As filed with the Securities and Exchange Commission on July 30, 1999.
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: 13 [X]
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 14
--
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:
MARIE K. KARPINSKI ARTHUR C. DELIBERT, ESQ.
100 Light Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Avenue, N.W.
(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, 1999 pursuant to Rule 485(b)
---
[___] 60 days after filing pursuant to Rule 485(a)(i)
[___] on ____________ pursuant to Rule 485(a)(i)
[___] 75 days after filing pursuant to Rule 485(a)(ii)
[___] on _____________, 1999 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
Contents of Registration Statement
Cross Reference Sheet
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
Legg Mason Pennsylvania Tax-Free Income Trust
Legg Mason Tax-Free Intermediate-Term Income Trust
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
PART A ITEM NO. PRIMARY SHARES PROSPECTUS CAPTION
- --------------- ---------------------------------
<S> <C> <C>
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management; How to Invest
9 Financial Highlights Information Financial Highlights
PART A ITEM NO. NAVIGATOR SHARES PROSPECTUS CAPTION
- --------------- -----------------------------------
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management
9 Financial Highlights Information Financial Highlights
STATEMENT OF ADDITIONAL INFORMATION
PART B ITEM NO. CAPTION
- --------------- -------
10 Cover Page and Table of Contents Same
11 Fund History Description of the Funds
12 Description of the Fund and Its Description of the Funds; Fund Policies; Investment
Investments and Risks Strategies and Risks
13 Management of the Fund Management of the Funds
14 Control Persons and Principal Holders Management of the Funds
of Securities
15 Investment Advisory and Other Services Management Agreement; Investment Advisory
Agreement; The Funds' Distributor
16 Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
17 Capital Stock and Other Securities Description of the Trust
18 Purchase, Redemption, and Pricing of Additional Purchase and Redemption Information;
Shares Valuation of Fund Shares
<PAGE>
19 Taxation of the Fund Additional Tax Information; Tax-Deferred Retirement
Plans
20 Underwriters The Funds' Distributors
21 Calculation of Performance Data Performance Information
22 Financial Statements Financial Statements
</TABLE>
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
NEW INSERTS HERE
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 PROSPECTUS July 31, 1999
logo
HOW TO INVEST(SERVICEMARK)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C O N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
<PAGE>
Legg Mason Tax-Free Income Funds
[icon] I N V E S T M E N T O B J E C T I V E S
MARYLAND TAX-FREE INCOME TRUST
INVESTMENT OBJECTIVE: 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.
PRINCIPAL INVESTMENT STRATEGIES:
The fund 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. Securities considered for investment must
be investment grade. Investment grade securities are those rated within the four
highest grades by Moody's Investors Service, Inc., Standard & Poor's or Fitch
Investors Service, Inc. or, if unrated by Moody's, S&P or Fitch, deemed by the
adviser to be of comparable quality. The 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, industrial development bonds or
airport bonds, or in securities the interest on which is paid from revenues of a
similar type of project.
Under normal circumstances, the fund will maintain at least 80% of its total
assets in Maryland municipal obligations the interest on which is not a tax
preference item for purposes of the federal alternative minimum tax.
The fund may invest in securities of any maturity. When selecting securities for
the fund, the adviser maintains the fund's dollar-weighted average maturity
between 12 and 24 years. The adviser establishes a duration target for the fund
based on the adviser's investment outlook. This outlook is determined by the
adviser's analysis of the economy, fiscal and monetary policy, and international
events. Factors directly impacting the municipal market, such as supply, demand,
and legislative developments, are also incorporated in the adviser's outlook.
The adviser analyzes each industry and issuer to determine its credit
fundamentals and outlook. Issuers are scrutinized not only for their ability to
make timely interest and principal payments, but for the stability of their
financial position and ratings. The tax consequences of trading activity are
always considered, and only those trades that the adviser believes add value to
shareholders on an after-tax basis are executed.
Securities may be sold because their credit fundamentals have changed, or in
order to buy a security which the adviser believes will produce greater
risk-adjusted returns.
For temporary defensive purposes, when in the adviser's opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the fund may invest in taxable
short-term investments. The fund may also temporarily invest more than 20% of
its total assets in municipal obligations the interest on which is exempt from
federal income tax but is a tax preference item and/or is subject to Maryland
state and local income taxes. The fund may not achieve its investment objective
when so invested.
3
<PAGE>
PENNSYLVANIA TAX-FREE INCOME TRUST
INVESTMENT OBJECTIVE: 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
PRINCIPAL INVESTMENT STRATEGIES:
The fund 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. Securities considered for
investment must be rated investment grade. Investment grade securities are those
within the four highest grades by Moody's, S&P or Fitch, or, if unrated by
Moody's, S&P or Fitch, 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. The 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, industrial development bonds or airport bonds, or in
securities the interest on which is paid from revenues of a similar type of
project.
Under normal circumstances, the fund will maintain at least 80% of its total
assets in Pennsylvania municipal obligations the interest on which is not a tax
preference item for purposes of the federal alternative minimum tax.
The fund may invest in securities of any maturity. When selecting securities for
the fund, the adviser maintains the fund's dollar-weighted average maturity
between 12 and 24 years. The adviser establishes a duration target for the fund
based on the adviser's investment outlook. This outlook is determined by the
adviser's analysis of the economy, fiscal and monetary policy, and international
events. Factors directly impacting the municipal market, such as supply, demand,
and legislative developments, are also incorporated in the adviser's outlook.
The adviser analyzes each industry and issuer to determine its credit
fundamentals and outlook. Issuers are scrutinized not only for their ability to
make timely interest and principal payments, but for the stability of their
financial position and ratings. The tax consequences of trading activity are
always considered, and only those trades that the adviser believes add value to
shareholders on an after-tax basis are executed.
Securities may be sold because their credit fundamentals have changed, or in
order to buy a security which the adviser believes will produce greater
risk-adjusted returns.
For temporary defensive purposes, when in the adviser's opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the fund may invest in taxable
short-term investments. The fund may also temporarily invest more than 20% of
its total assets in municipal obligations the interest on which is exempt from
federal income tax but is a tax preference item and/or is subject to
Pennsylvania personal income tax. The fund may not achieve its investment
objective when so invested.
4
<PAGE>
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
INVESTMENT OBJECTIVE: a high level of current income exempt from federal
income tax, consistent with prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES:
The fund 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. Securities considered for
investment must be rated investment grade. Investment grade securities are those
within the four highest grades by Moody's, S&P or Fitch, or, if unrated by
Moody's, S&P or Fitch, deemed by the adviser to be of comparable quality. The
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, industrial development bonds or airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project.
Under normal circumstances the fund will maintain at least 80% of its total
assets in municipal obligations the interest on which is not a tax preference
item for purposes of the federal alternative minimum tax.
The fund may invest in securities of any maturity. When selecting securities for
the fund, the adviser maintains the fund's dollar-weighted average maturity
between 2 and 10 years. The adviser establishes a duration target for the fund
based on the adviser's investment outlook. This outlook is determined by the
adviser's analysis of the economy, fiscal and monetary policy, and international
events. Factors directly impacting the municipal market, such as supply, demand,
and legislative developments, are also incorporated in the adviser's outlook.
The adviser analyzes each industry and issuer to determine its credit
fundamentals and outlook. Issuers are scrutinized not only for their ability to
make timely interest and principal payments, but for the stability of their
financial position and ratings. The tax consequences of trading activity are
always considered, and only those trades that the adviser believes add value to
shareholders on an after-tax basis are executed.
Securities may be sold because their credit fundamentals have changed, or in
order to buy a security which the adviser believes will produce greater
risk-adjusted returns.
For temporary defensive purposes, when in the adviser's opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the fund may invest in taxable
short-term investments. The fund may also temporarily invest more than 20% of
its total assets in municipal obligations the interest on which is exempt from
federal income tax but is a tax preference item. The fund may not achieve its
investment objective when so invested.
5
<PAGE>
[icon] P R I N C I P A L R I S K S
The following are the principal risks of investing in each of the funds.
IN GENERAL -
Investors can lose money by investing in the funds. There is no assurance that a
fund will meet its investment objective. As with all mutual funds, an investment
in any of these funds is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
INTEREST RATE RISK -
Each fund is subject to interest rate risk, which is the possibility that the
market prices of the funds' municipal debt investments may decline due to an
increase in market interest rates. Generally, the longer the maturity of a
fixed-income security, the greater is the effect on its value when rates
increase.
RISK OF CHANGES IN ECONOMIC CONDITIONS OR GOVERNMENTAL POLICIES -
Changes in economic conditions in, or governmental policies of, the State of
Maryland or the Commonwealth of Pennsylvania could have a significant impact on
the performance of Maryland Tax-Free and Pennsylvania Tax-Free, respectively.
SECTOR FOCUS AND ISSUER NON-DIVERSIFICATION -
A fund focusing a significant portion of its investments in a single sector of
the municipal securities market will be more susceptible to factors adversely
affecting one issue of bonds in that sector than would a fund not following this
practice.
Each fund is a non-diversified fund. The percentage of each fund's assets
invested in any single issuer is not limited by the Investment Company Act of
1940. When a fund's assets are invested in the securities of a limited number of
issuers, the value of its shares will be more susceptible to any single
economic, political or regulatory event than shares of a diversified fund.
The funds may invest in securities issued by hospitals and other healthcare
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.
CREDIT RISK -
There is a risk that a fixed-income security could be downgraded or could
default in payment of principal or interest. Credit ratings are the opinions of
the private companies that rate companies or their securities; they are not
guarantees.
Each fund may invest in bonds that are issued by or on behalf of public
authorities to finance privately operated facilities. Payment of principal and
interest on these bonds depends on the stream of revenue from the facility or
the credit standing of the private operator; they are not supported by the
taxing power of the public authority that issued them.
CALL RISK -
Many fixed-income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed-income securities
experience when rates decline. Furthermore, the funds reinvest the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
6
<PAGE>
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 the federal government
to restructure the federal income tax system could adversely affect the value of
municipal securities.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, the adviser, administrator,
distributor and other outside service providers and could impact municipalities
or companies in which the funds invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
7
<PAGE>
[icon] P E R F O R M A N C E
The information below provides an indication of the risks of investing in a fund
by showing changes in the fund's performance from year to year. Annual returns
assume reinvestment of all dividends and distributions. Historical performance
of a fund does not necessarily indicate what will happen in the future. Sales
charges have not been deducted from total returns (in the bar chart); if these
amounts had been deducted, total returns in the bar chart would be less than
those shown.
MARYLAND TAX-FREE INCOME TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
25%
20%
15% 14.81
12.11
10%
8.33 7.69
5% 5.59
3.57
0%
-3.12
- -5%
1992 1993 1994 1995 1996 1997 1998
The fund's year-to-date total return as of June 30, 1999 was -1.32%.
DURING THE SEVEN CALENDAR YEARS ENDED DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1995 + 5.73%
-----------------------------------------------------------------------
Worst quarter: March 31, 1994 - 3.92%
-----------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the Lehman Brothers Municipal Bond Index.(c)
-----------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
-----------------------------------------------------------------------
Maryland Tax-Free Income Fund + 2.68% + 4.96% + 6.89%(a)
-----------------------------------------------------------------------
Lehman Brothers Municipal Bond + 6.48% + 6.22% + 7.87%(b)
Index
-----------------------------------------------------------------------
(a) May 1, 1991 (commencement of operations) to December 31, 1998.
(b) For the period May 31, 1991 to December 31, 1998.
(c) The figures in this table include changes in principal value, reinvested
dividends and capital gain distributions, if any, and assume the maximum sales
charge.
8
<PAGE>
PENNSYLVANIA TAX-FREE INCOME TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
16%
15.25
14%
12.71
12%
10%
9.46 8.10
8%
6%
5.76
4%
3.30
2%
0%
- -2%
-3.82
- -4%
1992 1993 1994 1995 1996 1997 1998
The fund's year-to-date total return as of June 30, 1999 was -0.88%.
DURING THE SEVEN CALENDAR YEARS ENDED DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1993 + 8.71%
-----------------------------------------------------------------------
Worst quarter: March 31, 1996 - 1.80%
-----------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the Lehman Brothers Municipal Bond Index.(c)
------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
------------------------------------------------------------------------
Pennsylvania Tax-Free Income + 2.85% + 4.94% + 7.13%(a)
Fund
------------------------------------------------------------------------
Lehman Brothers Municipal Bond + 6.48% + 6.22% + 7.86%(b)
Index
------------------------------------------------------------------------
(a) August 1, 1991 (commencement of operations) to December 31, 1998.
(b) For the period August 31, 1991 to December 31, 1998.
(c) The figures in this table include changes in principal value, reinvested
dividends and capital gain distributions, if any, and assume the maximum sales
charge.
9
<PAGE>
TAX-FREE INTERMEDIATE-TERM INCOME TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
12%
11.95
10%
9.95
8%
6% 6.09
5.26
4%
3.49
2%
0%
-1.96
- -2%
1993 1994 1995 1996 1997 1998
The fund's year-to-date total return as of June 30, 1999 was -1.17%.
DURING THE SIX CALENDAR YEARS ENDED DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1995 +4.70%
-----------------------------------------------------------------------
Worst quarter: March 31, 1994 -2.83%
-----------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the Lehman Brothers Seven-Year Municipal Bond Index.(c)
-----------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
-----------------------------------------------------------------------
Tax-Free Intermediate Term +3.15% +4.45% +5.48%(a)
-----------------------------------------------------------------------
Lehman Brothers Seven Year
Municipal Bond Index +6.22% +5.79% +6.76%(b)
-----------------------------------------------------------------------
(a) November 9, 1992 (commencement of operations) to December 31, 1998.
