As filed with the Securities and Exchange Commission on July 31, 1998.
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: 11 [X]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 12
---
LEGG MASON TAX-FREE INCOME FUND
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
100 Light 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 , 1998 pursuant to Rule 485(b)
---------------
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1998 pursuant to Rule 485(a)(i)
---------------
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1998 pursuant to Rule 485(a)(ii)
---------------
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason Tax-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 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Investment Techniques;
Description of the Trust and Its Shares
5 Expenses;
The Funds' Management and Investment
Adviser;
The Funds' Distributor
6 Prospectus Highlights;
Dividends and Other Distributions;
Shareholder Services;
Taxes; How Your Shareholder Account is
Maintained; Description of the Trust and Its
Shares
7 How You Can Invest In the Funds;
How Your Shareholder Account Is Maintained;
How Net Asset Value Is Determined;
The Funds' Distributor
8 How You Can Redeem Your Primary Shares
9 Not Applicable
<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 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Investment Techniques;
Description of the Trust and Its Shares
5 Expenses;
The Funds' Management and Investment Adviser;
The Funds' Distributor
6 Dividends and Other Distributions;
Shareholder Services;
Taxes; How Shareholder Accounts are
Maintained;
Description of the Trust and Its Shares
7 How To Purchase and Redeem Shares;
How 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 18
Dividends and Other Distributions 18
Taxes 19
Shareholder Services 21
The Funds' Management and Investment Adviser 22
The Funds' Distributor 23
The Funds' Custodian and Transfer Agent 23
Description of the Trust and its Shares 23
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
100 Light 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:
PricewaterhouseCoopers LLP
250 W. Pratt Street
Baltimore, Maryland 21201
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.
LMF-038
LEGG MASON
TAX-FREE
INCOME
FUNDS
MARYLAND TAX-FREE
PENNSYLVANIA TAX-FREE
TAX-FREE INTERMEDIATE
PRIMARY SHARES
THE ART OF INVESTING
PROSPECTUS
JULY 31, 1998
[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, 1998 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, 1998
Legg Mason Wood Walker, Incorporated
100 Light 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 Capital Management, 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 issuers of those instruments, 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 issuers of those
instruments, 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 issuers of those instruments, 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 objectives. 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. Debt instruments with longer
maturities typically fluctuate more than those with shorter maturities
when interest rates change. 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
2
<PAGE>
more than a portfolio of shorter-term securities. Additionally, changes in
economic conditions in, or governmental policies of, the State of Maryland
(with respect to Maryland Tax-Free), the Commonwealth of Pennsylvania
(with respect to Pennsylvania Tax-Free) and the various states and
municipalities (with respect to Tax-Free Intermediate) could have a
significant impact on the performance of the Funds. As non-diversified
series, the Funds may be subject to greater risk with respect to their
portfolio securities than investment companies that have a broader range
of investments, because changes in the financial condition or market
assessment of a single issuer may cause greater fluctuation in a Fund's
total return and the price of a Fund's shares. 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 10-14.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER:
Legg Mason Capital Management, Inc.
ADMINISTRATOR:
Legg Mason Fund Adviser, Inc. ("LMFA")
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 21.
DIVIDENDS:
Declared daily and paid monthly. See "Dividends and Other
Distributions," page 18.
REINVESTMENT:
All dividends and other distributions are automatically reinvested in
Primary Shares of the distributing Fund 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 14. Larger purchases may be eligible for reduced initial
sales charges, as may purchases pursuant to a Letter of Intention as
described on page 16.
REDEMPTION METHODS:
Redeem by calling your financial advisor or service provider, or
redeem by mail. See "How You Can Redeem Your Primary Shares," page 16.
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). The front-end sales charge of each Fund will be
waived for all purchases made through July 31, 1999.
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, 1998.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR EACH
FUND
Maximum sales charge on purchases
(as a percentage of offering price):
Maryland Tax-Free and Pennsylvania Tax-Free 2.75 %(A,B)
Tax-Free Intermediate 2.00 %(A,B)
Sales charge on reinvested dividends None
Redemption or exchange fees None
ANNUAL FUND OPERATING EXPENSES -- PRIMARY
SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
</TABLE>
<TABLE>
<CAPTION>
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
<S> <C> <C> <C>
Management fees 0.32%(C) 0.27%(C) 0.19%(C)
12b-1 fees 0.25% 0.25% 0.25%
Other expenses(D) 0.13% 0.20% 0.27%
Total operating
expenses(D) 0.70%(C) 0.71%(C) 0.71%(C)
</TABLE>
(A) See "How You Can Invest In The Funds," page 14, for additional
information concerning volume reductions, sales charge waivers and
reduced sales charge purchase plans.
(B) The sales charge on each Fund will be waived for all shares purchased
through July 31, 1999. After July 31, 1999, any exchanges of shares
purchased pursuant to the sales charge waiver will be subject to any
sales charge imposed by the fund into which you are exchanging, since no
sales charge was paid on the initial purchase.
(C) After fee waivers. 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, 1999 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 management fee, 12b-1 fee, other
expenses and total operating expenses relating to Primary Shares would
have been as follows: for Maryland Tax-Free, 0.55%, 0.25%, 0.13% and
0.93% of average net assets; for Pennsylvania Tax-Free, 0.55%, 0.25%,
0.19% and 1.00% of average net assets; and for Tax-Free Intermediate,
0.55%, 0.25%, 0.26% and 1.06% of average net assets.
(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, the same; for
Pennsylvania Tax-Free, 0.19% and 0.70%, respectively, of the Fund's
average net assets; and for Tax-Free Intermediate, 0.26% and 0.70%,
respectively, of the Fund's average net assets.
EXAMPLE
The following example illustrates 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.
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
Maryland Tax-Free
Assuming the maximum
initial 2.75% sales
charge $34 $49 $65 $112
Assuming no initial sales
charge $ 7 $22 $39 $ 87
Pennsylvania Tax-Free
Assuming the maximum
initial 2.75% sales
charge $34 $49 $65 $112
Assuming no initial sales
charge $ 7 $22 $39 $ 87
Tax-Free Intermediate:
Assuming the maximum
initial 2.00% sales
charge $27 $42 $58 $105
Assuming no initial sales
charge $ 7 $22 $39 $ 87
</TABLE>
This example assumes that the maximum initial sales charge 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,
1999, the expense figures in the examples will be higher.
4
<PAGE>
The above tables and the assumption in the 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 PRIMARY SHARES OF THE
FUNDS. THE ABOVE TABLES AND EXAMPLE SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN. The actual expenses 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
Funds' Management and Investment Adviser," page 21 and the "Funds'
Distributor," page 22.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited by
PricewaterhouseCoopers LLP, independent accountants. Each Fund's financial
statements for the year ended March 31, 1998 and the report of
PricewaterhouseCoopers LLP 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 Period (Loss) Investments Operations Income Investments Investments Distributions
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARYLAND TAX-FREE INCOME TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 15.91 $ .81(D) $ .59 $ 1.40 $ (.81) $ (.11) $ -- $ (.92)
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
-- Primary Class
Years Ended Mar. 31,
1998 $ 15.80 $ .81(E) $ .71 $ 1.52 $ (.81) $ (.03) $ -- $ (.84)
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
-- Primary Class
Years Ended Mar. 31,
1998 $ 15.22 $ .67(F) $ .39 $ 1.06 $ (.67) $ -- $ -- $ (.67)
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)
<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 Period
Period Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARYLAND TAX-FREE INCOME TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 16.39 8.97% .70%(D) .70%(D) 4.97%(D) 18.9% $154,468
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,I) 5.91%(D,I) 5.4%(I) 83,052
PENNSYLVANIA TAX-FREE INCOME TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 16.48 9.80% .71%(E) .70%(E) 5.00%(E) 14.1% $ 68,048
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,I) 6.11%(E,I) -- 28,873
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
-- Primary Class
Years Ended Mar. 31,
1998 $ 15.61 7.12% .71%(F) .70%(F) 4.34%(F) 9.0% $ 59,255
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 AND VOLUNTARY EXPENSE WAIVERS DESCRIBED BELOW.
(D) NET OF FEES WAIVED 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, 1999. IF
NO FEES HAD BEEN WAIVED BY THE ADVISER, THE ANNUALIZED RATIO OF EXPENSES
TO AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS FOLLOWS:
1992, 1.11%; 1993, 1.02%, 1994, .94%; 1995, .94%; 1996, .95%; 1997, .96%
AND 1998, .93%.
(E) NET OF FEES WAIVED 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, 1999. IF NO FEES HAD BEEN WAIVED BY THE ADVISER, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR EACH PERIOD
WOULD HAVE BEEN AS FOLLOWS: 1992, 1.35%; 1993, 1.21%; 1994, 1.03%, 1995,
1.01%; 1996, 1.02%; 1997, 1.04% AND 1998, 1.00%.
(F) NET OF FEES WAIVED 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, 1999. IF NO FEES HAD BEEN
WAIVED BY THE ADVISER, THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY
NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS FOLLOWS: 1993, 1.40%; 1994,
1.14%; 1995, 1.04%; 1996, 1.10%; 1997, 1.11% AND 1998, 1.06%.
(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
6
<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.
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, 1998 were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL MARYLAND PENNSYLVANIA TAX-FREE
RETURN: TAX-FREE TAX-FREE INTERMEDIATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year +5.97% +6.78% +4.98%
Five Years +31.16 +32.19 +27.34
Life of Class +59.32(A) +59.25(B) +32.88(C)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL MARYLAND PENNSYLVANIA TAX-FREE
RETURN: TAX-FREE TAX-FREE INTERMEDIATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year +5.97% +6.78% +4.98%
Five Years +5.57 +5.74 +4.95
Life of Class +6.96(A) +7.23(B) +5.41(C)
</TABLE>
(A) Inception of Maryland Tax-Free -- May 1, 1991.
(B) Inception of Pennsylvania Tax-Free -- August 1, 1991.
(C) Inception of Tax-Free Intermediate -- November 9, 1992.
Each Fund also may advertise its yield or tax equivalent yield. Yield
reflects investment income net of expenses over a 30-day (or one-month)
period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share at the end of the period. Tax equivalent
yield shows the taxable yield an investor would have to earn before taxes
to equal the Fund's tax-exempt yield. A tax equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus a stated
federal, state and local income tax rate. The effective yield, although
calculated similarly, will be slightly higher than the yield because it
assumes that income earned from the investment is reinvested (i.e., the
compounding effect of reinvestment). Yield computations differ from other
accounting methods and therefore may differ from dividends actually paid
or reported net income.
Total return and yield information reflect past performance and are
not predictions or guarantees of future results. Yields and total returns
of Primary Shares of the Funds would be lower if the Adviser and Legg
Mason had not waived a portion of the fees during the fiscal years 1992
through 1998. 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 18.
7
<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 issuers of those instruments, 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 10.
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 issuers of those instruments, 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 10.
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 issuers of those instruments, 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 10.
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
8
<PAGE>
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 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
9
<PAGE>
power. "Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of the IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
TEMPORARY INVESTMENTS
During unusual market conditions, including if, in the Adviser's
opinion, there are insufficient suitable Maryland municipal obligations
(with respect to Maryland Tax-Free), Pennsylvania municipal obligations
(with respect to Pennsylvania Tax-Free) or municipal obligations (with
respect to Tax-Free Intermediate) available that pay interest that is not
a Tax Preference Item, a Fund temporarily may invest more than 20% of its
total assets in municipal obligations the interest on which is exempt from
federal income tax but is such an item (with respect to Tax-Free
Intermediate) and/or is subject to Maryland state and local income taxes
(with respect to Maryland Tax-Free) and/or is subject to Pennsylvania
personal income tax (with respect to Pennsylvania Tax-Free). Each Fund
expects that under normal circumstances it will maintain needed liquidity
through the purchase of short-term municipal securities. However, for
liquidity purposes, or pending the investment of the proceeds of the sale
of shares, a Fund temporarily may invest in taxable short-term investments
consisting of: obligations of the U.S. Government, its agencies and
instrumentalities; certificates of deposit and bankers' acceptances of
U.S. domestic banks with assets of one billion dollars or more; commercial
paper or other corporate notes of high quality; and any of such items
subject to short-term repurchase agreements. Each Fund may invest without
limit in such instruments for temporary, defensive purposes, when in the
Adviser's opinion, no suitable municipal securities are available. No more
than 10% of a Fund's net assets will be invested in repurchase agreements
maturing in more than seven days and other illiquid securities. Interest
earned from such taxable investments will be taxable to investors as
ordinary income when distributed to them.
