LEGG MASON
TAX-FREE INCOME FUNDS:
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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
(revised August 2, 1999)
[LOGO]
LEGG
MASON
FUNDS
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.
Not every fund listed in this Prospectus is available for purchase
in every state. Please consult your Legg Mason financial advisor
concerning the availability of a particular fund.
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TABLE OF CONTENTS
About the funds:
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1 Investment objectives
5 Principal risks
7 Performance
10 Fees and expenses of the funds
12 Management
About your investment:
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14 How to invest
16 How to sell your shares
17 Account policies
18 Services for investors
19 Dividends and taxes
20 Financial highlights
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LEGG MASON TAX-FREE INCOME FUNDS
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INVESTMENT OBJECTIVES
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LEGG MASON 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 ordinarily executed.
Legg Mason Tax-Free Income Funds 1
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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.
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LEGG MASON 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
2 Legg Mason Tax-Free Income Funds
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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 ordinarily 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.
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LEGG MASON 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.
Legg Mason Tax-Free Income Funds 3
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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 ordinarily 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.
4 Legg Mason Tax-Free Income Funds
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PRINCIPAL RISKS
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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 -
The market prices of the funds' municipal debt investments generally
decline when market interest rates increase, and increase when market
interest rates decline. 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 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.
Legg Mason Tax-Free Income Funds 5
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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 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.
6 Legg Mason Tax-Free Income Funds
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PERFORMANCE
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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.
Maryland Tax-Free Income Trust -- Primary Shares
Year by year total return as of December 31 of each year (%)
[GRAPHIC TABLE APPEARS HERE]
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
8.32 12.16 (3.12) 14.81 3.58 7.69 5.59
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.
1 Year 5 Years Life of Class
- -------------------------------------- ----------- ----------- ---------------
Maryland Tax-Free Income Fund + 5.59% + 5.55% + 7.28%(a)
Lehman Brothers Municipal Bond
Index + 6.48% + 6.22% + 7.87%(b)
(a) May 1, 1991 (commencement of operations) to December 31, 1998.
(b) May 31, 1991 to December 31, 1998.
Legg Mason Tax-Free Income Funds 7
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Pennsylvania Tax-Free Income Trust -- Primary Shares
Year by year total return as of December 31 of each year (%)
[GRAPHIC TABLE APPEARS HERE]
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
9.46 12.77 (3.82) 15.25 3.29 8.09 5.76
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, 1994 - 4.51%
In the following table, average annual total returns as of December
31, 1998 are compared with the Lehman Brothers Municipal Bond Index.
1 Year 5 Years Life of Class
- ------------------------------------------ ----------- ----------- -------------
Pennsylvania Tax-Free Income Fund + 5.76% + 5.53% + 7.41% (a)
Lehman Brothers Municipal Bond
Index + 6.48% + 6.22% + 7.86% (b)
(a) August 1, 1991 (commencement of operations) to December 31, 1998.
(b) August 31, 1991 to December 31, 1998.
8 Legg Mason Tax-Free Income Funds
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Tax-Free Intermediate-Term Income Trust -- Primary Shares
Year by year total return as of December 31 of each year (%)
[GRAPHIC TABLE APPEARS HERE]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
9.95 (1.96) 11.95 3.49 6.09 5.26
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.
1 Year 5 Years Life of Class
- ----------------------------------- ----------- ----------- ---------------
Tax-Free Intermediate Term +5.26% +4.87% +5.83%(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) November 30, 1992 to December 31, 1998.
Legg Mason Tax-Free Income Funds 9
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FEES AND EXPENSES OF THE FUNDS
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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.
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
- --------------------------------------------------------------------------------
Maryland Pennsylvania Tax-Free
Primary Shares of: Tax-Free Tax-Free Intermediate
- ---------------------------------- ----------- -------------- -------------
Management fees (a) 0.55% 0.55% 0.55%
Distribution and Service
(12b-1) fees 0.25% 0.25% 0.25%
Other Expenses 0.14% 0.20% 0.23%
- ---------------------------------- ------- ------- -------
Total Annual Fund
Operating Expenses (a) 0.94% 1.00% 1.03%
(a) 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 and total operating expenses
relating to Primary Shares are as follows: for Maryland Tax-Free,
0.31% and 0.70% of average net assets; for Pennsylvania Tax-Free,
0.25% and 0.70% of average net assets; and for Tax Free Intermediate,
0.22% and 0.70% of average net assets.
10 Legg Mason Tax-Free Income Funds
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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 $ 96 $ 300 $ 520 $ 1,155
Pennsylvania Tax-Free $ 102 $ 318 $ 552 $ 1,225
Tax-Free Intermediate $ 105 $ 328 $ 569 $ 1,259
Legg Mason Tax-Free Income Funds 11
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MANAGEMENT
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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.
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.
12 Legg Mason Tax-Free Income Funds
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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.
The adviser, administrator and distributor are wholly-owned
subsidiaries of Legg Mason, Inc., a financial services holding
company.
Legg Mason Tax-Free Income Funds 13
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HOW TO INVEST
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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.
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 your balances in 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 Legg
Systematic Mason's Future First Systematic Investment Plan. Under this
Investment plan, you may arrange for automatic monthly investments in the
Plan 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 financial
Investments 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.
14 Legg Mason Tax-Free Income Funds
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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 regular trading on 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.
Legg Mason Tax-Free Income Funds 15
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HOW TO SELL YOUR SHARES
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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 distributions
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.
16 Legg Mason Tax-Free Income Funds
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ACCOUNT POLICIES
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Calculation of Net Asset Value:
Net asset value per Primary Share is determined daily as of the close
of regular trading on 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:
- reject any order for shares or suspend the offering of
shares for a period of time
- change its minimum investment amounts
- 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.