(b) For the period November 30, 1992 to December 31, 1998.
(c) The figures in this table include changes in principal value, reinvested
dividends and capital gain distributions, if any, and assume the maximum sales
charge.
10
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The tables below describe the fees and expenses you will incur as an investor in
a fund. Each fund pays operating expenses directly out of its assets. Other
expenses include transfer agency, custody, professional and registration fees.
The fees shown are current fees, and the expenses shown are based on expenses
for the fiscal year ended March 31, 1999. The fees and expenses are calculated
as a percentage of average net assets.
SHAREHOLDER FEES (fees paid directly from your investment)
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
Maximum sales charge
(load) imposed on
purchases (as a % of
offering price) 2.75% (a) 2.75% (a) 2.00% (a)
(a) See "How to Invest," page __, for sales charge schedules. The sales charge
on each fund will be waived for all shares purchased through July 31, 2000. If
the waiver is not extended beyond that date, any later 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.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
-------------------------------------------------------------------------
PRIMARY SHARES OF: MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
-------------------------------------------------------------------------
Management fees(b) 0.55% 0.55% 0.55%
-------------------------------------------------------------------------
Distribution and Service (12b-1) 0.25% 0.25% 0.25%
fees
-------------------------------------------------------------------------
Other Expenses 0.14% 0.20% 0.23%
-------------------------------------------------------------------------
Total Annual Fund Operating 0.94% 1.00% 1.03%
Expenses(b)
-------------------------------------------------------------------------
(b) Pursuant to a voluntary expense limitation, the adviser and Legg Mason have
agreed to waive management 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, 2000 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. With these waivers, the
management fee, other expenses and total operating expenses relating to Primary
Shares are as follows: for Maryland Tax-Free, 0.31%, 0.14% and 0.70% of average
net assets; for Pennsylvania Tax-Free, 0.25%, 0.20% and 0.70% of average net
assets; and for Tax Free Intermediate, 0.22%, 0.23% and 0.70% of average net
assets.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
11
<PAGE>
---------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------
Maryland Tax-Free
-----------------
Assuming the maximum initial
2.75% sales charge $368 $566 $781 $1398
Assuming no initial sales charge $96 $300 $520 $1155
Pennsylvania Tax-Free
---------------------
Assuming the maximum initial
2.75% sales charge $374 $585 $812 $1466
Assuming no initial sales charge $102 $318 $552 $1225
Tax-Free Intermediate
---------------------
Assuming the maximum initial
2.00% sales charge $303 $521 $757 $1434
Assuming no initial sales charge $105 $328 $569 $1259
---------------------------------------------------------------------------
12
<PAGE>
[icon] M A N A G E M E N T
ADVISER AND ADMINISTRATOR:
LEGG MASON CAPITAL MANAGEMENT, INC., 100 Light Street, Baltimore, Maryland
21202, is the funds' adviser. The adviser is responsible for 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 has contracted to pay the adviser an advisory fee equal to an annual rate
of 0.55% of the fund's average daily net assets. Because of fee waivers, the
funds paid advisory fees for the fiscal year ended March 31, 1999 as follows:
Maryland Tax-Free 0.31%
Pennsylvania Tax-Free 0.25%
Tax-Free Intermediate 0.22%
The adviser acts as adviser to private accounts and investment company
portfolios with aggregate assets as of June 30, 1999 of over $4 billion.
LEGG MASON FUND ADVISER, INC., 100 Light Street, Baltimore, Maryland 21202,
administers the affairs of the funds and provides the funds with office
facilities and personnel reasonably necessary for the operation of the funds.
The adviser, not the fund, pays the administrator a fee equal to an annual rate
of 0.05% of each fund's average daily net assets.
The administrator acts as investment adviser or manager to private accounts and
twenty investment company portfolios with aggregate assets as of June 30,1999 of
over $19 billion.
PORTFOLIO MANAGEMENT:
An investment committee is responsible for the day-to-day management of each
fund.
13
<PAGE>
DISTRIBUTOR OF THE FUNDS' SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares. Each fund has adopted a plan
that allows it to pay distribution fees and shareholder service fees for the
sale of its shares and for services provided to shareholders. Under each plan,
the funds may pay the distributor an annual fee equal to an annual rate of 0.25%
of that fund's average daily net assets attributable to Primary Shares.
Because these fees are paid out of the fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell Primary
Shares of each fund. The distributor pays these brokers up to 90% of the service
fee that it receives from a fund for those sales.
The adviser, administrator and distributor are wholly-owned subsidiaries of Legg
Mason, Inc., a financial services holding company.
14
<PAGE>
[icon] H O W T O I N V E S T
To open a regular account or a retirement account with one or more of the funds,
contact a Legg Mason financial advisor or other entity that has entered into an
agreement with the funds' distributor to sell shares of the Legg Mason family of
funds. A Legg Mason financial advisor will explain the shareholder services
available from our funds and answer any questions you may have. The minimum
initial investment for regular accounts and retirement accounts is $1,000 and
the minimum for each purchase of additional shares is $100, except as noted
below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. Contact your Legg Mason
financial advisor or other entity offering the funds to discuss which one might
be appropriate for you.
SALES CHARGE WAIVER
The sales charge on each fund will be waived for all shares purchased through
July 31, 2000.
SALES CHARGE SCHEDULE FOR TAX-FREE INTERMEDIATE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Sales Charge as a Sales Charge as a Percentage
Percentage of Public of Net Amount Invested (Net
Amount of Purchase Offering Price Asset Value)
<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>
SALES CHARGE SCHEDULE FOR MARYLAND TAX-FREE AND PENNSYLVANIA TAX-FREE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Sales Charge as a Sales Charge as a Percentage
Percentage of Public of Net Amount Invested (Net
Amount of Purchase Offering 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>
15
<PAGE>
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
----------------------------------------------------------------------------
IN PERSON Give your financial advisor a check for $100 or more
payable to the fund
----------------------------------------------------------------------------
MAIL Mail your check, payable to the fund, for $100 or more
to your financial advisor
----------------------------------------------------------------------------
TELEPHONE Call your financial advisor to transfer available cash
OR WIRE balances in your brokerage account or to transfer
money from your bank directly to Legg Mason. Wire transfers
may be subject to a service charge by your bank.
----------------------------------------------------------------------------
FUTURE FIRST Contact your Legg Mason financial advisor to enroll in
SYSTEMATIC Legg Mason's Future First Systematic Investment Plan.
INVESTMENT Under this plan, you may arrange for automatic monthly
PLAN investments in the fund of $50 or more. The fund's
transfer agent will transfer funds monthly from your Legg
Mason account or from your checking account to purchase
shares of the fund.
----------------------------------------------------------------------------
AUTOMATIC Arrangements may be made with some employers and
INVESTMENTS financial institutions for regular automatic monthly
investments of $50 or more in shares of the fund. You may
also reinvest dividends from certain unit investment trusts
in shares of the fund.
----------------------------------------------------------------------------
Call your financial advisor or another entity offering the funds for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
Purchase orders received by your financial advisor or the entity offering the
funds before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close of
the exchange on that day. Orders received after the close of the exchange will
be processed at the fund's net asset value as of the close of the exchange on
the next day the exchange is open. Payment must be made within three business
days to Legg Mason.
You will begin to earn dividends on shares of the funds as of the settlement
date, which is normally the third business day after your order is placed with a
financial advisor.
Not every fund listed in this Prospectus is available for purchase in every
jurisdiction. Please consult your Legg Mason financial advisor concerning the
availability of a particular fund.
16
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
----------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial advisor or entity offering the
fund and request a redemption. 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.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you.
Wire requests will be subject to a fee of $18. Be sure that your
financial advisor has your bank account information on file.
The funds will follow reasonable procedures to ensure the
validity of any telephone redemption request, such as
requesting identifying information from callers or employing
identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, if the funds
follow reasonable procedures to ensure the validity of
telephone redemption requests, you may be held responsible for
any fraudulent telephone order.
----------------------------------------------------------------------------
MAIL Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners of
the account and their signatures guaranteed without
qualification. You may obtain a signature guarantee from most
banks or securities dealers.
----------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial advisor or another entity.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
Each fund has reserved the right under certain conditions to redeem its shares
in kind by distributing portfolio securities in payment for redemptions.
17
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Primary Share is determined daily as of the close of the New
York Stock Exchange, on every day the exchange is open. To calculate each fund's
Primary Share price, the fund's assets attributable to Primary Shares are valued
and totaled, liabilities are subtracted, and the resulting net assets are
divided by the number of Primary Shares outstanding.
Securities for which market quotations are readily available are valued at the
last sale price of the day for a comparable position, or, in the absence of any
such sales, the last available bid price for a comparable position. Where such
market quotations are not readily available, securities are valued based upon
appraisals received from an independent pricing service. Securities with
remaining maturities of 60 days or less are valued at amortized cost.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds. A fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a
period of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
18
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial advisor or other entity offering the funds for sale.
CONFIRMATIONS AND ACCOUNT STATEMENTS:
You will receive from Legg Mason a confirmation after each transaction involving
Primary Shares (except a reinvestment of dividends, capital gain distributions
and purchases made through the Future First Systematic Investment Plan or
through automatic investments). Legg Mason or the entity through which you
invest will send you account statements monthly unless there has been no
activity in the account, in which case a statement will be sent to you
quarterly. Legg Mason will send you statements quarterly if you participate in
the Future First Systematic Investment Plan or if you purchase shares through
automatic investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares of a fund with a net asset value of
$5,000 or more, you may elect to make systematic withdrawals from the fund. The
minimum amount for each withdrawal is $50. If you are making withdrawals from a
fund pursuant to the systematic withdrawal plan, then you should not purchase
shares of that fund.
EXCHANGE PRIVILEGE:
Primary fund shares may be exchanged for primary shares of any of the other Legg
Mason funds, provided these funds are eligible for sale in your state of
residence. You can request an exchange in writing or by phone. Be sure to read
the current prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has a sales charge higher than the sales
charge applicable to the fund you own. In addition, an exchange of a fund's
shares will be treated as a sale of the shares and any gain on the transaction
may be subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' written notice
to shareholders
19
<PAGE>
[icon] D I V I D E N D S A N D T A X E S
Dividends from net investment income of each fund are declared daily and paid
monthly.
Dividends from 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) 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 a federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Primary Shares of the fund. If you wish to receive dividends and/or
other distributions in cash, you must notify the fund at least 10 days before
the next dividend and/or other distribution is paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Under normal circumstances, substantially all dividends paid by the funds will
be exempt from federal income tax. From a technical standpoint, each fund may
pay such dividends to its shareholders if at least 50% of its total assets at
the close of each quarter of its taxable year consists of certain obligations
the interest on which is exempt from federal income tax. (These dividends,
though tax-exempt, nevertheless must be reported on the recipient's federal
income tax return).
Generally, 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 those taxes. Similarly, individual shareholders of Pennsylvania Tax-Free
who are otherwise subject to the Pennsylvania personal income tax will generally
not be subject to that tax on distributions by the fund that are attributable to
interest on Pennsylvania municipal obligations.
Fund dividends and other distributions will be taxable to investors (other than
retirement plans and other tax exempt investors) whether received in cash or
reinvested in additional Primary Shares of the fund. Dividends of any taxable
net investment income and net short-term capital gains will be taxable as
ordinary income. Distributions of a fund's net capital gain will be taxable as
long-term capital gain, regardless of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Because each investor's tax situation is different, please consult your tax
advisor about federal, state and local tax considerations.