As a fundamental policy, each Fund may borrow money solely for
temporary purposes from banks or by engaging in reverse repurchase
agreements in an amount up to 10% of the value of its total assets;
however, borrowings by a Fund in excess of 5% of the value of 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
10
<PAGE>
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.
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 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
11
<PAGE>
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 at times experience 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 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.
12
<PAGE>
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 an interest rate 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. Because each Fund invests in
such securities backed by banks and other financial institutions, changes
in the credit quality of these institutions could cause losses to a Fund.
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.
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
13
<PAGE>
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 Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to transfer funds each month from
your Legg Mason account or from your checking account. Please contact a
Financial
14
<PAGE>
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. The sales charge on each of the Funds
will be waived for all shares purchased through July 31, 1999. After July
31, 1999, any exchanges of shares purchased pursuant to the sales charge
waiver will be subject to any sales charge imposed by the fund into which
you are exchanging since no sales charge was paid on the initial purchase.
<TABLE>
<CAPTION>
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)
------------------- ----------------- ----------------
<CAPTION>
<S> <C> <C>
Less than $50,000 2.00% 2.04%
$50,000 to $99,999 1.75 1.78
$100,000 to $249,999 1.50 1.52
$250,000 to $499,999 1.25 1.27
$500,000 to $999,999 1.00 1.01
$1,000,000 and over 0.75 0.76
</TABLE>
<TABLE>
<CAPTION>
SALES CHARGE SCHEDULE FOR MARYLAND TAX-FREE
AND PENNSYLVANIA TAX-FREE
Sales Charge as
Sales Charge as a percentage of
a Percentage of Net Amount
Public Offering Invested (Net
Amount of Purchase Price Asset Value)
------------------- ----------------- ----------------
<S> <C> <C>
Less than $50,000 2.75% 2.83%
$50,000 to $99,999 2.50 2.56
$100,000 to $249,999 2.00 2.04
$250,000 to $499,999 1.50 1.52
$500,000 to $999,999 1.25 1.27
$1,000,000 to $2,999,999 1.00 1.01
$3,000,000 to $4,999,999 0.50 0.50
$5,000,000 and over 0.25 0.25
</TABLE>
Shares of any Fund may be obtained without a sales charge by
exchanging shares of another Fund for which an equal or higher sales
charge was paid, or by exchanging shares of other Legg Mason funds which
were originally obtained through exchange of Fund shares on which an equal
or higher sales charge was paid. If the sales charges previously paid were
less than sales 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
15
<PAGE>
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 17. 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. Some Service Providers may place other
conditions on the purchase of shares. Consult their program literature for
further information.
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 do not 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 by 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
16
<PAGE>
Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
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.
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.)
Some Service Providers may have other procedures for redemption,
either in addition to or instead of those described above. Consult your
Service Provider's literature for more information.
17
<PAGE>
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily, as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Securities owned by each Fund for which
market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued based upon appraisals received from an independent pricing
service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities
received from recognized dealers in those securities. 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 Financial Advisor or Service
Provider. Dividends from any net short-term capital gain 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 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.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to
having all dividends and capital gain distributions reinvested in
additional Primary Shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks.
In certain cases, you may reinvest your dividends and capital gain
distributions in Primary 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.
18
<PAGE>
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
Fund's 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
distributing 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 8, 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). The maximum tax rate
applicable to a noncorporate taxpayer's net capital gain recognized on
capital assets held for more than one year is 20% (10% for taxpayers in
the 15% marginal tax bracket). In the case of a RIC such as the Funds, the
relevant holding period is determined by how long the Fund has held the
portfolio security on which the gain was realized, not by how long you
have held your Fund shares.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry Primary 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 of any Fund 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 Primary Shares through a redemption
or exchange within 90 days after the shareholder acquired the shares and
(2) the shareholder subsequently acquires Primary 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 14, and
"Shareholder Services -- Exchange Privilege," page 21. 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 Primary Shares are
19
<PAGE>
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.
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.
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.
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.
Dividends derived from interest on Maryland municipal obligations may
not be exempt from taxation under the laws of states other than Maryland.
FOR PENNSYLVANIA TAX-FREE:
PENNSYLVANIA TAXES
Individual shareholders of Pennsylvania Tax-Free who are otherwise
subject to the Pennsylvania personal income tax will not be subject to
that tax on distributions by the Fund that are attributable to interest on
Pennsylvania municipal obligations. Distributions attributable to most
other sources, including gains, will not be exempt from Pennsylvania
personal income tax.
Shares that are held by individual shareholders who are Pennsylvania
residents will be exempt from the Pennsylvania county personal property
tax to the extent that the Fund's portfolio consists of Pennsylvania
municipal obligations on the annual assessment date. Nonresidents of
Pennsylvania are not subject to this tax. Corporations are not subject to
any of these personal property taxes. For shareholders who are residents
of the City of Philadelphia, distributions of interest derived from
Pennsylvania municipal obligations are not taxable for purposes of the
Philadelphia School District investment net income tax, provided that the
Fund reports to its shareholders the percentage of Pennsylvania municipal
obligations held by it for the year. The Fund will report such percentage
to its shareholders.
Distributions of interest, but not gains, realized on Pennsylvania
municipal obligations are not subject to the Pennsylvania corporate net
income tax. The Pennsylvania Department of Revenue also takes the position
that shares of funds similar to the Fund are not considered exempt assets
of a corporation for the purposes of determining its capital stock value
subject to Pennsylvania capital stock and franchise taxes.
Dividends derived from interest on Pennsylvania municipal obligations
may not be exempt from taxation under the laws of states other than
Pennsylvania.
20
<PAGE>
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).
The foregoing is only a summary of some of the important federal,
Maryland, Pennsylvania and certain local income tax considerations
generally affecting the 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 the Future First Systematic
Investment Plan or through automatic investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares only through the
Future First Systematic Investment Plan or through automatic investments,
in which case an account statement will be sent quarterly. Reports will be
sent 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 16. 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
21
<PAGE>
exchange privilege upon 60 days' notice to shareholders. Some Service
Providers may not offer all of the Legg Mason funds for exchange.
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.
ADVISORY AGREEMENTS
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 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, an advisory fee equal to an annual
rate of 0.55% of the Fund's average daily net assets attributable to
Primary Shares. Because of fee waivers (see below), the Funds paid
advisory fees for the fiscal year ended March 31, 1998 as follows:
<TABLE>
<S> <C>
Maryland Tax-Free: .32%
Pennsylvania Tax-Free: .27%
Tax-Free Intermediate: .19%
</TABLE>
FEE WAIVERS
The Adviser and Legg Mason have agreed to waive advisory and 12b-1
fees in any month to the extent a Fund's expenses related to Primary
Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) during that month exceed an annual rate of 0.70% of that Fund's
average daily net assets attributable to Primary Shares. This waiver
expires on July 31, 1999, or when a Fund's assets reach the following
levels:
<TABLE>
<CAPTION>
<S> <C>
Maryland Tax-Free: $200 million
Pennsylvania Tax-Free: $125 million
Tax-Free Intermediate: $100 million
</TABLE>
These agreements are voluntary and may be terminated by the Adviser
and Legg Mason at any time. Each Fund pays all its other expenses which
are not assumed by the Adviser.
PRIMARY SHARES EXPENSE RATIOS
For the fiscal year ended March 31, 1998, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
<TABLE>
<S> <C>
Maryland Tax-Free: 0.70%
Pennsylvania Tax-Free: 0.70%
Tax-Free Intermediate: 0.70%
</TABLE>
ADVISER
The Adviser acts as adviser to private accounts and investment company
portfolios with a value as of June 30, 1998 of approximately $3 billion.
The Adviser's address is 100 Light Street, Baltimore, Maryland 21202.
ADMINISTRATION AGREEMENT
Pursuant to an agreement with the Adviser ("Administration
Agreement"), which was approved by the Trust's Board of Trustees, LMFA
serves as the Trust's administrator. LMFA manages the affairs of the Trust
and provides the Trust with office facilities and personnel reasonably
necessary for the operation of the Trust. The Adviser pays LMFA, pursuant
to the Administration Agreement, a fee equal to an annual rate of 0.05% of
each Fund's average daily net assets.
LMFA acts as investment adviser or manager to eighteen investment
company portfolios and to private accounts. Aggregate assets under
management totaled approximately $12.2 billion as of June 30, 1998.
YEAR 2000
Like other mutual funds, financial and business organizations around
the world, the Trust could be adversely affected if the computer systems
used by its investment adviser and other service providers do not properly
process and calculate date-related information and data from and
22
<PAGE>
after January 1, 2000. This is commonly known as the "Year 2000 Problem."
The Adviser is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to the computer systems that it
uses and to obtain assurances that comparable steps are being taken by the
Trust's other major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse
impact on the Funds.
PORTFOLIO MANAGEMENT
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,
1998, Legg Mason received from BFDS $17,000, $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 President and Treasurer of the Trust are employed by Legg Mason.
THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of the
Funds. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, is the transfer agent for Fund shares and dividend-disbursing agent
for the Funds.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated November 21, 1990. The Declaration of Trust
authorizes the Trust to issue an unlimited number of shares and to create
additional series, each of
23
<PAGE>
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 100 Light 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.
24
<PAGE>
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<PAGE>
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<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
TAX-FREE
INCOME FUNDS
The Art of Investing
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, 1998
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000 800 o 822 o 5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
215 o 443 o 7850
800 o 441 o 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:
PricewaterhouseCoopers LLP
250 W. Pratt Street Street
Baltimore, Maryland 21201
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, 1998
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 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 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 any qualified retirement plan of Legg Mason, Inc. or
of any of its affiliates. 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, 1998 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 Capital Management, 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 issuers of those
instruments, is exempt from federal and Maryland state and local income taxes
<PAGE>
("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. 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 issuers of those instruments, 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
issuers of those instruments, 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
Financial Highlights 4
Performance Information 5
Who Should Invest 5
Investment Objectives and Policies 6
Investment Techniques 9
How To Purchase and Redeem Shares 11
How Shareholder Accounts are
Maintained 13
How Net Asset Value is Determined 13
Dividends and Other Distributions 13
Taxes 14
Shareholder Services 15
The Funds' Management and Investment Adviser 16
The Funds' Distributor 17
The Funds' Custodian and Transfer Agent 17
Description of the Trust and Its Shares 17
Legg Mason Wood Walker, Incorporated
100 Light 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 average net assets and annual Fund
operating expenses of the Navigator Class of Pennsylvania Tax-Free for the
period March 10, 1998 (commencement of operations) to March 31, 1998 and
are based on estimated expenses for the initial period of operations of
the Navigator Classes of Maryland Tax-Free and Tax-Free Intermediate.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
--------------------------------------
<S> <C> <C> <C>
Management fees 0.32%(A) 0.27%(A) 0.19%(A)
12b-1 fees None None None
Other expenses(B) 0.13% 0.18% 0.26%
--------------------------------------
Total operating
expenses(B) 0.45%(A) 0.45%(A) 0.45%(A)
======================================
</TABLE>
(A) After fee waivers. 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, 1999 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 management fee, other expenses and total operating
expenses relating to Navigator Shares would be as follows: for Maryland
Tax-Free, 0.55%, 0.13% and 0.68% of average net assets; for Pennsylvania
Tax-Free, 0.55%, 0.18% and 0.73% of average net assets; and for Tax-Free
Intermediate, 0.55%, 0.26% and 0.81% of average net assets.
(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 the same for each Fund.
For further information concerning the expenses of each Fund, please
see "The Funds' Management and Investment Adviser," page 18.
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.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
-----------------------------
<S> <C> <C> <C> <C>
Maryland Tax-Free $5 $14 $25 $57
Pennsylvania Tax-Free $5 $14 $25 $57
Tax-Free Intermediate $5 $14 $25 $57
</TABLE>
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, 1999, 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>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited by
PricewaterhouseCoopers LLP, independent accountants. Each Fund's financial
statements for the year ended March 31, 1998 and the report of
PricewaterhouseCoopers LLP 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
Marketing Department at 800-822-5544. As of the date of this Prospectus,
Navigator Shares of Maryland Tax-Free and Tax-Free Intermediate have not
commenced operations.
