank shall further use reasonable
care to minimize the likelihood of such damage, loss of data, delays and/or
errors and should such damage, loss of data, delays and/or errors occur, the
Bank shall use its best efforts to mitigate the effects of such occurrence.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any consequential damages arising out to any act or failure to act
hereunder.
5.06 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate with
the Bank in the defense of such claim. The party seeking indemnification shall
in no case confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other party's prior
written consent.
Article 6 Covenants of the Fund and the Bank
----------------------------------
6.01 The Fund shall on behalf of each of the Portfolios
promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of
Trustees of the Fund authorizing the appointment of the Bank and the execution
and delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the
Fund and all
<PAGE>
amendments thereto.
6.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices and to make changes in said procedures and
facilities as the Fund may from time to time reasonably request.
6.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
6.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law and shall not be used by the
Bank for any purpose not directly related to the business of the Fund.
6.05 In case of any requests or demands for the inspection
of the Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon
one hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Fund on behalf of the applicable Portfolio(s). Additionally, the
Bank reserves the right to charge for any other reasonable expenses associated
with such termination, including but not limited to training Fund employees,
training materials and procedural documentation required by the Fund. In the
event that the Fund designates a successor to any of the Bank's obligations
hereunder, the Bank shall, at the expense and direction of the Fund, transfer to
such successor a certified list of Shareholders of the Fund, a complete record
of the account of each Shareholder, and all other necessary or relevant books,
records and other data established or maintained by the Bank hereunder.
Article 8 Additional Funds
----------------
8.01 In the event that the Fund establishes one or more
series of Shares in addition to the Legg Mason Maryland Tax-Free Income Trust,
Legg Mason Pennsylvania Tax-Free Income Trust, Legg Mason High Quality Tax-Free
Income Trust with respect to which it desires to have State Street render
services as transfer agent under the terms hereof, it shall so notify State
Street in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
<PAGE>
Article 9 Assignment
----------
9.01 Except as provided in Section 9.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
9.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
9.03 The Bank may, without further consent on the part of
the Fund, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(1)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to the Fund for
the acts and omissions of any subcontractor as it is for its own acts and
omissions.
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Fund.
Article 11 Massachusetts Law to Apply
--------------------------
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
Article 12 Merger of Agreement
-------------------
12.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject matter hereof whether oral or written.
Article 13 Limitation of Liability of the Trustees, Shareholders,
Officers, Employees and Agents
------------------------------------------------------
13.01 A copy of the Declaration of Trust of the Fund is on
file with the Secretary of the Commonwealth of Massachusetts. The parties agree
that neither the Shareholders, Trustees, officers, employees nor any agent of
the Fund shall be liable hereunder and that the parties to this Agreement other
than the Fund shall look solely to the Fund property for the performance of this
Agreement or payment of any claim under this Agreement.
Article 14 Miscellaneous
-------------
14.01 The Bank agrees to treat all records and other
information relative to the Fund and its prior, present or potential
Shareholders confidentially and the Bank on behalf of itself and its employees
agrees to keep confidential all such information, except after prior
notification to an approval in writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld where the Bank may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Fund.
<PAGE>
14.02 Notwithstanding any other provision in this Agreement,
the parties agree that the assets and liabilities of each Portfolio of the Fund
are separate and distinct from the assets and liabilities of each other
Portfolio and that no Portfolio shall be liable or shall be charged for any
debt, obligation or liability of any other Portfolio, whether arising under the
Agreement or otherwise.
Article 15 Counterparts
------------
15.01 This Agreement may be executed by the parties hereto
on any number of counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf by and through their
duly authorized officers, as of the day and year first above written.
LEGG MASON TAX-FREE INCOME FUND
/s/ Marie K. Karpinski
BY:________________________________
ATTEST:
/s/ Stefanie L. Wong
- -----------------------------
STATE STREET BANK AND TRUST COMPANY
/s/ Phyllis A. Schroder
BY:________________________________
Executive Vice President
ATTEST:
- -----------------------------
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Responsibility
--------------
Service Performed Bank Fund
----------------- ---- ----
1. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
<PAGE>
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Article 1.02 (a), (b) and (c) of the
Agreement.