20
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand each fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single fund share. Total return represents the rate that
an investor would have earned (or lost) on an investment in a fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by the funds' independent accountants, PricewaterhouseCoopers LLP, whose
report, along with the funds' financial statements, is incorporated by reference
into the Statement of Additional Information (see back cover) and is included in
the annual report. The annual report is available upon request by calling
toll-free 1-800-822-5544.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Investment Operations Distributions
----------------------------------------------------------------------------------------------------------------------
For the Net Asset Net Net Realized From Net
Years Value, Investment & Unrealized Realized Total Net Asset
Ended Beginning Income Gain Total From From Net Gain on Distribu- Value, End
Mar. 31, of Year (Loss) (Loss) On Investment Investment Investments tions of Year
Investments Operations Income
----------------------------------------------------------------------------------------------------------------------
Maryland Tax-Free - Primary Class
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
1999 $16.39 $.78D $.05 $.83 $(.78) $(.05) $(.83) $16.39
----------------------------------------------------------------------------------------------------------------------
1998 15.91 .81D .59 1.40 (.81) (.11) (.92) 16.39
----------------------------------------------------------------------------------------------------------------------
1997 16.07 .83D (.09) .74 (.83) (.07) (.90) 15.91
----------------------------------------------------------------------------------------------------------------------
1996 15.87 .86D .25 1.11 (.86) (.05) (.91) 16.07
----------------------------------------------------------------------------------------------------------------------
1995 15.69 .83D .18 1.01 (.83) -- (.83) 15.87
----------------------------------------------------------------------------------------------------------------------
Pennsylvania Tax-Free - Primary Class
----------------------------------------------------------------------------------------------------------------------
1999 $16.48 $.80E $.10 $.90 $(.80) $(.05) $(.85) $16.53
----------------------------------------------------------------------------------------------------------------------
1998 15.80 .81E .71 1.52 (.81) (.03) (.84) 16.48
----------------------------------------------------------------------------------------------------------------------
1997 16.10 .83E (.11) .72 (.83) (.19) (1.02) 15.80
----------------------------------------------------------------------------------------------------------------------
1996 16.02 .89E .15 1.04 (.89) (.07) (.96) 16.10
----------------------------------------------------------------------------------------------------------------------
1995 15.80 .85E .22 1.07 (.85) -- (.85) 16.02
----------------------------------------------------------------------------------------------------------------------
Tax-Free Intermediate-Term - Primary Class
----------------------------------------------------------------------------------------------------------------------
1999 $15.61 $.67F $.08 $.75 $(.67) $(.01) $(.68) $15.68
----------------------------------------------------------------------------------------------------------------------
1998 15.22 .67F .39 1.06 (.67) -- (.67) 15.61
----------------------------------------------------------------------------------------------------------------------
1997 15.34 .68F (.12) .56 (.68) -- (.68) 15.22
----------------------------------------------------------------------------------------------------------------------
1996 15.06 .68F .28 .96 (.68) -- (.68) 15.34
----------------------------------------------------------------------------------------------------------------------
1995 14.96 .72F .10 .82 (.72) -- (.72) 15.06
----------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------
Net Investment
Income to Net Assets,
Total Expenses Net Expenses Average Net Portfolio End of Year
Total to Average Net to Average Net Assets Turnover Rate (thousands)
Return Assets Assets
(A) (B) (C)
-----------------------------------------------------------------------------------------------------------------------
Maryland Tax-Free - Primary Class
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
1999 5.16% .70%D .70%D 4.71%D 12.9% $166,458
-----------------------------------------------------------------------------------------------------------------------
1998 8.97% .70%D .70%D 4.97%D 18.9% 154,468
-----------------------------------------------------------------------------------------------------------------------
1997 4.73% .67%D .66%D 5.18%D 6.0% 145,974
-----------------------------------------------------------------------------------------------------------------------
1996 7.11% .59%D .58%D 5.29%D 14.1% 146,645
-----------------------------------------------------------------------------------------------------------------------
1995 6.60% -- .54%D 5.32%D 9.5% 142,314
-----------------------------------------------------------------------------------------------------------------------
Pennsylvania Tax-Free - Primary Class
-----------------------------------------------------------------------------------------------------------------------
1999 5.54% .70%E .70%E 4.82%E 10.6% $75,093
-----------------------------------------------------------------------------------------------------------------------
1998 9.80% .71%E .70%E 5.00%E 14.1% 68,048
-----------------------------------------------------------------------------------------------------------------------
1997 4.61% .67%E .66%E 5.20%E 13.6% 64,875
-----------------------------------------------------------------------------------------------------------------------
1996 6.52% .54%E .53%E 5.42%E 17.2% 65,275
-----------------------------------------------------------------------------------------------------------------------
1995 7.03% -- .49%E 5.42%E 2.1% 63,929
-----------------------------------------------------------------------------------------------------------------------
21A
<PAGE>
-----------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------
Net Investment
Income to Net Assets,
Total Expenses Net Expenses Average Net Portfolio End of Year
Total to Average Net to Average Net Assets Turnover Rate (thousands)
Return Assets Assets
(A) (B) (C)
-----------------------------------------------------------------------------------------------------------------------
Tax-Free Intermediate-Term - Primary Class
-----------------------------------------------------------------------------------------------------------------------
1999 4.82% .70%F .70%F 4.24%F 17.9% $63,502
-----------------------------------------------------------------------------------------------------------------------
1998 7.12% .71%F .70%F 4.34%F 9.0% 59,255
-----------------------------------------------------------------------------------------------------------------------
1997 3.71% .67%F .66%F 4.43%F 8.9% 54,736
-----------------------------------------------------------------------------------------------------------------------
1996 6.47% .57%F .56%F 4.41%F -- 60,042
-----------------------------------------------------------------------------------------------------------------------
1995 5.65% -- .34%F 4.83%F 24.8% 48,837
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Excluding sales charge. Sales charges are being waived for the period
November 3, 1997 through July 31, 2000.
(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: 0.50% until June 30, 1994; 0.55% until March 31,
1995; 0.65% until December 31, 1996; and 0.70% through July 31, 2000. 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:
1999, 0.94%; 1998, 0.93%; 1997, 0.96%; 1996, 0.95%; and 1995, 0.94%.
(E) Net of fees waived by the adviser in excess of voluntary expense
limitations as follows: 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, 2000. 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: 1999, 1.00%; 1998, 1.00%; 1997, 1.04%; 1996,
1.02%; and 1995, 1.01%
(F) Net of fees waived by the adviser in excess of voluntary expense
limitations as follows: 0.30% until June 30, 1994; 0.35% until July 31,
1995; 0.65% until December 31, 1996; and 0.70% through July 31, 2000. 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:
1999, 1.03%; 1998, 1.06%; 1997, 1.11%, 1996, 1.10%; and 1995, 1.04%
22
<PAGE>
L e g g M a s o n T a x - F r e e I n c o m e F u n d
The following additional information about the funds is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) the prospectus. The SAI provides additional details about
the funds and their policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC (phone 1-800-SEC-0330).
Reports and other information about the funds are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-038 SEC file number 811-6223
23
<PAGE>
Legg Mason Tax-Free Income Fund:
Navigator Class of Legg Mason Maryland Tax-Free Income Trust
Navigator Class of Legg Mason Pennsylvania Tax-Free Income Trust
Navigator Class of Legg Mason Tax-Free Intermediate-Term Income Trust
NAVIGATOR SHARES PROSPECTUS July 31, 1999
logo
HOW TO INVEST SM
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
TABLE OF CONTENTS
About the funds:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
About the investment:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
2
<PAGE>
Legg Mason Tax-Free Income Funds
[icon] INVESTMENT OBJECTIVES
MARYLAND TAX-FREE INCOME TRUST
INVESTMENT OBJECTIVE: 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.
PRINCIPAL INVESTMENT STRATEGIES:
The fund 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. Securities considered for investment must
be investment grade. Investment grade securities are those rated within the four
highest grades by Moody's Investors Service, Inc., Standard & Poor's or Fitch
Investors Service, Inc. or, if unrated by Moody's, S&P or Fitch, deemed by the
adviser to be of comparable quality. The 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, industrial development bonds or
airport bonds, or in securities the interest on which is paid from revenues of a
similar type of project.
Under normal circumstances, the fund will maintain at least 80% of its total
assets in Maryland municipal obligations the interest on which is not a tax
preference item for purposes of the federal alternative minimum tax.
The fund may invest in securities of any maturity. When selecting securities for
the fund, the adviser maintains the fund's dollar-weighted average maturity
between 12 and 24 years. The adviser establishes a duration target for the fund
based on the adviser's investment outlook. This outlook is determined by the
adviser's analysis of the economy, fiscal and monetary policy, and international
events. Factors directly impacting the municipal market, such as supply, demand,
and legislative developments, are also incorporated in the adviser's outlook.
The adviser analyzes each industry and issuer to determine its credit
fundamentals and outlook. Issuers are scrutinized not only for their ability to
make timely interest and principal payments, but for the stability of their
financial position and ratings. The tax consequences of trading activity are
always considered, and only those trades that the adviser believes add value to
shareholders on an after-tax basis are executed.
Securities may be sold because their credit fundamentals have changed, or in
order to buy a security which the adviser believes will produce greater
risk-adjusted returns.
For temporary defensive purposes, when in the adviser's opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the fund may invest in taxable
short-term investments. The fund may also temporarily invest more than 20% of
its total assets in municipal obligations the interest on which is exempt from
federal income tax but is a tax preference item and/or is subject to Maryland
state and local income taxes. The fund may not achieve its investment objective
when so invested.
3
<PAGE>
PENNSYLVANIA TAX-FREE INCOME TRUST
INVESTMENT OBJECTIVE: 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
PRINCIPAL INVESTMENT STRATEGIES:
The fund 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. Securities considered for
investment must be rated investment grade. Investment grade securities are those
within the four highest grades by Moody's, S&P or Fitch, or, if unrated by
Moody's, S&P or Fitch, 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. The 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, industrial development bonds or airport bonds, or in
securities the interest on which is paid from revenues of a similar type of
project.
Under normal circumstances, the fund will maintain at least 80% of its total
assets in Pennsylvania municipal obligations the interest on which is not a tax
preference item for purposes of the federal alternative minimum tax.
The fund may invest in securities of any maturity. When selecting securities for
the fund, the adviser maintains the fund's dollar-weighted average maturity
between 12 and 24 years. The adviser establishes a duration target for the fund
based on the adviser's investment outlook. This outlook is determined by the
adviser's analysis of the economy, fiscal and monetary policy, and international
events. Factors directly impacting the municipal market, such as supply, demand,
and legislative developments, are also incorporated in the adviser's outlook.
The adviser analyzes each industry and issuer to determine its credit
fundamentals and outlook. Issuers are scrutinized not only for their ability to
make timely interest and principal payments, but for the stability of their
financial position and ratings. The tax consequences of trading activity are
always considered, and only those trades that the adviser believes add value to
shareholders on an after-tax basis are executed.
Securities may be sold because their credit fundamentals have changed, or in
order to buy a security which the adviser believes will produce greater
risk-adjusted returns.
For temporary defensive purposes, when in the adviser's opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the fund may invest in taxable
short-term investments. The fund may also temporarily invest more than 20% of
its total assets in municipal obligations the interest on which is exempt from
federal income tax but is a tax preference item and/or is subject to
Pennsylvania personal income tax. The fund may not achieve its investment
objective when so invested.
4
<PAGE>
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
INVESTMENT OBJECTIVE: a high level of current income exempt from federal
income tax, consistent with prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES:
The fund 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. Securities considered for
investment must be rated investment grade. Investment grade securities are those
within the four highest grades by Moody's, S&P or Fitch, or, if unrated by
Moody's, S&P or Fitch, deemed by the adviser to be of comparable quality. The
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, industrial development bonds or airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project.
Under normal circumstances the fund will maintain at least 80% of its total
assets in municipal obligations the interest on which is not a tax preference
item for purposes of the federal alternative minimum tax.
The fund may invest in securities of any maturity. When selecting securities for
the fund, the adviser maintains the fund's dollar-weighted average maturity
between 2 and 10 years. The adviser establishes a duration target for the fund
based on the adviser's investment outlook. This outlook is determined by the
adviser's analysis of the economy, fiscal and monetary policy, and international
events. Factors directly impacting the municipal market, such as supply, demand,
and legislative developments, are also incorporated in the adviser's outlook.
The adviser analyzes each industry and issuer to determine its credit
fundamentals and outlook. Issuers are scrutinized not only for their ability to
make timely interest and principal payments, but for the stability of their
financial position and ratings. The tax consequences of trading activity are
always considered, and only those trades that the adviser believes add value to
shareholders on an after-tax basis are executed.
Securities may be sold because their credit fundamentals have changed, or in
order to buy a security which the adviser believes will produce greater
risk-adjusted returns.
For temporary defensive purposes, when in the adviser's opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the fund may invest in taxable
short-term investments. The fund may also temporarily invest more than 20% of
its total assets in municipal obligations the interest on which is exempt from
federal income tax but is a tax preference item. The fund may not achieve its
investment objective when so invested.
5
<PAGE>
[icon] P R I N C I P A L R I S K S
The following are the principal risks of investing in each of the funds.
IN GENERAL -
Investors can lose money by investing in the funds. There is no assurance that a
fund will meet its investment objective. As with all mutual funds, an investment
in any of these funds is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
INTEREST RATE RISK -
Each fund is subject to interest rate risk, which is the possibility that the
market prices of the funds' municipal debt investments may decline due to an
increase in market interest rates. Generally, the longer the maturity of a
fixed-income security, the greater is the effect on its value when rates
increase.
RISK OF CHANGES IN ECONOMIC CONDITIONS OR GOVERNMENTAL POLICIES -
Changes in economic conditions in, or governmental policies of, the State of
Maryland or the Commonwealth of Pennsylvania could have a significant impact on
the performance of Maryland Tax-Free and Pennsylvania Tax-Free, respectively.
SECTOR FOCUS AND ISSUER NON-DIVERSIFICATION -
A fund focusing a significant portion of its investments in a single sector of
the municipal securities market will be more susceptible to factors adversely
affecting one issue of bonds in that sector than would a fund not following this
practice.
Each fund is a non-diversified fund. The percentage of each fund's assets
invested in any single issuer is not limited by the Investment Company Act of
1940. When a fund's assets are invested in the securities of a limited number of
issuers, the value of its shares will be more susceptible to any single
economic, political or regulatory event than shares of a diversified fund.
The funds may invest in securities issued by hospitals and other healthcare
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.
CREDIT RISK -
There is a risk that a fixed-income security could be downgraded or could
default in payment of principal or interest. Credit ratings are the opinions of
the private companies that rate companies or their securities; they are not
guarantees.
Each fund may invest in bonds that are issued by or on behalf of public
authorities to finance privately operated facilities. Payment of principal and
interest on these bonds depends on the stream of revenue from the facility or
the credit standing of the private operator; they are not supported by the
taxing power of the public authority that issued them.