<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 Period (Loss) Investments Operations Income Investments Investments Distributions
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA TAX-FREE INCOME TRUST
-- Navigator Class
Year Ended Mar. 31,
1998(C) $ 16.44 $.05(D) $ (.04) $.09 $ (.05) $ -- $ -- $(.05)
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------------------------------------------------
Net Net
Asset Total Net Investment
Value, Expenses Expenses Income
End of Total to Average to Average to Average
Period Return Net Assets(A) Net Assets(B) Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PENNSYLVANIA TAX-FREE INCOME TRUST
-- Navigator Class
Year Ended March 31,
1998(C) $ 16.48 .55%(E) .45%(D,F) .45%(D,F) 4.82%(D,F)
<CAPTION>
Ratios/Supplemental Data
- -------------------------------------------------
Net Assets
Portfolio End of
Turnover Period
Rate (in thousands)
- -------------------------------------------------
PENNSYLVANIA TAX-FREE INCOME TRUST
-- Navigator Class
Year Ended March 31,
1998(C) 14.1% $90
</TABLE>
(A) PURSUANT TO SECURITIES AND EXCHANGE COMMISSION REGULATIONS EFFECTIVE
DECEMBER 31, 1995, THIS RATIO REFLECTS TOTAL EXPENSES BEFORE
COMPENSATING BALANCE CREDITS.
(B) THIS RATIO REFLECTS TOTAL EXPENSES REDUCED BY THE IMPACT OF
COMPENSATING BALANCE CREDITS AND VOLUNTARY EXPENSE WAIVERS DESCRIBED
BELOW.
(C) FOR THE PERIOD MARCH 10, 1998 (COMMENCEMENT OF SALE OF NAVIGATOR CLASS)
TO MARCH 31, 1998.
(D) NET OF FEES WAIVED BY THE ADVISER IN EXCESS OF VOLUNTARY EXPENSE
LIMITATIONS AS FOLLOWS: 0.45% UNTIL JULY 31, 1998. IF NO FEES HAD BEEN
WAIVED BY THE ADVISER, THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE
DAILY NET ASSETS FOR THE PERIOD WOULD HAVE BEEN .75%.
(E) NOT ANNUALIZED
(F) ANNUALIZED
4
<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 of Maryland
Tax-Free and Tax-Free Intermediate have no performance record and
Navigator Shares of Pennsylvania Tax-Free have only a brief performance
history. 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, 1998 were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL MARYLAND PENNSYLVANIA TAX-FREE
RETURN: TAX-FREE TAX-FREE INTERMEDIATE
--------------------------------------------------------------
Primary Class:
<S> <C> <C> <C>
One Year +5.97% +6.78% +4.98%
Five Years +31.16 +32.19 +27.34
Life of Class +59.32(A) +59.25(B) +32.88(C)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL MARYLAND PENNSYLVANIA TAX-FREE
TOTAL RETURN: TAX-FREE TAX-FREE INTERMEDIATE
--------------------------------------------------------------
Primary Class:
<S> <C> <C> <C>
One Year +5.97% +6.78% +4.98%
Five Years +5.57 +5.74 +4.95
Life of Class +6.96(A) +7.23(B) +5.41(C)
</TABLE>
(A) INCEPTION OF MARYLAND TAX-FREE -- MAY 1, 1991.
(B) INCEPTION OF PENNSYLVANIA TAX-FREE -- AUGUST 1, 1991.
(C) INCEPTION OF TAX-FREE INTERMEDIATE -- NOVEMBER 9, 1992.
Each Fund also may advertise its yield or tax equivalent yield. Yield
reflects investment income net of expenses over a 30-day (or one-month)
period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share at the end of the period. Tax equivalent
yield shows the taxable yield an investor would have to earn before taxes
to equal the Fund's tax-exempt yield. A tax equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus a stated
federal, state and local income tax rate. The effective yield, although
calculated similarly, will be slightly higher than the yield because it
assumes that income earned from the investment is reinvested (i.e., the
compounding effect of reinvestment). Yield computations differ from other
accounting methods and therefore may differ from dividends actually paid
or reported net income.
Total return and yield information reflect past performance and are
not predictions or guarantees of future results. Yields and total returns
of Primary Shares of the Funds would be lower if the Adviser and Legg
Mason had not waived a portion of the fees during the fiscal years 1992
through 1998. 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 13.
5
<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 issuers of those instruments, 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 6.
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 issuers of those instruments, 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 6.
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 issuers of those instruments, 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 6.
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
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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
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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.
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 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
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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 at times experience 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
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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 an interest rate 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. Because each Fund invests in
such securities backed by banks and other financial institutions, changes
in the credit quality of these institutions could cause losses to a Fund.
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
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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 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 12.
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Certain institutions that have agreements with Legg Mason or the Funds
may be authorized to accept purchase and redemption orders on their
behalf. In that case, a Fund will be deemed to have received your purchase
or redemption order when the authorized institution accepts the order, and
your order will receive the next price calculated after the order has been
accepted by the institution. You should consult with your institution to
determine the time by which it must receive your order for you to purchase
or redeem Fund shares at that day's price. It is the institution's
responsibility to transmit your order to the Fund in a timely fashion.
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. See above for information on pricing of
redemptions made through certain institutions having agreements with Legg
Mason or the Funds.
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
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$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 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. Each Institutional Client may establish its own minimum
account size for investors using its services.
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 entity that does not have an agreement with Legg Mason or
Fairfield. The Funds do not 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 Financial Advisor or Service
Provider. Dividends from any net short-term capital gain 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.
Navigator Shares held by qualified retirement plans generally receive
dividends and other distributions in additional shares. Other 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.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to
having all dividends and capital gain distributions reinvested in
additional Navigator Shares. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and capital gain
distributions in shares of another Navigator fund. Please contact a
financial advisor for additional information about this option.
If no election is made, both dividends and capital gain distributions
are credited to the Institutional Client's account in Navigator Shares of
the
13
<PAGE>
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 through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland, 21203-1476. Customers of
Institutional Clients should confer with the Institutional Client
regarding any change in the election. An election must be received by Legg
Mason 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
Fund's 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
distributing 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 5, 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). The maximum tax rate
applicable to a noncorporate taxpayer's net capital gain recognized on
capital assets held for more than one year is 20% (10% for taxpayers in
the 15% marginal tax bracket). In the case of a RIC such as the Funds, the
relevant holding period is determined by how long the Fund has held the
portfolio security on which the gain was realized, not by how long you
have held your Fund shares.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry Navigator 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 of any Fund for shares of any
other Navigator fund generally will have similar tax consequences. See
"Shareholder Services -- Exchange Privilege." If Navigator 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.
14
<PAGE>
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.
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.
Dividends derived from interest on Maryland municipal obligations may
not be exempt from taxation under the laws of states other than Maryland.
For Pennsylvania Tax-Free:
Pennsylvania Taxes
Individual shareholders of Pennsylvania Tax-Free who are otherwise
subject to the Pennsylvania personal income tax will not be subject to
that tax on distributions by the Fund that are attributable to interest on
Pennsylvania municipal obligations. Distributions attributable to most
other sources, including gains, will not be exempt from Pennsylvania
personal income tax.
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.
Dividends derived from interest on Pennsylvania municipal obligations
may not be exempt from taxation under the laws of states other than
Pennsylvania.
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).
The foregoing is only a summary of some of the important federal,
Maryland, Pennsylvania and certain local income tax considerations
generally affecting the 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
15
<PAGE>
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 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, including
the Legg Mason Cash Reserve Trust, 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 financial advisor with
the information described in the section "How to Purchase and Redeem
Shares," page 10. 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. Some Institutional Clients
may not offer all of the Navigator Funds for exchange.
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.
ADVISORY AGREEMENTS
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 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, an advisory fee equal to an annual
rate of 0.55% of each Fund's average daily net assets attributable to
Navigator Shares. Because of fee waivers (see below), the Funds paid
advisory fees for the fiscal year ended March 31, 1998 as follows:
<TABLE>
<S> <C>
Maryland Tax-Free 0.32%
Pennsylvania Tax-Free 0.27%
Tax-Free Intermediate 0.19%
</TABLE>
FEE WAIVERS
The Adviser has agreed to waive advisory fees in any month to the
extent a Fund's expenses related to Navigator Shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) during that month exceed
an annual rate of 0.45% of that Fund's average daily net assets
attributable to Navigator Shares.
This waiver expires on July 31, 1999, or when a Fund's assets reach
the following levels:
<TABLE>
<CAPTION>
<S> <C>
Maryland Tax-Free $200 million
Pennsylvania Tax-Free $125 million
Tax-Free Intermediate $100 million
</TABLE>
These agreements are voluntary and may be terminated by the Adviser at
any time. Each Fund pays all its other expenses which are not assumed by
the Adviser.
NAVIGATOR SHARES EXPENSE RATIOS
For the fiscal year ended March 31, 1998, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
<TABLE>
<S> <C>
Maryland Tax-Free 0.45%
Pennsylvania Tax-Free 0.45%
Tax-Free Intermediate 0.45%
</TABLE>
16
<PAGE>
ADVISER
The Adviser acts as adviser to private accounts and investment company
portfolios with a value as of June 30, 1998 of approximately $3 billion.
The Adviser's address is 100 Light Street, Baltimore, Maryland 21202.
ADMINISTRATION AGREEMENT
Pursuant to an agreement with the Adviser ("Administration
Agreement"), which was approved by the Trust's Board of Trustees, LMFA
serves as the Trust's administrator. LMFA manages the affairs of the Trust
and provides the Trust with office facilities and personnel reasonably
necessary for the operation of the Trust. The Adviser pays LMFA, pursuant
to the Administration Agreement, a fee equal to an annual rate of 0.05% of
each Fund's average daily net assets.
LMFA acts as investment adviser or manager to eighteen investment
company portfolios and to private accounts. Aggregate assets under
management totaled approximately $12.2 billion as of June 30, 1998.
YEAR 2000
Like other mutual funds, financial and business organizations around
the world, the Trust could be adversely affected if the computer systems
used by its investment adviser and other service providers do not properly
process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to the computer systems that it
uses and to obtain assurances that comparable steps are being taken by the
Trust's other major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse
impact on the Funds.
PORTFOLIO MANAGEMENT
Victoria M. Schwatka has been primarily responsible for the day-to-day
management of each 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 sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1998, Legg Mason received from BFDS $17,000, $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.
Legg Mason and LMFA may make payments out of their own assets to Fairfield
or others to support the distribution of Navigator Shares and shareholder
servicing.
The 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.
17
<PAGE>
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.
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 Primary Class
from their financial advisor 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. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. 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 100 Light 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.
18
<PAGE>
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<PAGE>
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<PAGE>
LMF-158A
<PAGE>
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 and NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
July 31, 1998
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 Prospectus for Primary Shares or for Navigator
Shares, each dated July 31, 1998, as appropriate, which have been filed with the
Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Funds' distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason") 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 Capital Management, 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 issuers of those
instruments, 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 issuers of those instruments, 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 issuers of those instruments, 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.
<PAGE>
Shares of Navigator Maryland Tax-Free Fund, Navigator Pennsylvania
Tax-Free Fund and Navigator Tax-Free Intermediate Fund (collectively referred to
as "Navigator Shares") represent interests in the Funds that are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own monies and monies for which they act
in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust 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 any qualified retirement plan of Legg Mason, Inc. or
of any of its affiliates. 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 FRONT-END SALES
CHARGE IS CURRENTLY BEING WAIVED FOR ALL PURCHASES OF PRIMARY SHARES OF EACH
FUND THROUGH JULY 31, 1999.
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 Capital Management, 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
---------------------------------
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410) 539-0000 (800) 822-5544
<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);
10. 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.
3
<PAGE>
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 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.
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 make 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
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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.
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
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adversely affected. In such event, each Fund would re-evaluate its investment
objective and policies and consider changes in its structure or possible
dissolution.