Legg Mason Tax-Free Income Funds 17
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SERVICES FOR INVESTORS
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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 one. 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:
- terminate or limit the exchange privilege of any shareholder
who makes more than four exchanges from the fund in one
calendar year
- terminate or modify the exchange privilege after 60 days'
written notice to shareholders
18 Legg Mason Tax-Free Income Funds
<PAGE>
[GRAPHIC]
DIVIDENDS AND TAXES
--------------------------------------------------------------------------
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.
Legg Mason Tax-Free Income Funds 19
<PAGE>
[GRAPHIC]
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
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>
<S> <C> <C> <C> <C>
Investment Operations
---------------------------------------------------------
Net Realized &
For the Net Asset Net Unrealized Gain Total From
Years Ended Value, Investment (Loss) On Investment
March 31, Beginning of Year Income Investments Operations
--------- ----------------- ------ ----------- ----------
Maryland Tax-Free -- Primary Class
1999 $ 16.39 $ .78(c) $ .05 $ .83
1998 15.91 .81(c) .59 1.40
1997 16.07 .83(c) (.09) .74
1996 15.87 .86(c) .25 1.11
1995 15.69 .83(c) .18 1.01
---- --------- ---------- --------- ---------
Pennsylvania Tax-Free -- Primary Class
1999 $ 16.48 $ .80(d) $ .10 $ .90
1998 15.80 .81(d) .71 1.52
1997 16.10 .83(d) (.11) .72
1996 16.02 .89(d) .15 1.04
1995 15.80 .85(d) .22 1.07
---- --------- ---------- --------- ---------
Tax-Free Intermediate-Term -- Primary Class
1999 $ 15.61 $ .67(e) $ .08 $ .75
1998 15.22 .67(e) .39 1.06
1997 15.34 .68(e) (.12) .56
1996 15.06 .68(e) .28 .96
1995 14.96 .72(e) .10 .82
---- --------- ---------- --------- ---------
</TABLE>
20 Legg Mason Tax-Free Income Funds
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Distributions
------------------------------------------
From Net
For the From Net Realized Net Asset
Years Ended Investment Gain on Total Value,
March 31, Income Investments Distributions End of Year
--------- ------ ----------- ------------- -----------
Maryland Tax-Free -- Primary Class
1999 $ (.78) $ (.05) $ (.83) $ 16.39
1998 (.81) (.11) (.92) 16.39
1997 (.83) (.07) (.90) 15.91
1996 (.86) (.05) (.91) 16.07
1995 (.83) -- (.83) 15.87
---- --------- --------- -------------- ---------
Pennsylvania Tax-Free -- Primary Class
1999 $ (.80) $ (.05) $ (.85) $ 16.53
1998 (.81) (.03) (.84) 16.48
1997 (.83) (.19) (1.02) 15.80
1996 (.89) (.07) (.96) 16.10
1995 (.85) -- (.85) 16.02
---- --------- --------- -------------- ---------
Tax-Free Intermediate-Term -- Primary Class
1999 $ (.67) $ (.01) $ (.68) $ 15.68
1998 (.67) -- (.67) 15.61
1997 (.68) -- (.68) 15.22
1996 (.68) -- (.68) 15.34
1995 (.72) -- (.72) 15.06
---- --------- --------- -------------- ---------
</TABLE>
Legg Mason Tax-Free Income Funds 21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------
Net Investment
Total Expenses Net Expenses Income
For the to Average to Average to Average Portfolio Net Assets,
Years Ended Total Return Net Assets (a) Net Assets (b) Net Assets Turnover Rate End of Year
March 31, (%) (%) (%) (%) (%) (thousands -- $)
- -------------- ------------ --------------- -------------- -------------- ------------- ----------------
Maryland Tax-Free -- Primary Class
1999 5.16 .70(c) .70(c) 4.71(c) 12.9 166,458
1998 8.97 .70(c) .70(c) 4.97(c) 18.9 154,468
1997 4.73 .67(c) .66(c) 5.18(c) 6.0 145,974
1996 7.11 .59(c) .58(c) 5.29(c) 14.1 146,645
1995 6.60 -- .54(c) 5.32(c) 9.5 142,314
- ----- ----- ------ ------ ------- ------ ---------
Pennsylvania Tax-Free -- Primary Class
1999 5.54 .70(d) .70(d) 4.82(d) 10.6 75,093
1998 9.80 .71(d) .70(d) 5.00(d) 14.1 68,048
1997 4.61 .67(d) .66(d) 5.20(d) 13.6 64,875
1996 6.52 .54(d) .53(d) 5.42(d) 17.2 65,275
1995 7.03 -- .49(d) 5.42(d) 2.1 63,929
- ----- ----- ------ ------ ------- ------ ---------
Tax-Free Intermediate-Term -- Primary Class
1999 4.82 .70(e) .70(e) 4.24(e) 17.9 63,502
1998 7.12 .71(e) .70(e) 4.34(e) 9.0 59,255
1997 3.71 .67(e) .66(e) 4.43(e) 8.9 54,736
1996 6.47 .57(e) .56(e) 4.41(e) -- 60,042
1995 5.65 -- .34(e) 4.83(e) 24.8 48,837
- ----- ----- ------ ------ ------- ------ ---------
</TABLE>
(a) 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.
(b) This ratio reflects total expenses reduced by the impact of compensating
balance credits and voluntary expense waivers described below.
(c) 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%.
(d) 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%.
(e) 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 Legg Mason Tax-Free Income Funds
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Legg Mason Tax-Free Income Funds
------------------------------------------------------------------
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:
- call toll-free 1-800-822-5544
- visit us on the Internet via http://www.leggmason.com
- 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