CALL RISK -
Many fixed-income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed-income securities
experience when rates decline. Furthermore, the funds reinvest the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
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
6
<PAGE>
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 the federal government
to restructure the federal income tax system could adversely affect the value of
municipal securities.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, the adviser, administrator,
distributor and other outside service providers and could impact municipalities
or companies in which the funds invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
7
<PAGE>
[icon] P E R F O R M A N C E
The information below provides an indication of the risks of investing in a fund
by showing changes in the fund's performance from year to year. Annual returns
assume reinvestment of all dividends and distributions. Historical performance
of a fund does not necessarily indicate what will happen in the future. As of
the date of this prospectus, the Navigator class of shares of Maryland Tax-Free
Income Trust and Tax-Free Intermediate-Term Income Trust have not yet commenced
operations. The Navigator class of Pennsylvania Tax-Free Income Trust commenced
operations on March 10, 1998. The returns presented are for the funds' Primary
Shares, which are not offered in this prospectus. Primary Shares and Navigator
Shares are invested in the same portfolio of securities. The annual returns for
Primary Shares and Navigator Shares would differ only to the extent that the
Navigator Shares would pay lower expenses, and therefore would have higher
returns. Sales charges on Primary Shares have not been deducted from total
returns (in the bar chart); if these amounts had been deducted, total returns in
the bar chart would be less than those shown.
MARYLAND TAX-FREE INCOME TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
25%
20%
15% 14.81
12.11
10%
8.33 7.69
5% 5.59
3.57
0%
-3.12
- -5%
1992 1993 1994 1995 1996 1997 1998
The fund's year-to-date total return for the fund's Primary Class as of June 30,
1999 was -1.32%.
DURING THE SEVEN CALENDAR YEARS ENDED DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1995 + 5.73%
-----------------------------------------------------------------------
Worst quarter: March 31, 1994 - 3.92%
-----------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998
are compared with the Lehman Brothers Municipal Bond Index.(c)
-----------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
-----------------------------------------------------------------------
Maryland Tax-Free Income Fund + 2.68% + 4.96% + 6.89%(a)
-----------------------------------------------------------------------
Lehman Brothers Municipal Bond + 6.48% + 6.22% + 7.87%(b)
Index
-----------------------------------------------------------------------
(a) May 1, 1991 (commencement of operations) to December 31, 1998.
(b) For the period May 31, 1991 to December 31, 1998.
(c) The figures in this table include changes in principal value, reinvested
dividends and capital gain distributions, if any, and assume the
maximum sales charge on Primary Shares.
8
<PAGE>
PENNSYLVANIA TAX-FREE INCOME TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
16%
15.25
14%
12.71
12%
9.46 8.10
8%
6%
5.76
4%
3.30
2%
0%
- -2%
-3.82
- -4%
1992 1993 1994 1995 1996 1997 1998
The year-to-date total return for the fund's Primary Class as of June 30, 1999
was - 0.88%.
DURING THE SEVEN CALENDAR YEARS OF THE PRIMARY CLASS ENDED DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1993 +8.71%
-----------------------------------------------------------------------
Worst quarter: March 31, 1996 -1.80%
-----------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the Lehman Brothers Municipal Bond Index.(d)
-----------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
-----------------------------------------------------------------------
Pennsylvania Tax-Free Income
Fund - Primary Shares 2.85% 4.94% 7.13% (a)
-----------------------------------------------------------------------
Pennsylvania Tax-Free Income
Fund - Navigator Shares N/A N/A 5.44% (b)
-----------------------------------------------------------------------
Lehman Brothers Municipal 6.48% 6.22% 7.86% (c)
Bond Index
-----------------------------------------------------------------------
(a) August 1, 1991 (commencement of operations of Primary Class) to December 31,
1998.
(b) For the period March 10, 1998 (commencement of sale of Navigator Class)
to December 31, 1998. The cumulative return presented in the table is
based only on a nine month period and therefore is not necessarily
representative of how the fund will perform over time.
(c) For the period August 31, 1991 to December 31, 1998.
(d) These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any, and assume the maximum sales charge on
Primary Shares.
9
<PAGE>
TAX-FREE INTERMEDIATE-TERM INCOME TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
12%
11.95
10%
9.95
8%
6% 6.09
5.26
4%
3.49
2%
0%
-1.96
- -2%
1993 1994 1995 1996 1997 1998
The year-to-date total return for the fund's Primary Class as of June 30, 1999
was -1.17%.
DURING THE SIX CALENDAR YEARS OF THE PRIMARY CLASS ENDED DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1995 +4.70%
-----------------------------------------------------------------------
Worst quarter: March 31, 1994 -2.83%
-----------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the Lehman Brothers Seven-Year Municipal Bond Index.(c)
----------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF PRIMARY CLASS
----------------------------------------------------------------------------
Tax-Free Intermediate +3.15% +4.45% +5.48% (a)
----------------------------------------------------------------------------
Lehman Brothers Seven-Year
Municipal Bond Index +6.22% +5.79% +6.76% (b)
----------------------------------------------------------------------------
(a) November 9, 1992 (commencement of operations of Primary Class) to December
31, 1998.
(b) For the period November 30, 1992 to December 31, 1998.
(c) The figures in this table include changes in principal value, reinvested
dividends and capital gain distributions, if any, and assume the maximum sales
charge on Primary Shares.
10
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur as an investor in
a fund. Each fund pays operating expenses directly out of its assets. Other
expenses include transfer agency, custody, professional and registration fees.
The funds have no sales charge and are not subject to a 12b-1 fee.
The fees shown are current fees, and the expenses shown are based on expenses
for the fiscal year ended March 31, 1999. 12
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
-------------------------------------------------------------------------
NAVIGATOR SHARES OF: MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
-------------------------------------------------------------------------
Management fees (a) 0.55% 0.55% 0.55%
-------------------------------------------------------------------------
Distribution and/or Service None None None
(12b-1) fees
-------------------------------------------------------------------------
Other Expenses (b) 0.14% 0.20% 0.23%
-------------------------------------------------------------------------
Total Annual Fund Operating 0.69% 0.75% 0.78%
Expenses (a)
-------------------------------------------------------------------------
(a) Pursuant to a voluntary expense limitation, the adviser has agreed to waive
management fees such that total operating expenses relating to Navigator Shares
(exclusive of taxes, interest, brokerage fees, and extraordinary expenses) will
not exceed an annual rate of 0.45% of average daily net assets of each fund
until July 31, 2000 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. With these waivers, the management
fee, other expenses and total operating expenses relating to Navigator Shares
are as follows: for Maryland Tax-Free, 0.31%, 0.14% and 0.45% of average net
assets; for Pennsylvania Tax-Free, 0.25%, 0.20% and 0.45% of average net assets;
and for Tax Free Intermediate, 0.22%, 0.23% and 0.45% of average net assets.
(b) Other expenses for Maryland Tax-Free and Tax-Free Intermediate are based on
estimated amounts for the current fiscal year.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
---------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------
Maryland Tax-Free 70 221 N/A N/A
Pennsylvania Tax-Free 77 240 417 930
Tax-Free Intermediate 80 249 N/A N/A
---------------------------------------------------------
11
<PAGE>
[icon] M A N A G E M E N T
ADVISER AND ADMINISTRATOR:
LEGG MASON CAPITAL MANAGEMENT, INC., 100 Light Street, Baltimore, Maryland
21202, is the funds' adviser. The adviser is responsible for 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 has contracted to pay the adviser an advisory fee equal to an annual rate
of 0.55% of the fund's average daily net assets. Because of fee waivers, the
funds paid advisory fees for the fiscal year ended March 31, 1999 as follows:
Maryland Tax-Free 0.31%
Pennsylvania Tax-Free 0.25%
Tax-Free Intermediate 0.22%
The adviser acts as adviser to private accounts and investment company
portfolios with aggregate assets as of June 30, 1999 of over $4 billion.
LEGG MASON FUND ADVISER, INC., 100 Light Street, Baltimore, Maryland 21202,
administers the affairs of the funds and provides the funds with office
facilities and personnel reasonably necessary for the operation of the funds.
The adviser, not the fund, pays the administrator a fee equal to an annual rate
of 0.05% of each fund's average daily net assets.
The administrator acts as investment adviser or manager to private accounts and
twenty investment company portfolios with aggregate assets as of June 30, 1999
of over $19 billion.
PORTFOLIO MANAGEMENT:
An investment committee is responsible for the day-to-day management of each
fund.
12
<PAGE>
DISTRIBUTOR OF THE FUNDS' SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland,
21202, is the distributor of each fund's shares under separate Underwriting
Agreements. Each Underwriting Agreement obligates Legg Mason to pay certain
expenses in connection with offering fund shares, including compensation to its
financial advisors, the printing and distribution of prospectuses, statements of
additional information and shareholder reports (after these have been printed
and mailed to existing shareholders at the funds' expense), supplementary sales
literature and advertising materials.
Legg Mason and the adviser may pay non-affiliated entities out of their own
assets to support the distribution of Navigator Shares and shareholder
servicing.
The adviser, administrator and distributor are wholly-owned subsidiaries of Legg
Mason, Inc., a financial services holding company.
13
<PAGE>
[icon] H O W T O I N V E S T
Navigator Shares are currently offered for sale only to:
o Institutional Clients of Legg Mason Trust Company for which they
exercise discretionary investment management responsibility and accounts
of the customers with such Institutional Clients ("Customers").
o qualified retirement plans managed on a discretionary basis and having
net assets of at least $200 million
o clients of Bartlett & Co. who, as of December 19, 1996, were
shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed Income
Fund and for whom Bartlett acts as an ERISA fiduciary
o certain institutions who were clients of Fairfield Group, Inc. as of
February 28, 1999 for investment of their own monies and monies for
which they act in a fiduciary capacity
o any qualified retirement plan of Legg Mason, Inc. or of any of its
affiliates
Eligible investors may purchase Navigator shares through a brokerage account at
Legg Mason. The minimum initial investment is $50,000 and the minimum for each
purchase of additional shares is $100. Institutional Clients may set different
minimums for their Customers' investments in accounts invested in Navigator
Shares.
Customers of certain Institutional Clients that have omnibus accounts with the
funds' transfer agent can purchase shares through those Institutions. The
distributor may pay such Institutional Clients for account servicing.
Institutional clients may charge their Customers for services provided in
connection with the purchase and redemption of shares. 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 by Institutional Clients. Any such fees, charges or
requirements imposed by Institutional Clients will be in addition to the fees
and requirements of this Prospectus.
Certain institutions that have agreements with Legg Mason or the funds may be
authorized to accept purchase and redemption orders on their behalf. Once the
authorized institution accepts the order, you will receive the next determined
net asset value. You should consult with your institution to determine the time
by which it must receive your order to get that day's share price. It is the
institution's responsibility to transmit your order to the fund in a timely
fashion.
Purchase orders received by Legg Mason before the close of the New York Stock
Exchange (normally 4:00 p.m., Eastern time) will be processed at the fund's net
asset value as of the close of the exchange on that day. Orders received after
the close of the exchange will be processed at the fund's net asset value as of
the close of the exchange on the next day the exchange is open. Payment must be
made within three business days to the selling organization.
You will begin to earn dividends on shares of the funds as of the settlement
date, which is normally the third business day after your order is placed with a
financial advisor.
14
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
To redeem your shares by telephone, call 1-800-822-5544.
Please have available the number of shares (or dollar amount) to be redeemed and
the account number.
The funds will follow reasonable procedures to ensure the validity of any
telephone redemption request, such as requesting identifying information from
callers or employing identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, if the funds follow reasonable
procedures to ensure the validity of telephone redemption requests, you may be
held responsible for any fraudulent telephone order.
Customers of Institutional Clients may redeem only in accordance with
instructions and limitations pertaining to their account at the Institution.
Redemption orders received by Legg Mason before the close of the exchange will
be transmitted to the funds' transfer agent. Your order will be processed at
that day's net asset value. Redemption orders received by Legg Mason after the
close of the exchange will be processed at the closing net asset value on the
next day the exchange is open.
Your order will be processed promptly and you will generally receive the
proceeds by mail to the name and address on the account registration within a
week. You may also have your telephone redemption requests paid by a direct wire
to a previously designated domestic commercial bank account.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Each fund has reserved the right under certain conditions to redeem its shares
in kind by distributing portfolio securities in payment for redemptions.
15
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Navigator Share is determined daily as of the close of the
New York Stock Exchange, on every day the exchange is open. To calculate each
fund's Navigator Share price, the fund's assets attributable to Navigator Shares
are valued and totaled, liabilities are subtracted, and the resulting net assets
are divided by the number of Navigator Shares outstanding.
Securities for which market quotations are readily available are valued at the
last sale price of the day for a comparable position, or, in the absence of any
such sales, the last available bid price for a comparable position. Where such
market quotations are not readily available, securities are valued based upon
appraisals received from an independent pricing service. Securities with
remaining maturities of 60 days or less are valued at amortized cost.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds. A fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a
period of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This
generally applies only in cases of very large redemptions, excessive
trading or during unusual market conditions. The funds may delay
redemptions beyond seven days, or suspend redemptions, only as permitted
by the SEC.
16
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
CONFIRMATION AND ACCOUNT STATEMENTS:
Confirmations will be sent to Institutional Clients after each transaction
involving Navigator Shares which will include the total number of shares being
held in safekeeping by the transfer agent. The transfer agent will send
confirmations of each purchase and redemption transaction (except a reinvestment
of dividends or capital gain distributions). Beneficial ownership of shares by
Customer accounts will be recorded by the Institutional Client and reflected in
their regular account statements.