When-Issued Securities
Delivery of and payment for when-issued securities normally take place
15 to 45 days after the date of the commitment. Interest rates on when-issued
securities are normally fixed at the time of the commitment. Consequently,
increases in the market rate of interest between the commitment date and
settlement date may result in a market value for the security on the settlement
date that is less than its purchase price.
With regard to each such commitment, a Fund maintains in a segregated
account with the custodian, commencing on the date of such commitment, cash,
U.S. government securities or other high-quality liquid debt securities equal in
value to the purchase price for the when-issued securities due on the settlement
date. Each Fund only makes when-issued commitments with the intention of
actually acquiring the securities subject thereto, but a Fund may sell these
securities before the settlement date if market conditions warrant. When payment
is due for when-issued securities, a Fund meets its obligations from
then-available cash flow, from the sale of securities or, although it would not
normally expect to do so, from the sale of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). The purchase of when-issued securities may affect a Fund's share
price in a manner similar to the use of borrowing.
Callable Bonds
Callable bonds generally have call-protection (that is, a period of
time during which the bonds may not be called) which usually lasts for 7 to 10
years from the date of issue, after which time such bonds may be redeemed by the
issuer. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of declining interest rates, when borrowings may be
replaced at lower rates than those obtained in prior years. If interest rates
decline as the call-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
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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 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 forego the opportunity for, 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
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A Fund may lend portfolio securities to dealers in municipal
securities, brokers or dealers in corporate or government securities, banks or
other recognized institutional borrowers of securities, provided that cash or
equivalent collateral, equal to at least 100% of the market value of the
securities loaned, is continuously maintained by the borrower with the Fund.
During the time portfolio securities are on loan, the borrower will pay the Fund
an amount equivalent to any dividends or interest paid on such securities, and
the Fund may invest the cash collateral and earn income, or it may receive an
agreed upon amount of taxable interest income from the borrower who has
delivered equivalent collateral. These loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Funds do not have the right to vote securities on loan, but
each Fund would terminate the loan and regain the right to vote if that were
considered 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.
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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
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
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If a Fund does not wish to hold a futures contract position until the
underlying instrument is delivered and paid for on the delivery date, it may
attempt to close out the contract by entering into an offsetting position on a
futures exchange that provides a secondary market for the contract. A futures
contract is closed out by entering into an opposite position in an identical
futures contract (for example, by purchasing a contract on the same instrument
and with the same delivery date as a contract the Fund had sold) at the current
price as determined on the futures exchange. A Fund's gain or loss on closing
out a futures contract depends on the difference between the price at which the
Fund entered into the contract and the price at which the contract is closed
out. Transaction costs in opening and closing futures contracts must also be
taken into account. There can be no assurance that a Fund will be able to offset
a futures position at the time it wishes to, or at a price that is advantageous.
If a Fund were unable to enter into an offsetting position in a futures
contract, it might have to continue to hold the contract until the delivery
date, in which case it would continue to bear the risk of price fluctuation in
the contract until the underlying instrument was delivered and paid for.
At the time a Fund enters into an interest rate futures contract, it is
required to deposit with its custodian, in the name of the futures broker (known
as a futures commission merchant, or "FCM"), a percentage of the contract's
value. This amount, which is known as initial margin, generally equals 5% or
less of the value of the futures contract. Initial margin is in the nature of a
good faith deposit or performance bond, and is returned to the Fund when the
futures position is terminated, after all contractual obligations have been
satisfied. Futures margin does not represent a borrowing by a Fund, unlike
margin extended by a securities broker, and depositing initial margin in
connection with futures positions does not constitute purchasing securities on
margin for the purposes of a Fund's investment limitations. Initial margin may
be maintained either in cash or in 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
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negate gains on securities the Fund owns, or could result in a net loss to the
Fund. In this sense, successful use of interest rate futures contracts by a Fund
will depend on the Adviser's ability to hedge the Fund in the correct way at the
appropriate time.
Other than the risk that interest rates will not move as expected, the
primary risk in employing interest rate futures contracts is that the market
value of the futures contracts may not move in concert with the value of the
securities the Fund wishes to hedge or intends to purchase. This may result from
differences between the instrument underlying the futures contracts and the
securities the Fund wishes to hedge or intends to purchase, as would be the
case, for example, if the Fund hedged U.S. Treasury bonds by selling futures
contracts on U.S. Treasury notes.
Even if the securities which are the objects of a hedge are identical
to those underlying the futures contract, there may not be perfect price
correlation between the two. Although the value of interest rate futures
contracts is primarily determined by the price of the underlying financial
instruments, the value of interest rate futures contracts is also affected by
other factors, such as current and anticipated short-term and long-term interest
rates, the time remaining until expiration of the futures contract, and
conditions in the futures markets, which may not affect the current market price
of the underlying financial instruments in the same way. In addition, futures
exchanges establish daily price limits for interest rate futures contracts, and
may halt trading in the contracts if their prices move upward and downward more
than a specified daily limit on a given day. This could distort the relationship
between the price of the underlying instrument and the futures contract, and
could prevent prompt liquidation of unfavorable futures positions. The value of
a futures contract may also move differently from the price of the underlying
financial instrument because of inherent differences between the futures and
securities markets, including variations in speculative demand for futures
contracts and for debt securities, the differing margin requirements for futures
contracts and debt securities, and possible differences in liquidity between the
two markets.
Put Options on Interest Rate Futures Contracts
Purchasing a put option on an interest rate futures contract gives a
Fund the right to assume a seller's position in the contract at a specified
exercise price at any time up to the option's expiration date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium), as determined on the commodity futures exchange where the
option is traded.
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
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identical option (that is, an option on the same futures contract, with the same
exercise price and expiration date) in a closing transaction on a futures
exchange that provides a secondary market for the option. A Fund is not required
to make futures margin payments when it purchases an option on an interest rate
futures contract.
Compared to the purchase or sale of an interest rate futures contract,
the purchase of a put option on an interest rate futures contract involves a
smaller potential risk to the Fund, because the maximum amount at risk is the
premium paid for the option (plus related transaction costs). If prices of debt
securities remain stable, however, purchasing a put option may involve a greater
probability of loss than selling a futures contract, even though the amount of
the potential loss is limited. The Adviser will consider the different risk and
reward characteristics of options and futures contracts when selecting hedging
instruments.
Risks of Transactions in Options on Interest Rate Futures Contracts
Options on interest rate futures contracts are subject to risks similar
to those described above with respect to interest rate futures contracts. These
risks include the risk that the Adviser may not hedge a Fund in the correct way
at the appropriate time, the risk of imperfect price correlation between the
option and the securities being hedged, and the risk that there may not be an
active secondary market for the option. There is also a risk of imperfect price
correlation between the option and the underlying futures contract.
Although the Adviser will purchase and write only those options for
which there appears to be a liquid secondary market, there can be no assurance
that such a market will exist for any particular option at any particular time.
If there were no liquid secondary market for a particular option, a Fund might
have to exercise an option it had purchased in order to realize any profit, and
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, certain of its
affiliates and unaffiliated entities having an agreement with Legg Mason.
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
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managed on a discretionary basis and having net assets of at least $200 million,
and to any qualified retirement plan of Legg Mason, Inc. or of any of its
affiliates. 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 Legg Mason account or from your checking account to be used 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 each Fund made through July 31, 1999.
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
13
<PAGE>
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)
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.
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. 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
14
<PAGE>
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 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
15
<PAGE>
payment.
The Maryland Transportation Authority operates certain highway, bridge
and tunnel toll facilities in the State. The tolls and other revenues received
from these facilities are pledged as security for revenue bonds of the Authority
issued under, and secured by, a trust agreement between the Authority and a
corporate trustee. On November 9, 1994, the Maryland Transportation Authority
issued $162.6 million of special obligation revenue bonds to fund projects at
the Baltimore/Washington International Airport secured by revenues from the
passenger facility charges received by the Maryland Aviation Administration and
from the general account balance of the Transportation Authority. As of March
31, 1998, $370.3 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 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.
The total cargo tonnage at the Port had declined from 30,682,730 in 1982 to
25,147,533 in 1997. 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 $18.8
billion in 1997. The ability of the Port to sustain and improve its volume and
value of cargoes 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 cost $167 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 cost
$33.1 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 $1,490,000, 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
16
<PAGE>
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 $7.0 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
1999.
The State has financed and expects to continue to finance the
construction and acquisition of various facilities through conditional purchase,
sale-leaseback, and similar transactions. All of the lease payments under these
arrangements are subject to annual appropriation by the Maryland General
Assembly. In the event that appropriations are not made, the State may not be
held contractually liable for the payments.
LOCAL SUBDIVISION DEBT The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by AD VALOREM taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general obligation
debt and to the levy and collection of the AD VALOREM taxes as and when such
taxes become necessary in order to provide sufficient funds to meet the debt
service requirements. The amount of debt which may be authorized may in some
cases be limited by the requirement that it not exceed a stated percentage of
the assessable base upon which such taxes are levied.
OTHER RISK FACTORS The manufacturing sector of Maryland's economy,
which historically has been a significant element of the State's economic
health, has experienced severe financial pressures and an overall contraction in
recent years. This is due in part to the reduction in defense-related contracts
and grants, which has had an adverse impact that is substantial and is believed
to be disproportionately large compared with the impact on most other states.
The State has endeavored to promote economic growth in other areas, such as
financial services, health care 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 $4,795 million at June 30, 1997.
Pennsylvania is not permitted to fund deficits
17
<PAGE>
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 1, 1998, all
outstanding general obligation bonds of Pennsylvania were rated AA- by S&P and
Aa3 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, 2003, Pennsylvania has projected that it will issue bonds
totaling $2,984.5 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 June 30, 1997, one of these agencies, the Pennsylvania
Turnpike Commission, had total outstanding indebtedness of $1,177.6 million. The
combined total debt outstanding for all other above-mentioned agencies as of
December 31, 1997, was $7,047.4 million. The debt of these agencies is supported
by assets of, or revenues derived from, the various projects financed and is not
an obligation of Pennsylvania. Some of these agencies, however, are indirectly
dependent on Pennsylvania appropriations. The only obligations of agencies in
Pennsylvania that bear a moral obligation of Pennsylvania are those issued by
the Pennsylvania Housing Finance Agency ("PHFA"), a state-created agency which
provides housing for lower and moderate income families, and The Hospitals and
Higher Education Facilities Authority of Philadelphia ("Hospital Authority"), an
agency created by the City of Philadelphia to acquire and prepare various sites
for use as intermediate care facilities for the mentally retarded.
LOCAL GOVERNMENT DEBT Numerous local government units in Pennsylvania
issue general obligations (i.e., backed by taxing power) debt, including
counties, cities, boroughs, townships and school districts. School district
obligations are supported indirectly by Pennsylvania. The issuance 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 1987 and 1997, 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
18
<PAGE>
years 1991 through 1995 and 1997 remained slightly above the nation's annual
average unemployment rate, while it was slightly below the national average in
1996. The unadjusted unemployment rate for Pennsylvania for May, 1998 was 4.5%
and for the United States for May, 1998 was 4.2%. The population of
Pennsylvania, 12.02 million people in 1997, according to the U.S. Bureau of the
Census, represents a slight increase from the 1988 estimate of 11.846 million.
Per capita income in Pennsylvania was $24,803 for calendar year 1996, slightly
above the per capita income of the United States of $24,426. 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, 1995, June 30, 1996 and June 30, 1997 with
fund balances of $688.304 million, $635.182 million, and $1,364.9 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 apply 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") each Fund must distribute annually to its shareholders at least 90% of
the sum of its net interest income excludable from gross income under section
103(a) of the Code plus its investment company taxable income (generally,
taxable net investment income plus net short-term capital gain, if any)
("Distribution Requirement") and must meet several additional requirements. For
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) 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 (3) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in the
securities (other than U.S. government securities 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.
19
<PAGE>
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 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.
Each 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 take
into account for purposes of the Income Requirement the original issue discount
that accrues thereon during the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Because each Fund
annually must distribute substantially all of its income, including accrued
original issue discount (even if that discount is tax-exempt), to satisfy the
Distribution Requirement, it may be required in a particular year to distribute
as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from the Fund's cash assets
or from the proceeds of sales of portfolio securities, if necessary. The Fund
may realize capital gains or losses from those dispositions, which would
increase or decrease its investment company taxable income and/or net capital
gain (the excess of net long-term capital gain over net short-term capital
loss).