<PAGE>
BY:
----------------------
ATTEST:
- --------------------
STATE STREET BANK AND TRUST COMPANY
BY:
-----------------------
Vice President
ATTEST:
- --------------------
Exhibit 10
[KIRKPATRICK & LOCKHART LETTERHEAD]
February 19, 1991
Legg Mason Tax-Free Income Fund
111 South Calvert Street
Baltimore, Maryland 21202
Dear Sir/Madam:
Legg Mason Tax-Free Income Fund ("Trust") is an unincorporated
voluntary association organized under the laws of the Commonwealth of
Massachusetts pursuant to a Declaration of Trust dated November 21, 1990 and
amended on January 31, 1991. You have requested our opinion regarding certain
matters in connection with the Trust's issuance of shares of beneficial interest
("Shares") in three new series, Legg Mason Maryland Tax-Free Income Trust, Legg
Mason Pennsylvania Tax-Free Income Trust, and Legg Mason High Quality Tax-Free
Income Trust.
We have, as counsel, participated in various business and other matters
related to the Trust, We have examined copies, either certified or otherwise
proved to be genuine, of the Declaration of Trust and By-Laws of the Trust, the
minutes of meetings of the trustees and other documents relating to the
organization and operation of the Trust, and we generally are familiar with its
business affairs. Based on the foregoing, it is our opinion that the unlimited
number of unissued Shares designated as the Legg Mason Maryland Tax- Free Income
Trust, Legg Mason Pennsylvania Tax-Free Income Trust and Legg Mason High Quality
Tax-Free Income Trust, which are currently being registered, may be legally and
validly issued from time to time in accordance with the Trust's Declaration of
Trust, as amended, and By-Laws and subject to compliance with the Securities Act
of 1933, the Investment Company Act of 1940, and applicable state laws
regulating the offer and sale of securities; and when so issued, will be legally
issued, fully paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that creditors of, contractors with and claimants
against the Trust shall look only to the assets
<PAGE>
Legg Mason Tax-Free Income Fund
February 19, 1991
Page 2
of the Trust for payment. It also requires that notice of such disclaimer be
given on each note, bond, contract, certificate, undertaking or instrument made
or issued by the officers or the Trustees of the Trust on behalf of the Trust.
The Declaration of Trust further provides (i) for indemnification out of Trust
assets for all losses and expenses of any shareholder held personally liable for
the obligations of the Trust solely by virtue of ownership of shares of the
Trust and (ii) for the Trust to assume the defense of any claim against the
shareholder for any act or obligation of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations.
We hereby consent to the filing of this opinion in connection with Pre-
Effective Amendment No. 1 to the Trust's Registration Statement on Form N-1A
(File No. 33-37971) to be filed with the Securities and Exchange Commission. We
also consent to the reference to our firm under the caption "Legg Mason Tax-Free
Income Fund's Legal Counsel" in the Statement of Additional Information filed as
part of the Registration Statement.
Sincerely yours,
KIRKPATRICK & LOCKHART
By: /s/ Arthur J. Brown
-------------------
Arthur J. Brown
Exhibit 10(b)
[KIRKPATRICK & LOCKHART LETTERHEAD]
August 27, 1992
Legg Mason Tax-Free Income Fund
111 South Calvert Street
Baltimore, Maryland 21202
Dear Sir/Madam:
Legg Mason Tax-Free Income Fund ("Trust") is an unincorporated
voluntary association organized under the laws of the Commonwealth of
Massachusetts pursuant to a Declaration of Trust dated November 21, 1990 and
amended on January 31, 1991, March 11, 1991 and June 26, 1992. You have
requested our opinion regarding certain matters in connection with the Trust's
issuance of shares of beneficial interest ("Shares") in a new series, known as
Legg Mason Tax-Free Intermediate-Term Trust.