EXCHANGE PRIVILEGE:
Navigator Shares of a fund may be exchanged for Navigator Shares of any other
Legg Mason funds or Legg Mason Cash Reserve Trust, provided these funds are
eligible for sale in your state of residence. You can request an exchange in
writing or by phone. Be sure to read the current prospectus for any fund into
which you are exchanging.
An exchange of a fund's shares will be treated as a sale of the shares and any
gain on the transaction may be subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' written
notice to shareholders
Some Institutional Clients may not offer all of the Navigator Funds for
exchange.
17
<PAGE>
[icon] D I V I D E N D S A N D T A X E S
Dividends from net investment income of each fund are declared daily and paid
monthly.
Dividends from 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) 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 a federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Navigator Shares of the fund. If you wish to receive dividends and/or
other distributions in cash, you must notify the fund at least 10 days before
the next dividend and/or other distribution is paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Under normal circumstances, substantially all dividends paid by the funds will
be exempt from federal income tax. From a technical standpoint, each fund may
pay such dividends to its shareholders if at least 50% of its total assets at
the close of each quarter of its taxable year consists of certain obligations
the interest on which is exempt from federal income tax. (These dividends,
though tax-exempt, nevertheless must be reported on the recipient's federal
income tax return).
Generally, 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 those taxes. Similarly, individual shareholders of Pennsylvania Tax-Free
who are otherwise subject to the Pennsylvania personal income tax will generally
not be subject to that tax on distributions by the fund that are attributable to
interest on Pennsylvania municipal obligations.
Fund dividends and other distributions will be taxable to investors (other than
retirement plans and other tax exempt investors) whether received in cash or
reinvested in additional Navigator Shares of the fund. Dividends of any taxable
net investment income and net short-term capital gains will be taxable as
ordinary income. Distributions of a fund's net capital gain will be taxable as
long-term capital gain, regardless of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Because each investor's tax situation is different, please consult your tax
advisor about federal, state and local tax considerations.
18
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand Pennsylvania
Tax-Free's financial performance since inception. Certain information reflects
financial results for a single fund share. Total return represents the rate that
an investor would have earned (or lost) on an investment in a fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by the funds' independent accountants, PricewaterhouseCoopers LLP, whose
report, along with the funds' financial statements, is incorporated by reference
into the Statement of Additional Information (see back cover) and is included in
the annual report. The annual report is available upon request by calling
toll-free 1-800-822-5544. As of the date of this prospectus, Navigator Shares of
Maryland Tax-Free and Tax-Free Intermediate have not commenced operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Investment Distributions
Operations
- ------------------------------------------------------------------------------------------------------------------
Net
For the Net Net Net From Net Asset
Years Asset Investmen Realized Total From Net Realized Total Value,
Ended Value, Income & From Investment Gain on Distri- End of
Mar. 31, Beginning (Loss) Unrealized Investment Income Investments butions Year
of Year Gain Operations
(Loss) On
Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Pennsylvania Tax-Free - Navigator Class
- ------------------------------------------------------------------------------------------------------------------
1999 $16.48 $.84(D) $.10 $.94 $(.84) $(.05) $(.89) $16.53
- ------------------------------------------------------------------------------------------------------------------
1998 16.44 .05(D) .04 .09 (.05) - (.05) 16.48
- ------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-------------------------------------------------------------------------------------------------------------
Total Net Net
Expenses Expenses Investment
Total to Average to Average Income to Net Assets,
Return Net Assets Net Assets Average Net Portfolio End of Year
(A) (B) (C) Assets Turnover Rate (thousands)
- ------------------------------------------------------------------------------------------------------------------
Pennsylvania Tax-Free - Navigator Class
- ------------------------------------------------------------------------------------------------------------------
1999 5.79% .46%(D) .45(D)% 5.04%(D) 10.6% $276
- ------------------------------------------------------------------------------------------------------------------
1998 .55%(F) 45%(D),(G) .45%(D),(G) 4.82%(D),(G) 14.1%(G) 90
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(A)Excluding sales charge. Sales charges are being waived for the period
November 3, 1997 through July 31, 2000.
(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 advisor in excess of voluntary expense limitations
as follows: 0.45% until July 31, 2000. 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: 1999, .75% and 1998, 0.75%.
(E)For the period March 10, 1998 (commencement of sale of Navigator Class) to
March 31, 1998.
(F)Not annualized.
(G)Annualized.
19
<PAGE>
L e g g M a s o n T a x - F r e e I n c o m e F u n d
The following additional information about the funds is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) the prospectus. The SAI provides additional details about
the funds and their policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC (phone 1-800-SEC-0330).
Reports and other information about the funds are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-038 SEC file number 811-6223
20
<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
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1999
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for Primary Shares and for Navigator
Shares of the funds, each dated July 31, 1999, which have been filed with the
Securities and Exchange Commission ("SEC"). The funds' annual report is
incorporated by reference into this Statement of Additional Information. Copies
of either the annual report or the Prospectuses are available without charge by
writing or calling the funds' distributor, Legg Mason Wood Walker, Incorporated
("Legg Mason") (address and telephone numbers listed below).
LEGG MASON WOOD WALKER
INCORPORATED
----------------------------
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410) 539-0000 (800) 822-5544
<PAGE>
TABLE OF CONTENTS
DESCRIPTION OF THE FUNDS.....................................................3
FUND POLICIES................................................................3
INVESTMENT STRATEGIES AND RISKS..............................................4
SPECIAL FACTORS AFFECTING MARYLAND AND PENNSYLVANIA TAX-FREE FUNDS..........14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................18
ADDITIONAL TAX INFORMATION..................................................20
VALUATION OF FUND SHARES....................................................23
PERFORMANCE INFORMATION.....................................................23
MANAGEMENT OF THE TRUST.....................................................28
THE FUNDS' INVESTMENT ADVISER...............................................30
THE FUNDS' DISTRIBUTOR......................................................33
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................35
DESCRIPTION OF THE TRUST....................................................36
THE TRUST'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT............37
OTHER INFORMATION...........................................................37
THE TRUST'S LEGAL COUNSEL...................................................37
THE TRUST'S INDEPENDENT ACCOUNTANTS.........................................38
FINANCIAL STATEMENTS........................................................38
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 offerings made by the Prospectuses
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 Prospectuses
and this Statement of Additional Information do not constitute offerings by any
fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
2
<PAGE>
DESCRIPTION OF THE FUNDS
Legg Mason Tax-Free Income Fund is an open-end investment company which
was established as a Massachusetts business trust under a Declaration of Trust
dated November 21, 1990. Legg Mason Maryland Tax-Free Income Trust, Legg Mason
Pennsylvania Tax-Free Income Trust and Legg Mason Tax-Free Intermediate-Term
Income Trust are separate series of Legg Mason Tax-Free Income Fund. Each fund
is non-diversified.
FUND POLICIES
Maryland Tax-Free's investment objective is to seek 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.
Pennsylvania Tax-Free's investment objective is to seek 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. Tax-Free
Intermediate's investment objective is to seek a high level of current income
exempt from federal income tax, consistent with prudent investment risk.
The following information supplements the information concerning each
fund's investment objectives, policies and limitations found 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);
3
<PAGE>
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.
The foregoing investment limitations of each fund 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 of the fund
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. If through a change in values, net asets or other
circumstances, a fund was in a position where more than 10% of its net assets
were invested in illiquid securities, it would consider appropriate steps to
protect liquidity.
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.
INVESTMENT STRATEGIES AND RISKS
The following information applies to all of the funds:
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 for purposes of
the federal alternative minimum tax. 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, 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 tax payments, the proceeds of
bond placements or other revenues.
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
4
<PAGE>
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.
The municipal obligations in which each fund may invest include municipal
leases and participation interests therein. These obligations, which may take
the form of a lease, an installment purchase or a conditional sales contract,
are issued by state and local governments and authorities to acquire land and a
wide variety of equipment and facilities, such as fire and sanitation vehicles,
telecommunications equipment and other capital assets. Rather than holding such
obligations directly, a fund may purchase a participation interest in a
municipal lease obligation from a bank or other third party. A participation
interest gives a fund a specified, undivided pro-rata interest in the total
amount of the obligation.
Municipal lease obligations have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "non-appropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
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
5
<PAGE>
to the issuers at the time of issuance. Neither the funds nor the adviser will
independently review the basis for such opinions.
The United States Supreme Court has held that Congress may subject the
interest on municipal obligations to federal income tax. It can be expected
that, as in the past, proposals will be introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Proposals also may be introduced in state
legislatures which could affect the state tax treatment of each fund's
distributions. If any such proposals were enacted, the availability of municipal
obligations for investment by the funds and the value of their assets could be
materially and adversely affected. In such event, each fund would re-evaluate
its investment objective and policies and consider changes in its structure or
possible dissolution.
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, industrial development bonds 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.
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. 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.
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. Typically, no interest accrues to
the purchaser until the security is delivered.
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 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
6
<PAGE>
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.
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
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 the fund's total assets calculated immediately after each
stand-by commitment is acquired.
When a fund exercises a stand-by commitment that it has acquired from a
dealer with respect to municipal obligations held by it, the dealer normally
pays the fund an amount equal to (1) the fund's acquisition cost of the
municipal obligations (excluding any accrued interest which the fund paid on its
acquisition) less any amortized market premium or plus any amortized market or
original issue discount during the period the fund owned the securities, plus
(2) all interest accrued on the securities since the last interest payment date
or the date the securities were purchased by the fund, whichever is later. The
fund's right to exercise stand-by commitments is unconditional and unqualified
and exercisable by the fund at any time prior to the underlying securities'
maturity.
A stand-by commitment is not transferable by a fund without the underlying
securities, although the fund could sell the underlying municipal obligations to
a third party at any time. The fund may pay for stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). Each fund intends to enter into
stand-by commitments only with those banks, brokers and dealers that in the
adviser's opinion present minimal credit risks.
Each fund intends to acquire stand-by commitments solely to facilitate
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not ordinarily affect
the valuation or assumed maturity of the underlying municipal obligations.
Stand-by commitments would not affect the average weighted maturity of the
assets of a fund.
FIXED, VARIABLE AND FLOATING RATE OBLIGATIONS
A variable rate obligation differs from an obligation with a fixed rate
coupon, the value of which fluctuates in inverse relation to interest rate
changes. If interest rates decline below the coupon rate, generally the value of
a fixed rate obligation increases and the obligation sells at a premium. Should
interest rates 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
7
<PAGE>
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.
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.
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
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.
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.
8
<PAGE>
In addition to the agency ratings, there are other criteria which will be
used by the adviser in selecting securities for a fund. Consideration will be
given to the maturity and duration of each bond as well as its effect on the
overall average maturity and during 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.
SECURITIES LENDING
Each fund may engage in securities lending and may invest in zero coupon
and deferred interest bonds. Any income from securities lending would be taxable
when distributed to shareholders.
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
9
<PAGE>
held by a custodian bank until resold and will be supplemented by additional
collateral if necessary to maintain a total value equal to or in excess of the
value of the repurchase agreements. Repurchase agreements are usually for
periods of one week or less, but may be for longer periods. Each fund will not
enter into repurchase agreements of more than seven days duration if more than
10% of its net assets would be invested in such agreements and other illiquid
investments. A fund's income from repurchase agreements is taxable income.
To the extent that proceeds from the sale upon a default of the obligation
to repurchase were less than the repurchase price, a fund might suffer a loss.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the securities, realization upon the collateral by the fund could be delayed
or limited, during which time the value of the fund's collateral might decline.
However, each fund has adopted standards for the parties with whom it will enter
into repurchase agreements that the Trust's Board of Trustees believes are
reasonably designed to assure that each party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement.
TAXABLE INVESTMENTS
For temporary, defensive purposes, when in the adviser's opinion, no
suitable municipal securities are available, for liquidity purposes, or pending
the investment of the proceeds of the sale of shares, the funds may invest in
taxable short-term investments consisting of: (i) obligations of the U.S.
Government, its agencies and instrumentalities; (ii) certificates of deposit and
bankers' acceptances of U.S. domestic banks with assets of one billion dollars
or more; (iii) commercial paper or other corporate notes of high quality; and
(iv) any of such items subject to short-term repurchase agreements.
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 may
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 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.
10
<PAGE>
Each fund's current policy is a 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.
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
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
11
<PAGE>
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 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
12
<PAGE>
may halt trading in the contracts if their prices move upward and downward more
than a specified daily limit on a given day. This could distort the relationship
between the price of the underlying instrument and the futures contract, and
could prevent prompt liquidation of unfavorable futures positions. The value of
a futures contract may also move differently from the price of the underlying
financial instrument because of inherent differences between the futures and
securities markets, including variations in speculative demand for futures
contracts and for debt securities, the differing margin requirements for futures
contracts and debt securities, and possible differences in liquidity between the
two markets.
PUT OPTIONS ON INTEREST RATE FUTURES CONTRACTS
Purchasing a put option on an interest rate futures contract gives a fund
the right to assume a seller's position in the contract at a specified exercise
price at any time up to the option's expiration date. In return for this right,
the fund pays the current market price for the option (known as the option
premium), as determined on the commodity futures exchange where the option is
traded.
A fund may purchase put options on interest rate futures contracts to
hedge against a decline in the market value of securities the fund owns. Because
a put option is based on a contract to sell a financial instrument at a certain
price, its value will tend to move in the opposite direction from the price of
the financial instrument underlying the futures contract; that is, the put
option's value will tend to rise when prices fall, and fall when prices rise. By
purchasing a put option on an interest rate futures contract, the fund would
attempt to offset potential depreciation of securities it owns by appreciation
of the put option. This strategy is similar to selling the underlying futures
contract directly.