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 amount, 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.
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
20
<PAGE>
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, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving, and Christmas. When market quotations are readily
available, portfolio securities are valued based upon market quotations,
provided such quotations adequately reflect, in the Adviser's judgment, the fair
value of the security. For valuation purposes, the market quotation shall be the
mean of the most recent bid and asked prices quoted by the dealers. Where such
market quotations are not readily available, securities are valued based upon
appraisals received from an independent pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The methods used by the pricing service and the quality of the
valuations so established are reviewed by the Adviser under the general
supervision of the Trust's Board of Trustees. The amortized cost method of
valuation is used with respect to obligations with 60 days or less remaining to
maturity unless the Adviser determines that this does not represent fair value.
All other assets are valued at fair value as determined in good faith by or
under the direction of the Trust's Board of Trustees. Premiums received on the
sale of put and call options are included in each Fund's net asset value, and
the current market value of options sold by a Fund will be subtracted from its
net assets.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in each Fund at that Fund's
respective commencement of operations (Primary Shares). Each table assumes that
all dividends and capital gain distributions are reinvested in the respective
Fund. Each table includes the effect of all charges and fees applicable to
Primary Shares the respective Fund has paid. (There are no redemption fees.) The
tables do not include the effect of any income tax that an investor would have
to pay on distributions. Performance data is only historical and is not intended
to indicate future results.
FOR THE MARYLAND TAX-FREE FUND:
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------
<S><C>
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
</TABLE>
21
<PAGE>
<TABLE>
<S><C>
1997 10,643 3,977 14,620
1998 11,067 4,865 15,932
- ---- ------ ------ ------
</TABLE>
* 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,
1998 would have been $10,840, and the investor would have received a total of
$4,044 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:
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------
<S><C>
1992* $10,192 $ 437 $10,629
1993 10,602 1,113 11,715
1994 10,450 1,711 12,161
1995 10,595 2,421 13,016
1996 10,702 3,162 13,864
1997 10,668 3,835 14,503
1998 11,151 4,774 15,925
- ---- ------ ------ ------
</TABLE>
* 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,
1998 would have been $10,899, and the investor would have received a total of
$4,006 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:
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------
<S><C>
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
22
<PAGE>
</TABLE>
<TABLE>
<S><C>
1997 10,154 2,251 12,405
1998 10,414 2,874 13,288
- ---- ------ ------ ------
</TABLE>
* 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,
1998 would have been $10,407, and the investor would have received a total of
$2,471 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 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, 1998 are contained in each Fund's prospectus. The
front-end sales charge is waived for all purchases of Primary Shares of each
Fund made through July 31, 1999.
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
23
<PAGE>
(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 totaling the interest earned on all debt obligations. For purposes
of these calculations, the maturity of an obligation with one or more call
provisions is assumed to be the next date on which the obligation reasonably can
be expected to be called or, if none, the maturity date.
Tax-exempt yield is calculated according to the same formula except
that a = interest exempt from federal income tax earned during the Period. This
tax-exempt yield is then translated into tax equivalent yield according to the
following formula:
TAX EQUIVALENT YIELD = ( E ) = t
-----
l - p
E = tax-exempt yield
p = stated income tax rate
t = taxable yield
From time to time, the Maryland Tax-Free Fund may also illustrate the
effect of tax equivalent yields using information such as that set forth below:
<TABLE>
<CAPTION>
Federal State & Taxable Yield
Marginal Local Blended
Single MFJ Rates Rates(^) Rate 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------------------------
<S><C>
Not over $24,000 Not over $40,100 15.0% 7.84% 21.7% 3.92% 4.31% 4.70% 5.09% 5.48%
$24,000 to $58,150 $40,100 to $96,900 28.0% 7.84% 33.6% 3.32% 3.65% 3.98% 4.31% 4.64%
$58,150 to $121,300 96,900 to $147,700 31.0% 7.84% 36.4% 3.18% 3.50% 3.82% 4.13% 4.45%
$121,300 to $263,750 $147,700 to $263,750 36.0% 7.84% 41.0% 2.95% 3.24% 3.54% 3.83% 4.13%
Over $263,750 Over $263,750 39.6% 7.84% 44.3% 2.78% 3.06% 3.34% 3.62% 3.90%
</TABLE>
(^) Based on 1997 tax rates using a state rate of 4.95% and a local rate of 60%
of the 4.95% state rate, or 2.97%.
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>
Federal State & Taxable Yield
Marginal Local Blended
Single MFJ Rates(^) Rates(^) Rate 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------------------------
<S><C>
Not over $24,000 Not over $40,100 15.0% 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>
(^) Based on 1997 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:
24
<PAGE>
<TABLE>
<CAPTION>
Marginal Taxable Yield
Federal
Single MFJ Rates(^) 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------
<S><C>
Not over $24,000 Not over $40,100 15.0% 4.25% 4.68% 5.10% 5.53% 5.95%
$24,000 to $58,150 $40,100 to $96,900 28.0% 3.60% 3.96% 4.32% 4.68% 5.04%
$58,150 to $121,300 $96,900 to $147,700 31.0% 3.45% 3.80% 4.14% 4.49% 4.83%
$121,300 to $263,750 $147,700 to $263,750 36.0% 3.20% 3.52% 3.84% 4.16% 4.48%
Over $263,750 Over $263,750 39.6% 3.02% 3.32% 3.62% 3.93% 4.23%
</TABLE>
(^) Based on 1997 tax rates
For the 30-day period ended March 31, 1998, the Maryland Tax-Free
Fund's yield and tax equivalent yield (assuming a 21.7% blended tax rate) were
4.63% and 5.91%, respectively. The Pennsylvania Tax-Free Fund's yield and tax
equivalent yield (assuming an 17.4% blended tax rate) for the same period were
4.69% and 5.68%, respectively. The Tax-Free Intermediate Fund's yield and tax
equivalent yield (assuming a 15% tax rate) for the same period were 4.01% and
4.72%, respectively.
OTHER INFORMATION From time to time, in reports and promotional
literature, each class of shares of a Fund's performance may be compared to
indices of broad groups of managed and unmanaged securities considered to be
representative of or similar to Fund portfolio holdings such as the Bond Buyer
20, Lipper General Purpose Municipal Bond Average, Lipper Maryland State
Municipal Bond Fund Average (Maryland Tax-Free Fund only) and Shearson
Lehman/American Express Municipal Bond Index. Securities indices may take no
account of the cost of investing or of any tax consequences of distributions.
The Funds may invest in securities not included in the indices to which they
make such comparisons.
A Fund may also cite rankings and ratings and compare the return of a
class with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. A Fund may also refer in
such materials to mutual fund performance rankings, ratings and comparisons with
funds having similar investment objectives and other mutual funds reported
periodically in national financial publications such as MONEY Magazine, FORBES,
BUSINESS WEEK and BARRON's.
A Fund may compare the investment return of a class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on a certificate of
deposit, which remains at a specified rate for a specified period of time, the
return of each class of shares will vary.
In advertising, a 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. Ae Fund may use other recognized
sources as they become available.
A 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
25
<PAGE>
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 $74.4 billion as of June 30,
1998.
THE TRUST'S TRUSTEES AND OFFICERS
The Trust's officers are responsible for the operation of the Trust
under the direction of the Board of Trustees. The officers and trustees and
their principal occupations during the past five years are set forth below. An
asterisk (*) indicates those officers and/or trustees who are "interested
persons" of the Trust as defined by the Investment Company Act of 1940 ("1940
Act"). The business address of each officer and trustee is 100 Light Street,
Baltimore, Maryland, unless otherwise indicated.
JOHN F. CURLEY [07/24/39], JR.*, Chairman of the Board and Trustee;
Retired Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood
Walker, 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.
26
<PAGE>
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; Brooklyn Museum of Art, 200
Eastern Parkway, Brooklyn, New York. Director of the Brooklyne Museum of Art;
Director/Trustee of eight Legg Mason funds. Formerly Director of the Baltimore
Museum of Art.
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 funds. 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.
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.
KATHI D. BAIR* [12/15/64], Secretary; Secretary and/or Assistant
Treasurer of eight Legg Mason funds; employee of Legg Mason.
SUSAN L. SILVA* [03/29/67], Assistant Secretary; Assistant Secretary of
five other Legg Mason funds; 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 of the previous year.
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.
27
<PAGE>
On July 1, 1998, 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.
On July 23, 1998, Sentrust, c/o Sentry Trust Co., 1930 Scotland Avenue,
Chambersburg, PA 17201 owned, in the aggregate 42.2% and Soldier & Co., c/o
Sentry Trust Co. of the same address, owned 57.8% of the outstanding shares of
Navigator Pennsylvania Tax-Free Fund.
The following table provides certain information relating to the
compensation of the Trust's trustees for the fiscal year ended March 31, 1998.
None of the Legg Mason funds has any retirement plan for its trustees.
COMPENSATION TABLE
- ------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM TRUST
NAME OF PERSON AND FROM THE TRUST* AND FUND COMPLEX PAID TO
POSITION 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 $3,600 $30,900
- ---------------------------------------------------------------------------------------
Charles F. Haugh -
Trustee $3,600 $30,900
- ---------------------------------------------------------------------------------------
Arnold L. Lehman -
Trustee $3,600 $30,900
- ---------------------------------------------------------------------------------------
Jill E. McGovern -
Trustee $3,600 $30,900
- ---------------------------------------------------------------------------------------
T. A. Rodgers -
Trustee $3,600 $30,900
- ---------------------------------------------------------------------------------------
</TABLE>
* Represents fees paid to each trustee during the fiscal year ended March
31, 1998.
** Represents aggregate compensation paid to each trustee during the
calendar year ended December 31, 1997. There are nine open-end
investment companies in the Legg Mason Complex (with a total of
eighteen funds).
THE FUNDS' INVESTMENT ADVISER
The Adviser, a Maryland corporation, is located at 100 Light Street,
Baltimore,
28
<PAGE>
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 7, 1997. Effective
January 1, 1998, the Advisory Agreement was transferred to the Adviser; prior to
that date, LMFA a wholly owned subsidiary of Legg Mason, Inc., served as each
Fund's investment adviser and manager under the Advisory Agreement. 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.
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 Prospectuses, 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
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 in accordance with the following
schedules. The fee waiver for Maryland Tax-Free will expire on July 31, 1999, or
when the Fund's net assets reach $200 million, whichever occurs first. The fee
waiver for Pennsylvania Tax-Free will expire on July 31, 1999, or when the
Fund's net assets reach $125 million, whichever occurs first. The fee waiver for
Tax-Free Intermediate will expire July 31, 1999, or when the Fund's net assets
reach $100 million, whichever occurs first.
29
<PAGE>
<TABLE>
<CAPTION>
RATE EXPIRATION DATE
---- ---------------
<S><C>
For the Maryland Tax-Free Fund:
Primary Shares:
0.70% July 31, 1999
0.65% December 31, 1996
0.60% March 31, 1996
0.55% July 31, 1995
0.50% June 30, 1994
0.45% December 31, 1993
0.40% December 31, 1992
Navigator Shares:
0.45% July 31, 1999
0.40% December 31, 1996
0.35% March 31, 1996
For the Pennsylvania Tax-Free Fund:
Primary Shares:
0.70% July 31, 1999
0.65% December 31, 1996
0.55% March 31, 1996
0.50% July 31, 1995
0.45% June 30, 1994
0.40% December 31, 1993
0.35% July 31, 1993
Navigator Shares:
0.45% July 31, 1999
0.40% December 31, 1996
0.30% March 31, 1996
For the Tax-Free Intermediate Fund:
Primary Shares:
0.70% July 31, 1999
0.65% December 31, 1996
0.35% July 31, 1995
0.30% June 30, 1994
0.30% December 31, 1993
0.20% March 31, 1993
Navigator Shares:
0.45% July 31, 1999
0.40% December 31, 1996
</TABLE>
For the fiscal years ended March 31, the Funds paid advisory fees of:
1998 1997 1996
---- ---- ----
Maryland Tax-Free Fund $826,561 $818,213 $809,671
Pennsylvania Tax-Free Fund $364,852 $365,484 $363,545
30
<PAGE>
Tax-Free Intermediate Fund $320,331 $313,749 $300,560
For the fiscal years ended March 31, the following advisory fees were
waived:
1998 1997 1996
---- ---- ----
Maryland Tax-Free Fund $336,314 $432,987 $541,013
Pennsylvania Tax-Free Fund $195,443 $244,013 $320,401
Tax-Free Intermediate Fund $209,159 $252,670 $287,375
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.