We have, as counsel, participated in various business and other matters
related to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of the Declaration of Trust and By-Laws of the Trust, the
minutes of meetings of the trustees and other documents relating to the
organization and operation of the Trust, and we generally are familiar with its
business affairs. Based on the foregoing, it is our opinion that the unlimited
number of unissued Shares designated as the Legg Mason Tax-Free
Intermediate-Term Trust, which is currently being registered, may be legally and
validly issued from time to time in accordance with the Trust's Declaration of
Trust, as amended, and By-Laws and subject to compliance with the Securities Act
of 1933, the Investment Company Act of 1940, and applicable state laws
regulating the offer and sale of securities; and when so issued, will be legally
issued, fully paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law,
<PAGE>
Legg Mason Tax-Free Income Fund
August 27, 1991
Page 2
shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the Trust shall look only to the assets
of the Trust for payment. It also requires that notice of such disclaimer be
given on each note, bond, contract, certificate, undertaking or instrument made
or issued by the officers or the Trustees of the Trust on behalf of the Trust.
The Declaration of Trust further provides (i) for indemnification out of assets
of the applicable Series of the Trust for all losses and expenses of any
shareholder held personally liable for the obligations of such Series of the
Trust solely by virtue of ownership of shares of such Series of the Trust and
(ii) for the applicable Series of the Trust to assume the defense of any claim
against the shareholder for any act or obligation of such Series of the Trust.
Thus, the risk of a shareholder incurring financial loss on account of a
shareholder liability is limited to circumstances in which the Trust would be
unable to meet its obligations.
We hereby consent to the filing of this opinion in connection with
Post- Effective Amendment No. 3 to the Trust's Registration Statement on Form
N-1A (File No. 33-37971) to be filed with the Securities and Exchange
Commission. We also consent to the reference to our firm under the caption "Legg
Mason Tax-Free Income Fund's Legal Counsel" in the Statement of Additional
Information filed as part of the Registration Statement.
Sincerely yours,
KIRKPATRICK & LOCKHART
By: /s/ Arthur J. Brown
-------------------
Arthur J. Brown
Exhibit 11
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. 10 to the Registration Statement of Legg Mason Tax-Free Income
Fund on Form N-1A (File No. 33-37971) of our reports dated May 2, 1997 on our
audits of the financial statements and financial highlights of the Maryland
Tax-Free Income Trust, Pennsylvania Tax-Free Income Trust, and Tax-Free
Intermediate-Term 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, 1997, which are incorporated by
reference in the Registration Statement. We also consent to the reference to our
firm under the caption "Financial Highlights" in the Prospectuses and "The
Trust's Independent Accountants" in the Statement of Additional Information.
/s/Coopers & Lybrand, L.L.P.
-------------------------------
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
July 29, 1997
Exhibit 13
February 11, 1991
Legg Mason Tax-Free Income Fund
111 South Calvert Street
Baltimore, Maryland 21202
Gentlemen:
Please be advised that the $100,000 worth of shares of Legg Mason Tax-
Free Income Fund (consisting of 9000 shares of the Legg Mason Maryland Tax-Free
Income Trust, 800 shares of the Legg Mason Pennsylvania Tax-Free Income Trust,
and 200 shares of the Legg Mason High Quality Tax-Free Income Trust) which we
have today purchased from you were purchased as an investment with no present
intention of redeeming or selling such shares and we do not have any intention
of redeeming or selling such shares.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
/s/ F. Barry Bilson
-------------------
By: Vice President
[LEGG MASON LETTERHEAD]
Exhibit 13(b)
August 27, 1992
Legg Mason Tax-Free Income Fund:
Legg Mason Tax-Free Intermediate-Term Income Trust
111 South Calvert Street
Baltimore, MD 21202
Gentlemen:
Please be advised that the one hundred shares of Legg Mason Tax-Free
Intermediate-Term Income Trust which we have purchased from you today were
purchased as an investment with no present or future intention of redeeming or
selling such shares.
Very truly yours,
Legg Mason Fund Adviser, Inc.