A fund's position in a put option on an interest rate futures contract may
be terminated either by exercising the option (and assuming a seller's position
in the underlying futures contract at the option's exercise price) or by closing
out the option at the current price as determined on the futures exchange. If
the put option is not exercised or closed out before its expiration date, the
entire premium paid would be lost by the fund. A fund could profit from
exercising a put option if the current market value of the underlying futures
contract were less than the sum of the exercise price of the put option and the
premium paid for the option because the fund would, in effect, be selling the
futures contract at a price higher than the current market price. A fund could
also profit from closing out a put option if the current market price of the
option is greater than the premium the fund paid for the option. Transaction
costs must also be taken into account in these calculations. A fund may close
out an option it had purchased by selling an identical option (that is, an
option on the same futures contract, with the same exercise price and expiration
date) in a closing transaction on a futures exchange that provides a secondary
market for the option. A fund is not required to make futures margin payments
when it purchases an option on an interest rate futures contract.
Compared to the purchase or sale of an interest rate futures contract, the
purchase of a put option on an interest rate futures contract involves a smaller
potential risk to the fund, because the maximum amount at risk is the premium
paid for the option (plus related transaction costs). If prices of debt
securities remain stable, however, purchasing a put option may involve a greater
probability of loss than selling a futures 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
13
<PAGE>
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.
SPECIAL FACTORS AFFECTING MARYLAND AND PENNSYLVANIA TAX-FREE FUNDS
OVERVIEW
Because the Maryland Tax-Free Fund and the Pennsylvania Tax-Free Fund each
focus 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,
14
<PAGE>
including the ability to continue to fund a substantial portion of the debt
service on general obligation debt from general fund revenues in the annual
State budget or to raise the rate of State property tax levies, and the ability
to maintain the amount of authorized debt within the range of affordability.
Consolidated Transportation Bonds are limited obligations issued by the
Maryland Department of Transportation, the principal of which must be paid
within 15 years from the date of issue, for highway, port, transit, rail or
aviation facilities or any combination of such facilities. Debt service on
Consolidated Transportation Bonds is payable from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and the corporate
income tax as are credited to the Maryland Department of Transportation, plus
all departmental operating revenues and receipts. Holders of such bonds are not
entitled to look to other sources for payment.
The Maryland Transportation Authority operates certain highway, bridge and
tunnel toll facilities in the State. The tolls and other revenues received from
these facilities are pledged as security for revenue bonds of the Authority
issued under, and secured by, a trust agreement between the Authority and a
corporate trustee. As of December 31, 1998, $340.8 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
$33.2 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
15
<PAGE>
in lease-backed revenue bonds on May 1, 1996. The proceeds from the bonds, along
with cash available from State lottery proceeds, investment earnings, and other
sources will be used to pay project design and construction expenses of
approximately $220 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 million 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
2000.
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. In
addition, Maryland's relatively high concentration of governmental employment
makes the state potentially vulnerable to any decreases in federal, including
military, and state governmental spending.
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 $4,724.5 million at June 30, 1998.
Pennsylvania is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the succeeding
fiscal year's budget. At December 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, 2004, Pennsylvania
16
<PAGE>
has projected that it will issue bonds totaling $4,328.5 million and retire
bonded debt in the principal amount of $2,986.1 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, 1998, the combined total debt outstanding for all
above-mentioned agencies was $8,518 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, 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 1989 and 1998, employment in Pennsylvania has grown each
year at a rate slightly in excess of the growth in employment in the
mid-Atlantic region, but less than that of the U.S. as a whole, during the same
period. Pennsylvania's average unemployment rate for the years 1994 through 1998
remained slightly above the nation's annual average unemployment rate. The
unadjusted unemployment rate for Pennsylvania for March, 1999 was 4.8% and for
the United States for March, 1999 was 4.4%. The population of Pennsylvania, 12
million people in 1998, according to the U.S. Bureau of the Census, represents a
slight increase from the 1989 estimate of 11.876 million. Per capita income in
Pennsylvania was $25,678 for calendar year 1997, slightly above the per capita
income of the United States of $25,298. 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, 1996, June 30, 1997 and June 30, 1998 with fund balances of $635.182
million, $1,364.9 million, and $1,958.88 million respectively.
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 obligators 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
17
<PAGE>
pledges (such as sewer authority bonds), the creditworthiness of these obligors
may be partly dependent on the creditworthiness of Pennsylvania or its municipal
authorities.
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
of Legg Mason Trust Company for which Trust Company exercises discretionary
investment management responsibility and accounts of customers with such
Institutional Clients; qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million; clients of Bartlett & Co.
who, as of December 19, 1996, were shareholders of Bartlett Short Term Bond Fund
or Bartlett Fixed Income Fund and for whom Bartlett acts as an ERISA fiduciary;
certain institutions who were clients of Fairfield Group, Inc. as of February
28, 1999 for investment of their own monies and monies for which they act in a
fiduciary capacity; and 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 BEING WAIVED
FOR ALL PURCHASES OF PRIMARY SHARES OF EACH FUND MADE THROUGH JULY 31, 2000.
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 funds' transfer agent, BFDS, does not
18
<PAGE>
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
purchases actually made. The first purchase under an LOI must be at least 2.5%
of the intended LOI purchases for the Maryland and Pennsylvania Tax-Free Funds
and 1% for the Tax-Free Intermediate Fund. Shares with a value of up to 2.5% for
the Maryland and Pennsylvania Tax-Free Funds and 1.25% for the Tax-Free
Intermediate Fund, of the intended LOI purchases will be held in escrow during
the thirteen-month period (registered in your name) to assure such necessary
payment. These escrowed shares may not be exchanged for shares of other Legg
Mason funds. If you redeem your account during this period, the applicable fund
will withhold from the escrow account sufficient shares to pay any unpaid sales
charge.
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)
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 Prospectuses at any time.
A redemption request received by your Legg Mason financial advisor 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
19
<PAGE>
securities into cash and will be subject to fluctuation in the market price of
those securities until they are sold. The funds do not redeem in kind under
normal circumstances, but would do so where the adviser determines that it would
be in the best interests of the shareholders as a whole. Although each fund may
elect to redeem any shareholder account with a current value of less than $500,
a fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
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
Each fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("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 they are taxable to shareholders as ordinary income
(whether paid in cash or reinvested in fund shares). No portion of those
dividends will qualify for the corporate dividends-received deduction.
Distributions derived from net capital gains, if any, are taxable to
shareholders as long-term capital gain regardless of the length of time they
have held their fund shares (and irrespective of whether those distributions are
paid in cash or reinvested in fund shares). 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 fund shares generally is not deductible. Persons who are
"substantial users" (or related persons) of facilities financed by IDBs or PABs
should consult their tax advisers before purchasing shares of a fund because,
for users of certain of these facilities, the interest on those bonds is not
exempt from federal income tax. For these purposes, a "substantial user"
includes a non-exempt person who regularly uses in trade or business a part of a
facility financed from the proceeds of IDBs or PABs.
A redemption of fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales charge paid). An exchange of 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
fund shares through a redemption or exchange within 90 days after the
shareholder acquired the shares and (2) the shareholder subsequently acquires
shares of that fund or of another Legg Mason fund without the imposition of a
sales charge that otherwise would have been imposed except of the reinstatement
privilege or exchange privilege. In these cases, any sales charge that was
imposed on the purchase of the original share will not be taken into account in
20
<PAGE>
determining the amount of gain or loss on the redemption or exchange - the tax
effect of that charge will instead be deferred by being treated as having been
incurred in connection with the newly acquired shares. In addition, if fund
shares are purchased within 30 days before or after redeeming, at a loss, other
shares of the same fund (regardless of class) all or part of that loss will not
be deductible and instead will increase the basis of the newly purchased shares.
For federal tax purposes, each fund is treated as a separate corporation.
In order to continue to qualify for treatment as a RIC under the 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. If any fund failed to
qualify for treatment as a RIC for any taxable year, (i) it would be taxed at
corporate rates on the full amount of its taxable income for that year without
being able to deduct the distributions it makes to its shareholders and (ii) the
shareholders would treat all those distributions, including distributions of net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss) and distributions that otherwise would be "exempt-interest
dividends" described in the following paragraph, as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
could be required to recognized unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
Dividends paid by a fund will qualify as "exempt-interest dividends" (as
defined in each Prospectus), and thus will be excludable from gross income by
its shareholders, if the fund satisfies the additional requirement that, at the
close of each quarter of the fund's taxable year, at least 50% of the value of
its total assets consists of securities the interest on which is excludable from
gross income under section 103(a) of the Code; each fund intends to continue to
satisfy this requirement. The portion of each dividend excludable from a fund's
shareholder's gross income may not exceed the fund's net tax-exempt income.
To the extent a fund invests in instruments that generate taxable income,
distributions of the interest earned thereon will be taxable to the fund's
shareholders as ordinary income to the extent of its earnings and profits.
Moreover, if a fund realizes capital gains as a result of market transactions,
any distributions of those gains will be taxable to its shareholders.
If fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of 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.
Each fund will withhold 31% of al dividends, capital gain distributions
and redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. Each fund will also withhold 31% of all dividend and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
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.
21
<PAGE>
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.
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 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.
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. 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.
22
<PAGE>
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 positions 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.
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 Primary Shares of each fund and
Navigator Shares of Pennsylvania Tax-Free at each fund's respective commencement
of operations. As of the date of this Statement of Additional Information,
Navigator Shares of Maryland Tax-Free and Tax-Free Intermediate have not yet
commenced operations. 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 the respective class of shares the
respective fund has paid. (There are no redemption fees.) The tables do not
23
<PAGE>
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 any Fund's future performance.
FOR THE MARYLAND TAX-FREE FUND PRIMARY SHARES:
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- -------------------------------------------------------------------------------
1992* $9,942 $ 561 $10,503
1993 10,569 1,244 11,813
1994 10,395 1,832 12,227
1995 10,507 2,527 13,034
1996 10,637 3,323 13,960
1997 10,643 3,977 14,620
1998 11,067 4,865 15,932
1999 11,068 5,633 16,701
* 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,
1999 would have been $10,840, and the investor would have received a total of
$4,571 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 PRIMARY SHARES:
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- -------------------------------------------------------------------------------
1992* $10,192 $ 437 $10,629
1993 10,602 1,113 11,715
1994 10,450 1,711 12,161
1995 10,595 2,421 13,016
1996 10,702 3,162 13,864
1997 10,668 3,835 14,503
1998 11,151 4,774 15,925
1999 11,624 5,593 16,857
* August 1, 1991 (commencement of operations) to March 31, 1992.
24
<PAGE>
FOR THE NAVIGATOR PENNSYLVANIA TAX-FREE FUND:
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
1999* $10,107 $556 $10,663
* March 10, 1998 (commencement of operations) to March 31, 1999.
With respect to Primary Shares, if the investor had not reinvested
dividends and capital gain distributions, the total value of the hypothetical
investment as of March 31, 1999 would have been $10,966, and the investor would
have received a total of $4,564 in distributions. With respect to Navigator
Shares, if the investor had not reinvested dividends and capital gain
distributions, the total value of the hypothetical investment as of March 31,
1999 would have been $10,079 and the investor would have received a total of
$584 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 PRIMARY SHARES:
Value of Original
Shares Plus Shares
Obtained Through Value of Shares
Reinvestment of Acquired Through
Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- -------------------------------------------------------------------------------
1993* $10,040 $ 186 $10,226
1994 9,980 640 10,620
1995 10,047 1,187 11,234
1996 10,234 1,462 11,696
1997 10,154 2,251 12,405
1998 10,414 2,848 13,262
1999 10,465 3,437 13,902
* 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,
1999 would have been $10,453, and the investor would have received a total of
$2,919 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:
P(1+T)n = 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.
25
<PAGE>
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. Year-by-year and average annual returns
for the calendar year ended December 31, 1998 are contained in each fund's
prospectus. THE FRONT-END SALES CHARGE IS BEING WAIVED FOR ALL PURCHASES OF
PRIMARY SHARES OF EACH FUND MADE THROUGH JULY 31, 2000.
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:
YIELD = 2[(A-B + 1)6] - 1
---
cd
where: a = dividends and interest earned during the Period
b = expenses accrued for the Period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
Period.
Except as noted below, in determining net investment income earned during
the Period (variable "a" in the above formula), each fund calculates interest
earned on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by a fund, interest earned during the Period is then
determined by 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:
26
<PAGE>
<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> <C> <C> <C> <C> <C> <C> <C> <C>
Not over $24,000 Not over $40,100
$24,000 to $58,150 $40,100 to $96,900
$58,150 to $121,300 96,900 to $147,700
$121,300 to $263,750 $147,700 to $263,750
Over $263,750 Over $263,750
^ Based on 1998 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.
</TABLE>
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> <C> <C> <C> <C> <C> <C> <C> <C>
Not over $24,000 Not over $40,100
$24,000 to $58,150 $40,100 to $96,900
$58,150 to $121,300 96,900 to $147,700
$121,300 to $263,750 $147,700 to $263,750
Over $263,750 Over $263,750
^ Based on 1998 tax rates.