Pursuant to an agreement with the Adviser ("Administration Agreement")
dated January 1, 1998, LMFA serves as the Fund's administrator whereby it is
obligated to (a) furnish each Fund with office space and executive and other
personnel necessary for the operations of the funds; (b) supervise all aspects
of each Fund's operations; (c) bear the expense of certain informational and
purchase and redemption services to fund shareholders; (d) arrange, but not pay
for, the periodic updating of prospectuses, proxy material, tax returns and
reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to the Trust's officers and directors. The Adviser pays LMFA,
pursuant to the Administration Agreement, a fee equal to an annual rate of 0.05%
of each Fund's average daily net assets. For the period January 1, 1998 to March
31, 1998, the Adviser paid LMFA $18,069 for its services as administrator.
Under the Administration Agreement, LMFA will not be liable for an
error of judgment or mistake of law or for any loss suffered by the Adviser or
the Funds in connection with the performance of the Administration Agreement,
except that LMFA may be liable for a loss resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services or a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its obligation
or duties thereunder.
To mitigate the possibility that 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.
31
<PAGE>
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.
Legg Mason and LMFA may make payments out of their own assets to Fairfield or
others to support the distribution of Navigator Shares and Shareholder
servicing.
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").
Continuation of the Plan was most recently approved on November 7, 1997
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
32
<PAGE>
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, the Funds paid Legg Mason distribution
and service fees of:
1998 1997 1996
---- ---- ----
Maryland Tax-Free Fund $375,710 $371,914 $368,033
Pennsylvania Tax-Free Fund $165,830 $166,129 $165,248
Tax-Free Intermediate Fund $145,605 $142,613 $136,619
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 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 fiscal year ended March 31, 1998, Legg Mason incurred the
following expenses:
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
Fund Fund Fund
-------------------------------------------------
Compensation to sales
personnel $168,000 $74,000 $ 64,000
33
<PAGE>
Advertising 11,000 11,000 11,000
Printing and mailing of
prospectuses to prospective
shareholders 35,000 32,000 26,000
Other 250,000 213,000 251,000
-------------------------------------------------
Total expenses $464,000 $330,000 $352,000
=================================================
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
each Fund made through July 31, 1999. Sales charges received by Legg Mason from
sales of each Fund are as follows:
1998 1997 1996
Maryland Tax-Free $191,000 $315,000 $347,000
Pennsylvania Tax-Free $84,000 $152,000 $174,000
Tax-Free Intermediate $0 $0 $100,000
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
34
<PAGE>
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 the Fund together with all other registered investment
companies having the same adviser, may not purchase more than 25% of the
principal amount of the offering of such class. In addition, a Fund may not
purchase securities during the existence of an underwriting if Legg Mason is the
sole underwriter of those securities or if such purchase is designated as a
"group sale" in an underwriting in which Legg Mason participates. Because Legg
Mason is a principal underwriter of municipal obligations and because new issues
of municipal securities often are sold pursuant to group sales, the Funds may be
precluded from purchasing certain new issues of municipal securities or may be
permitted to make only limited investments therein.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from executing transactions on an exchange for its affiliates, such as the
Funds, unless the affiliate expressly consents by written contract. The Advisory
Agreements expressly provide 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, 1998 and
1997, the
35
<PAGE>
Maryland Tax-Free Fund's portfolio turnover rates were 18.9% and 6.0%,
respectively; the Pennsylvania Tax-Free Fund's portfolio turnover rates were
14.1% and 13.6%, respectively; and the Tax-Free Intermediate Fund's portfolio
turnover rates were 9.0% and 8.9%, respectively.
THE TRUST'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston
Massachusetts, serves as custodian of the Funds' assets. BFDS, P.O. Box 953,
Boston, Massachusetts 02103 serves as transfer and dividend-disbursing agent and
administrator of various shareholder services. Legg Mason also assists BFDS with
certain of its duties as transfer agent, for which BFDS pays Legg Mason a fee.
Each Fund reserves the right, upon 60 days' written notice, to make other
charges to investors to cover administrative costs.
OTHER INFORMATION
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of each Fund could, under
certain circumstances, be held personally liable for the obligations of that
Fund and of the other Funds. However, the Trust's Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust or the Funds and
requires that notice of such disclaimer be given in each note, bond, contract,
instrument, certificate or undertaking made or issued by the trustees or by any
officers or officer by or on behalf of the Trust, a Fund, the trustees or any of
them in connection with the Trust. The Declaration of Trust provides for
indemnification from each Fund's property for all losses and expenses of any
Fund shareholder held personally liable for the obligations of that Fund. Thus,
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which a Fund itself would be unable to
meet its obligations, a possibility which the Adviser believes is remote. Upon
payment of any liability incurred by a Fund shareholder solely by reason of
being or having been a shareholder, the shareholder paying such liability will
be entitled to reimbursement from the general assets of that Fund. The trustees
intend to conduct the operations of each Fund in such a way as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of each
Fund.
THE TRUST'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036, serves as counsel to the Trust.
THE TRUST'S INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, Maryland
21201, 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, 1998; the Statements of
Operations for the year ended March 31, 1998; the Statements of Changes in Net
Assets for the years ended March 31, 1998 and 1997; 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, 1998, are hereby incorporated by reference in this Statement of
Additional Information.
36
<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
A-1
<PAGE>
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 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.
S & P may assign (+) or (-) modifiers to indicate relative strength or
weakness within a particular rating 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".
A-2
<PAGE>
Because bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated "F-1+".
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse change in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Short-Term Ratings
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 3
Additional Purchase and Redemption Information 12
Special Factors Affecting Maryland and
Pennsylvania Tax-Free Funds 14
Additional Tax Information 18
Valuation of Fund Shares 20
Performance Information 21
The Trust's Trustees and Officers 25
The Funds' Investment Adviser 28
The Funds' Distributor 30
Portfolio Transactions and Brokerage 32
The Trust's Custodian and Transfer and
Dividend-Disbursing Agent 34
Other Information 34
The Trust's Legal Counsel 34
The Trust's Independent Accountants 34
Financial Statements 34
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, 1998 and the reports of the independent
accountants thereon are incorporated into the Statement of
Additional Information by reference to the Legg Mason Tax-Free
Income Fund'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 (1)
(b) Amendment dated January 31, 1991 to the
Declaration of Trust (1)
(c) Amendment dated March 11, 1991 to the
Declaration of Trust 91)
(d) Amendment dated July 30, 1992 to the
Declaration of Trust (1)
(2) By-Laws (1)
(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 (1)
(b) Advisory Fee Agreement with respect
to the Tax-Free Intermediate-Term
Income Trust (1)
(c) Substitution Agreement - filed herewith
(d) Administration Agreement with respect to the
Maryland Portfolio - filed herewith
(e) Administration Agreement with respect to the
Pennsylvania Portfolio - filed herewith
(f) Administration Agreement with respect to the
Tax-Free Intermediate Portfolio - filed
herewith
(6) (a) Amended Underwriting Agreement with respect
to the Maryland, Pennsylvania and Tax-Free
Intermediate-Term Income Portfolios (1)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement (1)
(9) (a) Transfer Agency and Service Agreement (1)
(b) Credit Agreement (2)
(10) (a) Opinion and consent of counsel with respect
to Registrant and the Maryland, Pennsylvania
and High Quality Portfolios (1)
(b) Opinion and consent of counsel with respect
to the Tax-Free Intermediate-Term Income
Portfolio (1)
(11) Other opinions, appraisals, rulings and consents -
Accountant's consent -- filed herewith
<PAGE>
(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 (1)
(b) Agreement for providing initial capital with
respect to the Tax-Free Intermediate-Term
Income Portfolio (1)
(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
(1)
(16) (a) Schedule for computation of performance
quotations for Legg Mason Maryland Tax-Free
Income Trust -- filed herewith
(b) Schedule for computation of performance
quotations for Legg Mason Pennsylvania Tax-
Free Income Trust -- filed herewith
(c) Schedule for computation of performance
quotations for Legg Mason Tax-Free
Intermediate-Term Income Trust -- filed
herewith
(17) Financial Data Schedules -- filed herewith
(18) Plan Pursuant to Rule 18f-3 - none
(1)Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 10 to the Registration Statement, SEC File No. 33-37971, filed
July 31, 1998.
(2)Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No.13 to Legg Mason Global Trust, Inc.'s Registration Statement, SEC
File No. 33-56672, filed April 30, 1998.
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 27, 1998)
- -------------- ----------------------
Shares of Capital Stock,
($.001 par value)
Legg Mason Maryland Tax-Free Income Trust
Primary Shares 3,979
Navigator Shares 0
Legg Mason Pennsylvania Tax-Free Income Trust
Primary Shares 1,808
Navigator Shares 2
Legg Mason High Quality Tax-Free Income Trust
<PAGE>
Primary Shares 1
Navigator Shares 0
Legg Mason Tax-Free Intermediate-Term Income Trust
Primary Shares 1,296
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 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
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. 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
<PAGE>
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 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 services 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.
<PAGE>
Registrant undertakes to carry out all indemnification provisions of
its Declaration of Trust, By-Laws, 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.
Item 28. Business and Other Connections of Manager and Investment Adviser
----------------------------------------------------------------
Legg Mason Capital Management, Inc. ("LMCM"), the Registrant's investment
adviser, is a registered investment adviser incorporated on October 4, 1982.
LMCM is engaged primarily in the investment advisory business. LMCM serves as
investment adviser for four open-end investment companies and for private
accounts. Information as to the officers and directors of LMCM is included in
its Form ADV filed on September 23, 1997 with the Securities and Exchange
Commission (registration number 801-18115) and is incorporated herein by
reference.
Legg Mason Fund Adviser, Inc. ("LMFA"), the Registrant's administrator, is
a registered investment adviser incorporated on January 20, 1982. LMFA is
engaged primarily in the investment advisory business. LMFA serves as investment
adviser or manager for eighteen open-end investment companies and for private
accounts. Information as to the officers and directors of LMFA is included in
its Form ADV filed on August 11, 1997 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.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
Legg Mason Focus Trust, Inc.
<PAGE>
(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. Retired Vice Chairman Chairman of the
of the Board Board and Trustee
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive President and Trustee
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice None
President and
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
<PAGE>
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
Joseph Sullivan Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
<PAGE>
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Seth J. Lehr Senior Vice None
1735 Market St President
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
<PAGE>
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
<PAGE>
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
- --------------------
* All addresses are 100 Light Street, Baltimore, Maryland 21202,
unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not
an affiliated person of the Registrant or an affiliated
person of such an affiliated person.
Item 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. 11 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, 1998.
Legg Mason Tax-Free Income Fund
By:/s/ Marie K. Karpinski
_______________________________
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 11 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
- --------- ----- ----
Chairman of the Board
/s/ John F. Curley, Jr.* and Trustee July 28, 1998
____________________________
John F. Curley, Jr.*
/s/ Edmund J. Cashman, Jr President and Trustee July 28, 1998
____________________________
Edmund J. Cashman, Jr.
/s/ Edward A. Taber, III Trustee July 28, 1998
____________________________
Edward A. Taber, III
/s/ Charles F. Haugh* Trustee July 28, 1998
____________________________
Charles F. Haugh*
/s/ Richard G. Gilmore* Trustee July 28, 1998
____________________________
Richard G. Gilmore*
/s/ Arnold L. Lehman* Trustee July 28, 1998
____________________________
Arnold L. Lehman*
/s/ Jill E. McGovern* Trustee July 28, 1998
____________________________
Jill E. McGovern*
/s/ T. A. Rodgers* Trustee July 28, 1998
____________________________
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President July 28, 1998
____________________________ and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
May 8, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of the following investment companies:
Legg Mason Cash Reserve Trust Legg Mason Value Trust, Inc.
Legg Mason Income Trust, Inc. Legg Mason Total Return Trust, Inc.
Legg Mason Global Trust, Inc. Legg Mason Special Investment Trust, Inc.