/s/ Thomas M. Daly, Jr.
-----------------------
By: (Vice) President
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 Directors 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
Directors on March 25, 1991;
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.
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.
<PAGE>
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.
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.
- 2 -
<PAGE>
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 NASD's Rules of Fair Practice that became effective
July 7, 1993, 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.
- 3 -
<PAGE>
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:
Date: February 7, 1996 LEGG MASON TAX-FREE INCOME FUND
----------------
Attest: By: /s/ Marie K. Karpinski
----------------------
By: /s/ Kathi D. Bair
-----------------
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ John F. Curley
------------------
- 4 -
Exhibit 16
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
March 31, 1996 - March 31, 1997 (one year)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.91 x 1.05781) - (16.52 x 1.0) x 1000 + 1000 = 1018.75
--------------------------------
(16.52 x 1.0)
P = 1000
C = 1018.75 - 1 = 0.01875= 1.88%
------- ----
1000
Average Annual Return: Same
---------------------
March 31, 1992 - March 31, 1997 (five years)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.91 X 1.31495) - (15.46 x 1.0) x 1000 + 1000 = 1353.22
------------------------------------
(15.46 x 1.0)
P = 1000
C = 1353.22 - 1 = 0.3532 = 35.32%
------- -----
1000
Average Annual Return:
----------------------
1
-----
5
(0.3532 + 1) - 1 = 6.23%
----
May 1, 1991 - March 31, 1997 (life of fund)
- ----------------------------
Cumulative Total Return
-----------------------
ERV = (15.91 X 1.38943) - (15.12 x 1.0) x 1000 + 1000 = 1462.03
------------------------------------
(15.12 x 1.0)
P = 1000
C = 1462.03 - 1 = 0.4620 = 46.20%
------- -----
1000
Average Annual Return:
----------------------
1
-------
5.91781
(0.4620 + 1) - 1 = 6.63%
----
<PAGE>
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
March 31, 1996 - March 31, 1997 (one year)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.22 x 1.04531) - (15.65 x 1.0) x 1000 + 1000 = 1016.59
--------------------------------
(15.65 x 1.0)
P = 1000
C = 1016.59 - 1 = 0.01659 = 1.66%
------- ----
1000
Average Annual Return: Same
---------------------
November 9, 1992 - March 31, 1996 (life of fund)
- ---------------------------------
Cumulative Total Return
-----------------------
ERV = (15.22 X 1.22257) - (15.00 x 1.0) x 1000 + 1000 = 1240.50
------------------------------------
(15.00 x 1.0)
P = 1000
C = 1240.50 - 1 = 0.24050 = 24.05%
------- -----
1000
Average Annual Return:
----------------------
1
-------
4.39178
(0.2405 + 1) - 1 = 5.03%
----
<PAGE>
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
March 31, 1996 - March 31, 1997 (one year)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.80 x 1.06598) - (16.56 x 1.0) x 1000 + 1000 = 1017.06
--------------------------------
(16.56 x 1.0)
P = 1000
C = 1017.06 - 1 = 0.01706 = 1.71%
------- ----
1000
Average Annual Return: Same
---------------------
March 31, 1992 - March 31, 1997 (five years)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.80 X 1.33093) - (15.41 x 1.0) x 1000 + 1000 = 1364.61
------------------------------------
(15.41 x 1.0)
P = 1000
C = 1364.61 - 1 = 0.3646 = 36.46%
------- -----
1000
Average Annual Return:
---------------------
1
-----
5
(0.3646 + 1) - 1 = 6.41%
----
August 1, 1991 - March 31, 1997 (life of fund)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.80 X 1.38785) - (15.12 x 1.0) x 1000 + 1000 = 1450.27
------------------------------------
(15.12 x 1.0)
P = 1000
C = 1450.27 - 1 = 0.4503 = 45.03%
------- -----
1000
Average Annual Return:
---------------------
1
-------
5.66576
(0.4503 + 1) - 1 = 6.78%
----
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</TABLE>