</TABLE>
From time to time, the Tax-Free Intermediate Fund may also illustrate the
effect of tax equivalent yields using information such as that set forth below:
<TABLE>
<CAPTION>
Federal State & Taxable Yield
Marginal Local Blended
SINGLE MFJ RATES RATES ^ RATE 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Not over $24,000 Not over $40,100
$24,000 to $58,150 $40,100 to $96,900
$58,150 to $121,300 96,900 to $147,700
$121,300 to $263,750 $147,700 to $263,750
Over $263,750 Over $263,750
^ Based on 1998 tax rates
</TABLE>
For the 30-day period ended March 31, 1999, Maryland Tax-Free Fund's yield
and tax equivalent yield (assuming a ___% blended tax rate) were ___% and ___%,
respectively. Pennsylvania Tax-Free Fund's yield and tax equivalent yield
(assuming an ___% blended tax rate) for the same period were ___% and ___%,
respectively. Tax-Free Intermediate Fund's yield and tax equivalent yield
(assuming a ___% tax rate) for the same period were ___% and ___%, 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.
27
<PAGE>
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. A 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 capital market. Ibbotson relies on
different indices to calculate the performance of common stocks, corporate and
government bonds and Treasury bills.
A 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.
A fund may also include in advertising biographical information on key
investment and managerial personnel.
A 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.
A 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 $93 billion as of June 30, 1999.
MANAGEMENT OF THE TRUST
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 and Trustee of one Legg Mason fund; Chairman of the Board, President and
Trustee of one Legg Mason fund; Chairman of the Board and Director of three Legg
Mason funds. Formerly: Director of Legg Mason Fund Adviser, Inc. and Western
Asset Management Company (each a registered investment adviser); officer and/or
Director of various other affiliates of Legg Mason, Inc.
28
<PAGE>
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 engaged in the 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 all
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 (bank holding company); and Director of Finance,
City of Philadelphia.
ARNOLD L. LEHMAN [07/18/44], TRUSTEE; Brooklyn Museum of Art, 200 Eastern
Parkway, Brooklyn, New York. Director of the Brooklyn Museum of Art;
Director/Trustee of all Legg Mason funds. Formerly Director of the Baltimore
Museum of Art.
JILL E. McGOVERN [08/29/44], TRUSTEE; 400 Seventh St., NW, Washington, DC.
Chief Executive Officer of the Marrow Foundation. Director/Trustee of all 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 all 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; Trustee of
two Legg Mason funds; President and Director of two 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 all Legg Mason
funds; Vice President of Legg Mason.
SUSAN L. SILVA* [03/29/67], SECRETARY; Secretary of five other Legg Mason
funds; employee of Legg Mason since 1994.
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, Lehman and Rodgers and Dr. McGovern.
On July 1, 1999, 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.
Set forth below is a table which contains the name, address and percentage
ownership of each person who is known by each fund to own beneficially and/or of
record five percent or more of its outstanding shares as of July 1, 1999:
29
<PAGE>
PENNSYLVANIA TAX-FREE:
- -------------------------------------------------------------------------------
Name and Address Primary Shares Navigator Shares
- -------------------------------------------------------------------------------
SENTRUST c/o Sentry Trust Company 100%
1930 Scotland Avenue
Chambersburg, PA 17201-1450
- -------------------------------------------------------------------------------
The following table provides certain information relating to the
compensation of the Trust's trustees for the fiscal year ended March 31, 1999.
None of the Legg Mason funds has any retirement plan for its trustees.
COMPENSATION TABLE
- -------------------------------------------------------------------------------
TOTAL COMPENSATION FROM TRUST
NAME OF PERSON AND AGGREGATE COMPENSATION AND FUND COMPLEX PAID TO
POSITION FROM THE TRUST* TRUSTEES**
- -------------------------------------------------------------------------------
John F. Curley, Jr. -
Chairman of the Board
and None None
Trustee
- -------------------------------------------------------------------------------
Edward A. Taber, III -
Trustee None None
- -------------------------------------------------------------------------------
Edmund J. Cashman, Jr.-
President and Trustee None None
- -------------------------------------------------------------------------------
Richard G. Gilmore -
Trustee $3,600 $35,100
- -------------------------------------------------------------------------------
Charles F. Haugh -
Trustee (A) $2,738 $25,800
- -------------------------------------------------------------------------------
Arnold L. Lehman -
Trustee $3,600 $30,600
- -------------------------------------------------------------------------------
Jill E. McGovern -
Trustee $3,600 $35,100
- -------------------------------------------------------------------------------
T. A. Rodgers -
Trustee $3,600 $35,100
- -------------------------------------------------------------------------------
(A) Mr. Haugh retired as a trustee in September 1998.
* Represents fees paid to each trustee during the fiscal year ended March
31, 1999.
** Represents aggregate compensation paid to each trustee during the
calendar year ended December 31, 1998. There are eleven open-end
investment companies in the Legg Mason Complex (with a total of twenty
funds).
THE FUNDS' INVESTMENT ADVISER
Legg Mason Capital Management, Inc., a Maryland corporation, is located at
100 Light Street, Baltimore, Maryland 21202. The adviser is a wholly owned
subsidiary of Legg Mason, Inc. (a financial services holding company), which
also is the parent of Legg Mason Wood Walker, Incorporated. The adviser serves
as each fund's investment adviser and manager under an Investment Advisory and
Management Agreement ("Advisory Agreement") dated March 25, 1991. Continuation
of the Agreement was most recently approved by the Board of Trustees on November
13, 1998. Effective January 1, 1998, the Advisory Agreement was transferred to
the adviser; prior to that date, Legg Mason Fund Adviser, Inc. ("LMFA"), a
wholly owned subsidiary of Legg Mason, Inc., served as each fund's investment
30
<PAGE>
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 each fund will expire on July 31, 2000, or when
Maryland Tax-Free's net assets reach $200 million, whichever occurs first; or
when Pennsylvania Tax-Free's net assets reach $125 million, whichever occurs
first; or when Tax-Free Intermediate's net assets reach $100 million, whichever
occurs first.
RATE EXPIRATION DATE
For the Maryland Tax-Free Fund:
Primary Shares:
0.70% July 31, 2000
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
31
<PAGE>
Navigator Shares:
0.45% July 31, 2000
0.40% December 31, 1996
0.35% March 31, 1996
For the Pennsylvania Tax-Free Fund:
Primary Shares:
0.70% July 31, 2000
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, 2000
0.40% December 31, 1996
0.30% March 31, 1996
For the Tax-Free Intermediate Fund:
Primary Shares:
0.70% July 31, 2000
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, 2000
0.40% December 31, 1996
For the fiscal years ended March 31, the funds paid advisory fees of:
1999 1998 1997
Maryland Tax-Free Fund $886,529 $826,561 $818,213
Pennsylvania Tax-Free Fund $390,922 $364,852 $365,484
Tax-Free Intermediate Fund $334,053 $320,331 $313,749
For the fiscal years ended March 31, the following advisory fees were
waived:
1999 1998 1997
Maryland Tax-Free Fund $383,889 $336,314 $432,987
Pennsylvania Tax-Free Fund $213,136 $195,443 $244,013
Tax-Free Intermediate Fund $197,395 $209,159 $252,670
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, Legg Mason Fund Adviser, Inc. serves as each 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
32
<PAGE>
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, and the fiscal year ended March 31, 1999, the
adviser paid LMFA $18,069 and $42,565, respectively, 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 Wood Walker, Inc., 100 Light Street, Baltimore, Maryland 21202,
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.
The distributor and the adviser may pay non-affiliated entities out of
their own assets 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 the National Association of Securities Dealers,
Inc. ("NASD").
Continuation of the Plan was most recently approved on November 13, 1998
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.
33
<PAGE>
Further, the trustees recognized that the adviser would earn greater management
fees if a fund's assets were increased, because such fees are calculated as a
percentage of the fund's assets and thus would increase if net assets increase.
The trustees further recognized that there can be no assurance that any of the
potential benefits described below would be achieved if the Plan were
implemented.
Among the potential benefits of the Plan, the trustees noted that the
payment of commissions and service fees to Legg Mason and its financial advisors
could motivate them to improve their sales efforts with respect to each fund's
Primary Shares and to maintain and enhance the level of services they provide to
the funds' Primary Class shareholders. These efforts, in turn, could lead to
increased sales and reduced redemptions, eventually enabling a fund to achieve
economies of scale and lower per share operating expenses. Any reduction in such
expenses would serve to offset, in whole or in part, the additional expenses
incurred by a fund in connection with the Plan. Furthermore, the investment
management of a fund could be enhanced, as net inflows of cash from new sales
might enable its portfolio manager to take advantage of attractive investment
opportunities, and reduced redemptions could eliminate the potential need to
liquidate attractive securities positions in order to raise the funds necessary
to meet the redemption requests.
As compensation for its services and expenses, Legg Mason receives from
each fund an annual distribution fee equivalent to 0.125% of its average daily
net assets attributable to Primary Shares and a service fee equivalent to 0.125%
of its average daily net assets attributable to Primary Shares in accordance
with the Plan. The distribution and service fees are calculated daily and
payable monthly. Legg Mason has voluntarily agreed to waive its fees and
reimburse each fund if and to the extent its expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) exceed during any month annual
rates of each fund's average daily net assets attributable to Primary Shares for
such month, or certain asset levels, whichever occurs first, in accordance with
the schedules described previously.
For the years ended March 31, the funds paid Legg Mason distribution and
service fees of:
1999 1998 1997
Maryland Tax-Free Fund $402,968 $375,710 $371,914
Pennsylvania Tax-Free Fund $177,046 $165,830 $166,129
Tax-Free Intermediate Fund $151,842 $145,605 $142,613
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.
34
<PAGE>
For the fiscal year ended March 31, 1999, Legg Mason incurred the
following expenses:
- -------------------------------------------------------------------------------
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate
Fund Fund Fund
- -------------------------------------------------------------------------------
Compensation to sales
personnel $198,000 $86,000 $72,000
- -------------------------------------------------------------------------------
Advertising 56,000 53,000 45,000
- -------------------------------------------------------------------------------
Printing and mailing of
prospectuses to
prospective shareholders 87,000 69,000 31,000
- -------------------------------------------------------------------------------
Other 217,000 273,000 145,000
- -------------------------------------------------------------------------------
Total expenses $558,000 $481,000 $293,000
- -------------------------------------------------------------------------------
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 being waived on purchases of Primary Shares of
each fund made through July 31, 2000. Sales charges received by Legg Mason from
sales of each fund are as follows:
1999 1998 1997
Maryland Tax-Free $0 $191,000 $315,000
Pennsylvania Tax-Free $0 $84,000 $152,000
Tax-Free Intermediate $0 $0 $0
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under each Advisory Agreement, the adviser is responsible for the
execution of portfolio transactions. Corporate, municipal and government debt
securities are generally traded on the over-the-counter ("OTC") market on a
"net" basis without a stated commission, through dealers acting for their own
account and not as brokers. Prices paid to a dealer in debt securities will
generally include a "spread," which is the difference between the price at which
the dealer is willing to purchase and sell the specific security at the time,
and includes the dealer's normal profit. Some portfolio transactions may be
executed through brokers acting as agent. In selecting brokers or dealers, the
adviser must seek the most favorable price (including the applicable dealer
spread) and execution for such transactions, subject to the possible payment as
described below of higher brokerage commissions to brokers who provide research
and analysis. The funds may not always pay the lowest commission or spread
available. Rather, in placing orders on behalf of a fund, the adviser also takes
into account such factors as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, the
adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the adviser for its use, may place orders
with brokers who provide supplemental investment and market research and
securities and economic analysis, and may pay to these brokers a higher
brokerage commission than may be charged by other brokers. Such research and
analysis may be useful to the adviser in connection with services to clients
other than the funds. The adviser's fee is not reduced by reason of its
receiving such brokerage and research services.
35
<PAGE>
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, 1999 and
1998, the Maryland Tax-Free Fund's portfolio turnover rates were 12.9% and
18.9%, respectively; the Pennsylvania Tax-Free Fund's portfolio turnover rates
were 10.6% and 14.1%, respectively; and the Tax-Free Intermediate Fund's
portfolio turnover rates were 17.9% and 9.0%, respectively.
DESCRIPTION OF THE TRUST
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. Each fund 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
36
<PAGE>
charges. Salespersons and others entitled to receive compensation for selling or
servicing fund shares may receive more with respect to one class than another.
The Board of Trustees 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 votes;
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 the joint Prospectuses and in this 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 the Prospectuses or in the joint Statement
of Additional Information; however, the funds deem this possibility slight.
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.
37
<PAGE>
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, 1999; the Statements of
Operations for the year ended March 31, 1999; the Statements of Changes in Net
Assets for the years ended March 31, 1999 and 1998; 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, 1999, are hereby incorporated by reference in this Statement of
Additional Information.
38
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
1. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") RATINGS
MUNICIPAL BONDS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
MUNICIPAL NOTES
Moody's ratings for state and municipal notes and other short-term
obligations are designated Moody's Investment Grade ("MIG") and for variable
rated demand obligations are designated Variable Moody's Investment Grade
("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term credit risk. Notes bearing the designation
MIG-1 or VMIG-1 are of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating, the modifier 2 indicates a
mid-range rating; the modifier 3 indicates that the issue ranks in the lower end
of its generic rating.
COMMERCIAL PAPER
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers with a Prime-1 ("P-1") rating will normally have the following
characteristics: (1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structures with moderate 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.
A-1
<PAGE>
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". 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.