Legg Mason Tax Exempt Trust, Inc. Legg Mason Investors Trust, Inc.
Legg Mason Tax-Free Income Fund
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of Marie K.
Karpinski, Kathi D. Bair, Arthur J. Brown and Arthur C. Delibert my true and
lawful attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, any Registration
Statements on Form N-1A, all Pre-Effective Amendments to any Registration
Statements of the Funds, any and all subsequent Post-Effective Amendments to
said Registration Statements, any supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933 and the Investment Company Act of 1940, all
related requirements of the Securities and Exchange Commission and all
requirements of appropriate states and territories. I hereby ratify and confirm
all that said attorney-in-fact or their substitutes may do or cause to be done
by virtue hereof.
WITNESS my hand on the date set forth below.
Signature Date
- --------- ----
/s/Richard G. Gilmore May 8, 1998
____________________________
Richard G. Gilmore
/s/T.A. Rodgers May 8, 1998
____________________________
T. A. Rodgers
/s/Charles F. Haugh May 8, 1998
____________________________
Charles F. Haugh
/s/Arnold L. Lehman May 8, 1998
____________________________
Arnold L. Lehman
/s/Jill E. McGovern May 8, 1998
____________________________
Jill E. McGovern
/s/Edward A. Taber, III May 8, 1998
____________________________
Edward A. Taber, III
/s/Edmund J. Cashman, Jr. May 8, 1998
____________________________
Edmund J. Cashman, Jr.
/s/John F. Curley, Jr. May 8, 1998
____________________________
John F. Curley, Jr.
/s/Raymond A. Mason May 8, 1998
____________________________
Raymond A. Mason
SUBSTITUTION AGREEMENT
Legg Mason Tax-Free Income Fund
AGREEMENT, made this 1st day of January, 1998, by and among Legg Mason
Fund Adviser, Inc. ("LMFA"), a Maryland corporation; Legg Mason Capital
Management, Inc. ("LMCM"), a Maryland corporation; and Legg Mason Tax-Free
Income Fund (the "Trust"), a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act"), and the Trust issues shares in
three different classes, each of which is known as a "Series"; and
WHEREAS, LMFA serves as Investment Adviser and Manager to the Trust and
each Series pursuant to an Investment Advisory and Management Agreement between
the Trust and LMFA dated March 25, 1991; and
WHEREAS, the persons rendering portfolio management services for the
Trust and each Series are employees of LMFA for purposes of the Investment
Advisory and Management Agreement, and for all other purposes are employees of
LMCM; and
WHEREAS, LMFA wishes to substitute LMCM in place of LMFA, as a party to
the Investment Advisory and Management Agreement; and
WHEREAS, LMFA and LMCM wish to enter into an agreement on behalf of the
Trust whereby LMFA will continue to provide administrative services to the
Trust, whereby the services provided to the Trust, and the total fees paid by
the Trust for investment advisory, management and administrative services,
remain unchanged; and
WHEREAS, LMFA has represented to the Trust that LMCM is under the same
management and control as LMFA, and that in the event of substitution as
requested by LMFA the persons rendering portfolio management services for the
Trust and each Series will remain the same; and
WHEREAS, under these circumstances, the Trust agrees to the
substitution of LMCM as a party to the Investment Advisory and Management
Agreement in place of LMFA.
NOW, THEREFORE, it is agreed as follows:
1. Substitution of Party. Effective as of the date first written above,
LMCM hereby assumes all of the interest, rights and responsibilities of LMFA
under the Investment Advisory and Management Agreement.
2. Performance of Duties. LMCM hereby assumes and agrees to perform all
of LMFA's duties and obligations under the Investment Advisory and Management
Agreement and be subject to all of the terms and conditions of said Agreement as
if they applied to LMCM. Nothing in this Substitution Agreement shall make LMCM
responsible for any claim or demand arising under the Investment Advisory and
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by LMCM; and nothing in this
Substitution Agreement shall make LMFA responsible for any claim or demand
arising under the Investment Advisory and Management Agreement from services
rendered after the effective date of this Substitution Agreement unless
otherwise agreed by LMFA.
3. Representations of LMCM and LMFA. LMCM represents and warrants that
it is registered as an investment adviser under the Investment Advisers Act of
1940, as amended ("Advisers Act"). LMFA and LMCM each represent and warrant that
they are under the same control and management, and that substitution of LMCM as
a party to the Investment Advisory and Management
<PAGE>
Agreement in place of LMFA shall not result in an "assignment" of the Investment
Advisory and Management Agreement as that term is defined in the 1940 Act or the
Advisers Act.
4. Consents. The Trust hereby consents to this assumption by LMCM of
the interest, rights and responsibilities of LMFA under the Investment Advisory
and Management Agreement and agrees, subject to the terms and conditions of said
Agreement, to look solely to LMCM for the performance of the duties and
obligations under said Agreement after the effective date described above.
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Attest: Legg Mason Tax-Free Income Fund
By:/s/ Kathi D. Bair By: /s/ Marie K. Karpinski
_____________________________________
Marie K. Karpinski
_____________________________________
Title Vice President and Treasurer
Attest: Legg Mason Fund Adviser, Inc.
By:/s/ Kathi D. Bair By: /s/ William H. Miller, III
_____________________________________
William H. Miller, III
_____________________________________
Title President
Attest: Legg Mason Capital Management, Inc.
By:/s/ Kathi D. Bair By: /s/ Philip E. Sachs
_____________________________________
Philip E. Sachs
_____________________________________
Title Chairman and CEO
ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of January, 1998 by and between Legg Mason
Capital Management, Inc. ("Adviser"), a Maryland corporation, and Legg Mason
Fund Adviser, Inc. ("Administrator"), a Maryland corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, the Adviser is the investment adviser of Legg Mason Maryland
Tax-Free Income Trust (the "Fund"), a series of Legg Mason Tax-Free Income Fund
(the "Trust") an open-end, diversified management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser wishes to retain the Administrator to provide it
with certain administrative services in connection with the Adviser's management
of the Fund; and
WHEREAS, the Administrator 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. Appointment. The Adviser hereby appoints the Administrator as
administrator for the Fund for the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Adviser has furnished the
Administrator with copies properly certified or authenticated of each of the
following:
(a) The Trust's Declaration of Trust, as filed with the
Secretary of State Corporation Division of the Commonwealth of Massachusetts and
all amendments thereto;
(b) The Trust's By-Laws and all amendments thereto;
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser as the investment adviser and the
Administrator as administrator, and approving the assignment of the Investment
Advisory and Management Agreement dated March 25, 1991 (the "Advisory
Agreement") to the Adviser and this Agreement;
(d) The Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended, and the 1940 Act as filed with the
Securities and Exchange Commission, including all exhibits thereto, relating to
shares of common stock of the Fund, par value $.001 per share and all amendments
thereto;
(e) The Fund's most recent prospectus; and
(f) The Fund's most recent statement of additional
information.
The Adviser will furnish the Administrator from time to time with copies of all
amendments of or supplements to the foregoing.
3. Administrative Services. The Administrator, 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 Administrator and shall furnish the Fund with office
facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund. The Administrator shall
oversee the maintenance of all books and records with respect to the Fund's
securities transactions and the keeping of the Fund's books of accounts in
accordance with all applicable federal and
1
<PAGE>
state laws and regulations. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Administrator hereby agrees that any records which it
maintains for the Fund are the property of the Fund, and further agrees to
surrender promptly to the Fund or its agents any of such records upon the Fund's
request. The Administrator 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.
4. Services Not Exclusive. The Administrator's services hereunder
are not deemed to be exclusive, and the Administrator shall be free to render
similar services to others. It is understood that persons employed by the
Administrator to assist in the performance of its duties hereunder might not
devote their full time to such service. Nothing herein contained shall be deemed
to limit or restrict the right of the Administrator or any affiliate of the
Administrator to engage in and devote time and attention to other businesses or
to render services of whatever kind or nature.
5. Expenses. During the term of this Agreement, the Administrator
will pay all expenses incurred by it in connection with its activities under
this Agreement.
6. Compensation. For the services which the Administrator will
render to the Adviser and the Fund under this Agreement, the Adviser will pay
the Administrator a fee, computed daily and paid monthly, at an annual rate
equal to 0.05% of the Fund's average daily net assets. Fees due to the
Administrator hereunder shall be paid promptly to the Administrator by the
Adviser following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
7. Limitation of Liability. The Administrator will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Adviser or by the Trust or the Fund in connection with the performance of this
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 under this
Agreement.
8. Definitions. As used in this Agreement, the term "securities"
shall have the meaning ascribed to it in the Declaration of Trust of the Trust;
and the terms "assignment" and "interested person" 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.
9. Duration and Termination. This Agreement will become effective
January 1, 1998, provided that it shall have been approved by the Trust's Board
of Trustees, including a majority of those Trustees who are not interested
persons of the Adviser or the Administrator and, unless sooner terminated as
provided for herein, shall continue in effect until January 1, 2000, and from
year to year thereafter, provided such continuation is approved at least
annually by the Board of Trustees, including a majority of those Trustees who
are not interested persons of the Adviser or the Administrator. This Agreement
is terminable without penalty, by the Adviser or by the Administrator, on not
less than 60 days' notice to the other party and will be terminated immediately
upon any termination of the Advisory Agreement with respect to the Fund or upon
the mutual written consent of the Administrator and the Adviser. Termination of
this Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Trust. This Agreement will
automatically and immediately terminate in the event of its assignment.
10. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
11. Amendments. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
2
<PAGE>
12. Miscellaneous. This Agreement embodies the entire agreement
and understanding between the parties hereto, and supersedes all prior
agreements and understandings relating to the subject matter hereof. The
captions in this Agreement are included for convenience of reference only and in
no way define or delimit any of the provisions hereof or otherwise affect their
construction or effect. Should any part of this Agreement be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding and
shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
LEGG MASON CAPITAL MANAGEMENT, INC.
Attest:
By:/s/ Kathi D. Bair By:/s/ Philip E. Sachs
_______________________ _______________________________
Philip E. Sachs
Chairman and CEO
LEGG MASON FUND ADVISER, INC.
Attest:
By:/s/ Kathi D. Bair By:/s/ William H. Miller, III
_______________________ _______________________________
William H. Miller, III
President
3
ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of January, 1998 by and between Legg Mason
Capital Management, Inc. ("Adviser"), a Maryland corporation, and Legg Mason
Fund Adviser, Inc. ("Administrator"), a Maryland corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, the Adviser is the investment adviser of Legg Mason
Pennsylvania Tax-Free Income Trust (the "Fund"), a series of Legg Mason Tax-Free
Income Fund (the "Trust") an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Adviser wishes to retain the Administrator to provide it
with certain administrative services in connection with the Adviser's management
of the Fund; and
WHEREAS, the Administrator 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. Appointment. The Adviser hereby appoints the Administrator as
administrator for the Fund for the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Adviser has furnished the
Administrator with copies properly certified or authenticated of each of the
following:
(a) The Trust's Declaration of Trust, as filed with the
Secretary of State Corporation Division of the Commonwealth of Massachusetts and
all amendments thereto;
(b) The Trust's By-Laws and all amendments thereto;
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser as the investment adviser and the
Administrator as administrator, and approving the assignment of the Investment
Advisory and Management Agreement dated March 25, 1991 (the "Advisory
Agreement") to the Adviser and this Agreement;
(d) The Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended, and the 1940 Act as filed with the
Securities and Exchange Commission, including all exhibits thereto, relating to
shares of common stock of the Fund, par value $.001 per share and all amendments
thereto;
(e) The Fund's most recent prospectus; and
(f) The Fund's most recent statement of additional
information.
The Adviser will furnish the Administrator from time to time with copies of all
amendments of or supplements to the foregoing.
3. Administrative Services. The Administrator, 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 Administrator and shall furnish the Fund with office
facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund. The Administrator shall
oversee the maintenance of all books and records with respect to the Fund's
securities transactions and the keeping of the Fund's books of accounts in
accordance with all applicable federal and state laws and regulations. In
compliance with the requirements of Rule 31a-3 under the 1940
1
<PAGE>
Act, the Administrator hereby agrees that any records which it maintains for the
Fund are the property of the Fund, and further agrees to surrender promptly to
the Fund or its agents any of such records upon the Fund's request. The
Administrator 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.
4. Services Not Exclusive. The Administrator's services hereunder
are not deemed to be exclusive, and the Administrator shall be free to render
similar services to others. It is understood that persons employed by the
Administrator to assist in the performance of its duties hereunder might not
devote their full time to such service. Nothing herein contained shall be deemed
to limit or restrict the right of the Administrator or any affiliate of the
Administrator to engage in and devote time and attention to other businesses or
to render services of whatever kind or nature.
5. Expenses. During the term of this Agreement, the Administrator
will pay all expenses incurred by it in connection with its activities under
this Agreement.
6. Compensation. For the services which the Administrator will
render to the Adviser and the Fund under this Agreement, the Adviser will pay
the Administrator a fee, computed daily and paid monthly, at an annual rate
equal to 0.05% of the Fund's average daily net assets. Fees due to the
Administrator hereunder shall be paid promptly to the Administrator by the
Adviser following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
7. Limitation of Liability. The Administrator will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Adviser or by the Trust or the Fund in connection with the performance of this
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 under this
Agreement.
8. Definitions. As used in this Agreement, the term "securities"
shall have the meaning ascribed to it in the Declaration of Trust of the Trust;
and the terms "assignment" and "interested person" 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.
9. Duration and Termination. This Agreement will become effective
January 1, 1998, provided that it shall have been approved by the Trust's Board
of Trustees, including a majority of those Trustees who are not interested
persons of the Adviser or the Administrator and, unless sooner terminated as
provided for herein, shall continue in effect until January 1, 2000, and from
year to year thereafter, provided such continuation is approved at least
annually by the Board of Trustees, including a majority of those Trustees who
are not interested persons of the Adviser or the Administrator. This Agreement
is terminable without penalty, by the Adviser or by the Administrator, on not
less than 60 days' notice to the other party and will be terminated immediately
upon any termination of the Advisory Agreement with respect to the Fund or upon
the mutual written consent of the Administrator and the Adviser. Termination of
this Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Trust. This Agreement will
automatically and immediately terminate in the event of its assignment.
10. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
11. Amendments. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
12. Miscellaneous. This Agreement embodies the entire agreement
and understanding between the parties hereto, and supersedes all prior
agreements and understandings relating to the subject matter hereof. The
captions in this Agreement are included for convenience of reference only
2
<PAGE>
and in no way define or delimit any of the provisions hereof or otherwise affect
their construction or effect. Should any part of this Agreement be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding and
shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
LEGG MASON CAPITAL MANAGEMENT, INC.
Attest:
By:/s/ Kathi D. Bair By:/s/ Philip E. Sachs
______________________ _____________________________
Philip E. Sachs
Chairman and CEO
LEGG MASON FUND ADVISER, INC.
Attest:
By:/s/ Kathi D. Bair By:/s/ William H. Miller, III
______________________ _____________________________
William H. Miller, III
President
3
ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of January, 1998 by and between Legg Mason
Capital Management, Inc. ("Adviser"), a Maryland corporation, and Legg Mason
Fund Adviser, Inc. ("Administrator"), a Maryland corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, the Adviser is the investment adviser of Legg Mason Tax-Free
Intermediate-Term Income Trust (the "Fund"), a series of Legg Mason Tax-Free
Income Fund (the "Trust") an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Adviser wishes to retain the Administrator to provide it
with certain administrative services in connection with the Adviser's management
of the Fund; and
WHEREAS, the Administrator 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. Appointment. The Adviser hereby appoints the Administrator as
administrator for the Fund for the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Adviser has furnished the
Administrator with copies properly certified or authenticated of each of the
following:
(a) The Trust's Declaration of Trust, as filed with the
Secretary of State Corporation Division of the Commonwealth of Massachusetts and
all amendments thereto;
(b) The Trust's By-Laws and all amendments thereto;
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser as the investment adviser and the
Administrator as administrator, and approving the assignment of the Investment
Advisory and Management Agreement dated March 25, 1991 (the "Advisory
Agreement") to the Adviser and this Agreement;
(d) The Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended, and the 1940 Act as filed with the
Securities and Exchange Commission, including all exhibits thereto, relating to
shares of common stock of the Fund, par value $.001 per share and all amendments
thereto;
(e) The Fund's most recent prospectus; and
(f) The Fund's most recent statement of additional
information.
The Adviser will furnish the Administrator from time to time with copies of all
amendments of or supplements to the foregoing.
3. Administrative Services. The Administrator, 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 Administrator and shall furnish the Fund with office
facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund. The Administrator shall
oversee the maintenance of all books and records with respect to the Fund's
securities transactions and the keeping of the Fund's books of accounts in
accordance with all applicable federal and state laws and regulations. In
compliance with the requirements of Rule 31a-3 under the 1940
1
<PAGE>
Act, the Administrator hereby agrees that any records which it maintains for the
Fund are the property of the Fund, and further agrees to surrender promptly to
the Fund or its agents any of such records upon the Fund's request. The
Administrator 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.
4. Services Not Exclusive. The Administrator's services hereunder
are not deemed to be exclusive, and the Administrator shall be free to render
similar services to others. It is understood that persons employed by the
Administrator to assist in the performance of its duties hereunder might not
devote their full time to such service. Nothing herein contained shall be deemed
to limit or restrict the right of the Administrator or any affiliate of the
Administrator to engage in and devote time and attention to other businesses or
to render services of whatever kind or nature.
5. Expenses. During the term of this Agreement, the Administrator
will pay all expenses incurred by it in connection with its activities under
this Agreement.
6. Compensation. For the services which the Administrator will
render to the Adviser and the Fund under this Agreement, the Adviser will pay
the Administrator a fee, computed daily and paid monthly, at an annual rate
equal to 0.05% of the Fund's average daily net assets. Fees due to the
Administrator hereunder shall be paid promptly to the Administrator by the
Adviser following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
7. Limitation of Liability. The Administrator will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Adviser or by the Trust or the Fund in connection with the performance of this
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 under this
Agreement.
8. Definitions. As used in this Agreement, the term "securities"
shall have the meaning ascribed to it in the Declaration of Trust of the Trust;
and the terms "assignment" and "interested person" 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.
9. Duration and Termination. This Agreement will become effective
January 1, 1998, provided that it shall have been approved by the Trust's Board
of Trustees, including a majority of those Trustees who are not interested
persons of the Adviser or the Administrator and, unless sooner terminated as
provided for herein, shall continue in effect until January 1, 2000, and from
year to year thereafter, provided such continuation is approved at least
annually by the Board of Trustees, including a majority of those Trustees who
are not interested persons of the Adviser or the Administrator. This Agreement
is terminable without penalty, by the Adviser or by the Administrator, on not
less than 60 days' notice to the other party and will be terminated immediately
upon any termination of the Advisory Agreement with respect to the Fund or upon
the mutual written consent of the Administrator and the Adviser. Termination of
this Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Trust. This Agreement will
automatically and immediately terminate in the event of its assignment.
10. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
11. Amendments. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
12. Miscellaneous. This Agreement embodies the entire agreement
and understanding between the parties hereto, and supersedes all prior
agreements and understandings relating to the subject matter hereof. The
captions in this Agreement are included for convenience of reference only and
2
<PAGE>
in no way define or delimit any of the provisions hereof or otherwise affect
their construction or effect. Should any part of this Agreement be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding and
shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
LEGG MASON CAPITAL MANAGEMENT, INC.
Attest:
By:/s/ Kathi D. Bair By:/s/ Philip E. Sachs
________________________ ___________________________
Philip E. Sachs
Chairman and CEO
LEGG MASON FUND ADVISER, INC.
Attest:
By:/s/ Kathi D. Bair By:/s/ William H. Miller, III
________________________ ___________________________
William H. Miller, III
President
3
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Legg Mason Tax-Free Income Fund:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 11 to the Registration Statement of Legg Mason Tax-Free Income Fund on Form
N-1A (File No. 33-37971) of our report dated April 24, 1998 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 report is included in the Annual Report to Shareholders for the year
ended March 31, 1998, which is 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/PricewaterhouseCoopers LLP
_____________________________
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
July 29, 1998
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
-----------------------------------------
March 31, 1997 - March 31, 1998 (one year)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (16.39 x 1.05778) - (16.36 x 1.0) x 1000 + 1000 = 1059.72
--------------------------------
(16.36 x 1.0)
P = 1000
C = 1059.72 - 1 = 0.05972= 5.97%
------- ----
1000
Average Annual Return: Same
---------------------
March 31, 1993 - March 31, 1998 (five years)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (16.39 X 1.31408) - (16.42 x 1.0) x 1000 + 1000 = 1311.68
------------------------------------
(15.46 x 1.0)
P = 1000
C = 1311.68 - 1 = 0.3116 = 31.16%
------- -----
1000
Average Annual Return:
---------------------
1
-----
5
(0.3116 + 1) - 1 = 5.57%
----
May 1, 1991 - March 31, 1998 (life of fund)
- ----------------------------
Cumulative Total Return
-----------------------
ERV = (16.39 X 1.46971) - (15.12 x 1.0) x 1000 + 1000 = 1593.15
------------------------------------
(15.12 x 1.0)
P = 1000
C = 1593.15 - 1 = 0.5931 = 59.32%
------- -----
1000
Average Annual Return:
---------------------
1
-----
6.91781
(0.5932 + 1) - 1 = 6.96%
----
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
---------------------------------------------
March 31, 1997 - March 31, 1998 (one year)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (16.48 x 1.05274) - (16.25 x 1.0) x 1000 + 1000 = 1067.64
--------------------------------
(16.25 x 1.0)
P = 1000
C = 1067.64 - 1 = 0.0676 = 6.78%
------- ----
1000
Average Annual Return: Same
---------------------
March 31, 1993 - March 31, 1998 (five years)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (16.48 X 1.3222) - (16.48 x 1.0) x 1000 + 1000 = 1322.20
-----------------------------------
(16.48 x 1.0)
P = 1000
C = 1322.20 - 1 = 0.3222 = 32.19%
------- -----
1000
Average Annual Return:
---------------------
1
-----
5
(0.3222 + 1) - 1 = 5.74%
----
August 1, 1991 - March 31, 1998 (life of fund)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (16.48 X 1.46104) - (15.12 x 1.0) x 1000 + 1000 = 1592.45
------------------------------------
(15.12 x 1.0)
P = 1000
C = 1592.45 - 1 = 0.5925 = 59.25%
------- -----
1000
Average Annual Return:
---------------------
1
-------
6.66576
(0.5925 + 1) - 1 = 7.23%
----
<PAGE>
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
---------------------------------------------
Navigator Class
March 10, 1998 - March 31, 1998 (life of class)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (16.48 x 1.00304) - (16.44 x 1.0) x 1000 + 1000 = 1005.48
--------------------------------
(16.44 x 1.0)
P = 1000
C = 1005.48 - 1 = 0.00548 = .55%
-------
1000
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
--------------------------------------------------
March 31, 1997 - March 31, 1998 (one year)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.62 x 1.04374) - (15.53 x 1.0) x 1000 + 1000 = 1049.79
--------------------------------
(15.65 x 1.0)
P = 1000
C = 1049.79 - 1 = 0.04979 = 4.98%
------- ----
1000
Average Annual Return: Same
---------------------
March 31, 1993 - March 31, 1998 (five years)
- -------------------------------
Cumulative Total Return
-----------------------
ERV = (15.62 X 1.25280) - (15.37 x 1.0) x 1000 + 1000 = 1273.18
------------------------------------
(15.37 x 1.0)
P = 1000
C = 1273.18 - 1 = 0.2731 = 27.34%
------- -----
1000
Average Annual Return:
---------------------
1
-----
5
(0.2731 + 1) - 1 = 4.95%
----
November 9, 1992 - March 31, 1998 (life of fund)
- ---------------------------------
Cumulative Total Return
-----------------------
ERV = (15.62 X 1.27604) - (15.00 x 1.0) x 1000 + 1000 = 1328.78
------------------------------------
(15.00 x 1.0)
P = 1000
C = 1328.78 - 1 = 0.3288 = 32.88%
------- -----
1000
Average Annual Return:
---------------------
1
------
5.39178
(0.3288 + 1) - 1 = 5.41%
----
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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</TABLE>