A-2
<PAGE>
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
Part C. Other Information
-----------------
Item 23. Exhibits
--------
(a) (i) Declaration of Trust(1)
(ii) Amendment dated January 31, 1991 to the Declaration of Trust(1)
(iii) Amendment dated March 11, 1991 to the Declaration of Trust(1)
(iv) Amendment dated July 30, 1992 to the Declaration of Trust(1)
(b) By-Laws(1)
(c) Specimen security -- not applicable
(d) (i) Investment Advisory Contract with respect to the Maryland,
Pennsylvania and High Quality Portfolios(1)
(ii) Advisory Fee Agreement with respect to the Tax-Free
Intermediate-Term Income Trust(1)
(iii) Substitution Agreement(2)
(iv) Administration Agreement with respect to the Maryland
Portfolio(2)
(v) Administration Agreement with respect to the Pennsylvania
Portfolio(2)
(vi) Administration Agreement with respect to the Tax-Free
Intermediate Portfolio(2)
(e) Amended Underwriting Agreement with respect to the Maryland,
Pennsylvania and Tax-Free Intermediate-Term Income Portfolios(1)
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement(1)
(h) (i) Transfer Agency and Service Agreement(1)
(ii) Credit Agreement(3)
(i) Opinion and consent of counsel with respect to the Maryland,
Pennsylvania, and Tax-Free Intermediate-Term Income Portfolios - filed
herewith
(j) Accountants' consent - filed herewith
(k) Financial statements omitted from Item 22 - none
(l) (i) Agreement for providing initial capital with respect to the
Registrant and the Maryland, Pennsylvania and High Quality
Portfolios(1)
(ii) Agreement for providing initial capital with respect to the
Tax-Free Intermediate-Term Income Portfolio(1)
(m) Amended Plan pursuant to Rule 12b-1 with respect to the Maryland,
Pennsylvania and Tax-Free Intermediate-Term Income Portfolios(1)
(n) Financial Data Schedules - not applicable
(o) Form of Plan Pursuant to Rule 18f-3 - filed herewith
(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, 1997.
(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 11 to the Registration Statement, SEC File No. 33-37971, filed
July 31, 1998.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No.26 to Legg Mason Value Trust, Inc.'s Registration Statement, SEC
File No. 2-75766, filed May 28, 1999.
Item 24. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
None.
<PAGE>
Item 25. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 11, SEC File No. 33-37971, filed July 31, 1998.
Item 26. 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 twenty open-end investment companies or portfolios.
Information as to the officers and directors of LMFA is included in its Form ADV
filed on June 24, 1998 with the Securities and Exchange Commission (registration
number 801-16958) and is incorporated herein by reference.
Item 27. 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.
Legg Mason Light Street Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal underwriter,
Legg Mason Wood Walker, Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ------------------ ------------------ -------------
Raymond A. Mason Chairman of the None
Board and Director
James W. Brinkley President and None
Director and COO
<PAGE>
Edmund J. Cashman, Jr. Senior Executive President and
Vice President and Trustee
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice 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
Robert G. Donovan Executive Vice None
President and
Director
Jeffrey W. Durkee 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
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
<PAGE>
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 A. 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
Theodore S. Kaplan Senior Vice None
President and
Senior Counsel
Seth J. Lehr Senior Vice None
1735 Market St President and
Philadelphia, PA 19103 Director
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
<PAGE>
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
Robert F. Price Senior Vice None
President and
General Counsel
Timothy C. Scheve Executive Vice None
President and
Treasurer and
Director
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
Andrew J. Bowden Vice President and None
Deputy General
Counsel
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President and None
Controller
Charles J. Daley, Jr. Vice President and None
Controller
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Norman C. Frost, Jr. Vice President None
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
James E. Furletti Vice President None
<PAGE>
Robert E. Patterson Vice President None
and Deputy
General Counsel
John A. Moag, Jr. Vice President None
Edward P. Meehan Vice President None
Edward W. Lister, Jr. Vice President None
Gregory B. McShea 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
Thomas E. Robinson Vice President None
James A. Rowan Vice President None
Douglas M. Schmidt Vice President None
B. Andrew Schmucker 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 A. 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
William A. Verch Vice President None
Shelia M. Vidmar Vice President None
and Deputy General
Counsel
<PAGE>
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 28. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 29. Management Services
-------------------
None.
Item 30. Undertakings
------------
None.
<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 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 30th day
of July, 1999.
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 to the Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
- --------- ----- ----
/s/ John F. Curley, Jr.* Chairman of the Board July 30, 1999
- ----------------------------- and Trustee
John F. Curley, Jr.*
/s/ Edmund J. Cashman, Jr.* President and July 30, 1999
- ----------------------------- Trustee
Edmund J. Cashman, Jr.*
/s/ Edward A. Taber, III* Trustee July 30, 1999
- -----------------------------
Edward A. Taber, III*
/s/ Richard G. Gilmore* Trustee July 30, 1999
- -----------------------------
Richard G. Gilmore*
/s/ Arnold L. Lehman* Trustee July 30, 1999
- -----------------------------
Arnold L. Lehman*
/s/ Jill E. McGovern* Trustee July 30, 1999
- -----------------------------
Jill E. McGovern*
/s/ T. A. Rodgers* Trustee July 30, 1999
- -----------------------------
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President July 30, 1999
- ----------------------------- 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
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
WWW.KL.COM
ARTHUR J. BROWN
(202) 778-9046
[email protected]
July 29, 1999
Legg Mason Tax-Free Income Fund
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
Dear Sir or Madam:
Legg Mason Tax-Free Income Fund ("Trust") is an unincorporated voluntary
association organized under the laws of the Commonwealth of Massachusetts
pursuant to a Declaration of Trust dated November 21, 1990. You have requested
our opinion regarding certain matters in connection with the issuance of certain
shares of beneficial interest ("Shares") of the Trust. In this opinion letter,
the term "Shares" refers to the Class A shares (known as Primary Shares) and
Class Y shares (known as Navigator Shares) of beneficial interest of Legg Mason
Maryland Tax-Free Income Trust, Legg Mason Pennsylvania Tax-Free Income Trust,
and Legg Mason Tax-Free Intermediate-Term Income Trust, each a series of the
Trust (each, a "Series"). This opinion letter is valid with respect to each
Class and Series listed in the preceding sentence only during the time
Post-Effective Amendment No. 13 to the Trust's Registration Statement is
effective and has not been superseded by another post-effective amendment
applicable to that Class or Series, that has become effective.
We have, as counsel, participated in various business and other matters
related to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of the Declaration of Trust and By-Laws of the Trust, the
minutes of meetings of the trustees and other documents relating to the
organization and operation of the Trust, and we generally are familiar with its
business affairs. Based on the foregoing, and the additional qualifications and
other matters set forth below, it is our opinion that as of the date hereof the
Shares, when sold in accordance with the Trust's Declaration of Trust, as
<PAGE>
Legg Mason Tax-Free Income Fund
July 29, 1999
Page 2
amended, and By-laws and the terms contemplated by Post-Effective Amendment No.
13 to the Trust's Registration Statement, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, will
have been legally issued, fully paid and non-assessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that all persons extending credit to, contracting
with or having any claim against the Trust or a particular Series shall look
only to the assets of the Trust or such Series for payment under such credit,
contract or claim; and neither the Trust's shareholders nor its Trustees, nor
any of the Trust's officers, employers or agents, whether past, present or
future, nor any other Series shall be personally liable therefor. It also
requires that every note, bond, contract, instrument, certificate or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust, any Series, or its Trustees in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their capacity as Trustees and neither such Trustee nor the shareholders shall
be personally liable thereon. Every note, bond, contract, instrument,
certificate, or undertaking made or issued by the Trustees or by any officer
shall include a recitation limiting the obligation represented thereby to the
Trust or to one or more Series and its or their assets (but the omission of such
recitation shall not operate to bind any Trust shareholder or Trustee). The
Declaration further provides: (1) for indemnification from the assets of the
applicable Series for all loss and expense of any shareholder or former
shareholder held personally liable solely by reason of his being or having been
a shareholder; and (2) for a Series to assume, upon request by the shareholder,
the defense of any claim made against the shareholder for any act or obligation
of the Series and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust or Series would be unable to meet its
obligations.
We hereby consent to the filing with the Securities and Exchange
Commission of this opinion in connection with Post-Effective Amendment No. 13 to
the Trust's Registration Statement on Form N-1A (File No. 33-37971). We also
consent to the reference to our firm in the Statement of Additional Information
filed as part of the Registration Statement.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Kirkpatrick & Lockhart LLP
------------------------------
Arthur J. Brown
CONSENT OF INDEPENDENT ACCOUNTANTS
---------
We consent to the incorporation by reference in this Post-Effective Amendment
No. 13 (File No. 33-37971) under the Securities Act of 1933 and Post-Effective
Amendment No. 14 (File No. 811-6223) under the Investment Company Act of 1940 to
the Registration Statement on Form N-1A of Legg Mason Tax-Free Income Fund, of
our reports dated April 30, 1999 on our audits of the Primary and Navigator
Class financial statements and financial highlights as of March 31, 1999 and for
the respective periods then ended, which reports are included in the Annual
Reports to Shareholders.
We also consent to the reference to our firm under the captions "Financial
Highlights" in each Prospectus and "The Corporation's Independent Accountants"
in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 28, 1999
Exhibit 23(o)
FORM OF LEGG MASON TAX-FREE INCOME FUND
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
Legg Mason Tax-Free Income Fund hereby adopts this Multiple Class Plan
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"), on behalf of its current operating series, Legg Mason Tax-Free
Intermediate-Term Income Trust, Legg Mason Maryland Tax-Free Income Trust and
Legg Mason Pennsylvania Tax-Free Income Trust, and any series that may be
established in the future (referred to hereinafter collectively as the "Funds"
and individually as a "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
-----------------------------------------------
1. PRIMARY CLASS SHARES. A sales charge of 2.00% of the public offering
price of Legg Mason Tax-Free Intermediate shares is imposed on the sale of
Primary Class shares of that Fund. A sales charge of 2.75% of the public
offering price of Legg Mason Maryland Tax-Free Income Trust shares is imposed on
the sale of Primary Class shares of that Fund. A sales charge of 2.75% of the
public offering price of Legg Mason Pennsylvania Tax-Free Income Trust shares is
imposed on the sale of Primary Class shares of that Fund. These charges may be
reduced according to a schedule set forth in the prospectus or in conjunction
with certain purchase plans described in the prospectus or statement of
additional information. They do not apply to the reinvestment of distributions.
The distributor may waive the collection of such charges from time to time.
Primary Class shares of each Fund are offered and sold without
imposition of a contingent deferred sales charge.
Primary Class shares of each Fund are available to all investors except
those qualified to purchase Navigator Class shares.
<PAGE>
Legg Mason Tax-Free Income Fund
Multiple Class Plan
Page 2
Primary Class shares of each Fund are subject to annual service and
distribution fees, each in the amount of 0.125% of the average daily net assets
of the Primary Class shares of that Fund under a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
2. NAVIGATOR CLASS SHARES. Navigator Class shares are offered and sold
without imposition of an initial sales charge or a contingent deferred sales
charge and are not subject to any service or distribution fees.
Navigator Class shares of each Fund are available for purchase only:
(i) by institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own funds and funds for which they act in a fiduciary
capacity; (ii) by clients of Legg Mason Trust Company ("Trust Company") for
which Trust Company exercises discretionary investment management
responsibility; (iii) by qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million; (iv) by the Legg Mason
Profit Sharing Plan and Trust; and (v) by ERISA clients of Bartlett & Co. that
were shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund
on December 19, 1996. Navigator Class shares are also available for purchase by
exchange, as described below.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
---------------------------------
Certain expenses may be attributable to a particular Class of shares of
each Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the transfer agency fees identified as
being attributable to a specific Class. All other expenses are allocated between
the Classes on the basis of their relative net assets.
<PAGE>
Legg Mason Tax-Free Income Fund
Multiple Class Plan
Page 3
C. EXCHANGE PRIVILEGES:
-------------------
Primary Class and Navigator Class shares of each Fund may be exchanged
for shares of the corresponding Class of other Legg Mason funds, or may be
acquired through an exchange of shares of the corresponding Class of other Legg
Mason funds.
Legg Mason U.S. Government Money Market Portfolio, Legg Mason Cash
Reserve Trust and Legg Mason Tax Exempt Trust (collectively referred to as "Legg
Mason Money Market Funds") currently offer only one class of shares. So long as
a Legg Mason Money Market Fund offers only a single class of shares, Primary
Class and Navigator Class shares of each Fund may be exchanged for shares of
that Legg Mason Money Market Fund, or may be acquired through an exchange of
shares of that Money Market Fund.
These exchange privileges may be modified or terminated by a Fund in
certain instances, and exchanges may be made only into funds that are legally
available for sale in the investor's state of residence.
D. CLASS DESIGNATION:
-----------------
Subject to approval by the Board of Directors, a Fund may alter the
nomenclature for the designations of one or more of its Classes of shares.
E. ADDITIONAL INFORMATION:
----------------------
This Multiple Class Plan is qualified by and subject to the terms of
the then current prospectus for the applicable Classes; provided, however, that
none of the terms set forth in any such prospectus shall be inconsistent with
the terms of the Classes contained in this Plan. The prospectus for each Fund
contains additional information about the Classes and each Fund's multiple class
structure.
<PAGE>
Legg Mason Tax-Free Income Fund
Multiple Class Plan
Page 4
F. DATE OF EFFECTIVENESS:
---------------------
This Multiple Class Plan is effective on July 31, 1997.
- -------------------- ------------------------------------
Date
