NAVIGATOR TAX-FREE INCOME FUNDS:
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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
(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.
<PAGE>
TABLE OF CONTENTS
ABOUT THE FUNDS:
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<TABLE>
<S> <C>
1 Investment objectives
4 Principal risks
6 Performance
9 Fees and expenses of the funds
10 Management
</TABLE>
ABOUT YOUR INVESTMENT:
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<TABLE>
<S> <C>
11 How to invest
12 How to sell your shares
13 Account policies
14 Services for investors
15 Dividends and taxes
16 Financial highlights
</TABLE>
<PAGE>
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.
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.
Legg Mason Tax-Free Income Funds 1
<PAGE>
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 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.
2 Legg Mason Tax-Free Income Funds
<PAGE>
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.
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.
Legg Mason Tax-Free Income Funds 3
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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.
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.
4 Legg Mason Tax-Free Income Funds
<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.
Legg Mason Tax-Free Income Funds 5
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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. 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 Navigator Shares would pay lower expenses, and
therefore would have higher returns.
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 for the fund's Primary Class as of
June 30, 1999 was -1.32%.
DURING THE SEVEN CALENDAR YEARS OF THE PRIMARY CLASS
ENDED DECEMBER 31, 1998:
<TABLE>
<S> <C> <C>
QUARTER ENDED TOTAL RETURN
- -------------------- ------------------- ----------------
BEST QUARTER: MARCH 31, 1995 + 5.73%
WORST QUARTER: MARCH 31, 1994 - 3.92%
</TABLE>
In the following table, average annual total returns as of December 31,
1998 are compared with the Lehman Brothers Municipal Bond Index.
<TABLE>
<S> <C> <C> <C>
1 YEAR 5 YEARS LIFE OF CLASS
- ------------------------------ ----------- ----------- ---------------
MARYLAND TAX-FREE INCOME
TRUST -- PRIMARY SHARES + 5.59% + 5.55% + 7.28%(A)
LEHMAN BROTHERS MUNICIPAL
TRUST BOND INDEX + 6.48% + 6.22% + 7.87%(B)
</TABLE>
(a) May 1, 1991 (commencement of operations) to December 31, 1998.
(b) May 31, 1991 to December 31, 1998.
6 Legg Mason Tax-Free Income Funds
<PAGE>
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 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:
<TABLE>
<S> <C> <C>
QUARTER ENDED TOTAL RETURN
- -------------------- ------------------- -------------------
BEST QUARTER: MARCH 31, 1993 +8.71%
WORST QUARTER: MARCH 31, 1994 -4.51%
</TABLE>
In the following table, average annual total returns as of December 31,
1998 are compared with the Lehman Brothers Municipal Bond Index.
<TABLE>
<S> <C> <C> <C>
1 YEAR 5 YEARS LIFE OF CLASS
- --------------------------------- ----------- ----------- ---------------
PENNSYLVANIA TAX-FREE INCOME
TRUST -- PRIMARY SHARES + 5.76% + 5.53% + 7.41%(A)
PENNSYLVANIA TAX-FREE INCOME
TRUST -- NAVIGATOR SHARES N/A N/A + 5.44%(B)
LEHMAN BROTHERS MUNICIPAL
BOND INDEX + 6.48% + 6.22% + 7.86%(C)
</TABLE>
(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) August 31, 1991 to December 31, 1998.
Legg Mason Tax-Free Income Funds 7
<PAGE>
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 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:
<TABLE>
<S> <C> <C>
QUARTER ENDED TOTAL RETURN
- -------------------- ------------------- -------------------
BEST QUARTER: MARCH 31, 1995 +4.70%
WORST QUARTER: MARCH 31, 1994 -2.83%
</TABLE>
In the following table, average annual total returns as of December 31,
1998 are compared with the Lehman Brothers Seven-Year Municipal Bond
Index.
<TABLE>
<S> <C> <C> <C>
1 YEAR 5 YEARS LIFE OF CLASS
- ----------------------------------------- ----------- ----------- --------------------
TAX-FREE INTERMEDIATE-TERM INCOME
TRUST -- PRIMARY SHARES +5.26% +4.87% +5.83%(A)
LEHMAN BROTHERS SEVEN-YEAR MUNICIPAL
BOND INDEX +6.22% +5.79% +6.76%(B)
</TABLE>
(a) November 9, 1992 (commencement of operations of Primary Class) to
December 31, 1998.
(b) November 30, 1992 to December 31, 1998.
8 Legg Mason Tax-Free Income Funds
<PAGE>
[GRAPHIC]
FEES AND EXPENSES OF THE FUNDS
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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.
<TABLE>
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -----------------------------------------------------------------------------
MARYLAND PENNSYLVANIA TAX-FREE
NAVIGATOR SHARES OF: TAX-FREE TAX-FREE INTERMEDIATE
- -------------------------- ----------- -------------- --------------
MANAGEMENT FEES (A) 0.55% 0.55% 0.55%
DISTRIBUTION AND/OR
SERVICE (12B-1) FEES NONE NONE NONE
OTHER EXPENSES (B) 0.14% 0.20% 0.23%
- -------------------------- ------ ------ ------
TOTAL ANNUAL FUND
OPERATING EXPENSES (A) 0.69% 0.75% 0.78%
</TABLE>
(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 and total operating expenses relating to Navigator Shares are as
follows: for Maryland Tax-Free, 0.31% and 0.45% of average net assets;
for Pennsylvania Tax-Free, 0.25% and 0.45% of average net assets; and for
Tax-Free Intermediate, 0.22% 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.
<TABLE>
<S> <C> <C> <C> <C>
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
</TABLE>
Legg Mason Tax-Free Income Funds 9
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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 the
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:
<TABLE>
<S> <C>
MARYLAND TAX-FREE 0.31%
PENNSYLVANIA TAX-FREE 0.25%
TAX-FREE INTERMEDIATE 0.22%
</TABLE>
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 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.
10 Legg Mason Tax-Free Income Funds
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HOW TO INVEST
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Navigator Shares are currently offered for sale only to:
- 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").
- 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
- 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.
Legg Mason Tax-Free Income Funds 11
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HOW TO SELL YOUR SHARES
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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 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.
Each fund has reserved the right under certain conditions to redeem its
shares in kind by distributing portfolio securities in payment for
redemptions.
12 Legg Mason Tax-Free Income Funds
<PAGE>
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ACCOUNT POLICIES
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CALCULATION OF NET ASSET VALUE:
Net asset value per Navigator 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 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:
- 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 13
<PAGE>
[GRAPHIC]
SERVICES FOR INVESTORS
----------------------------------------------------------------------------
CONFIRMATIONS 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:
- 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
Some Institutional Clients may not offer all of the Navigator Funds for
exchange.
14 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 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.
15 Legg Mason Tax-Free Income Funds
<PAGE>
[GRAPHIC]
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
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 the 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>
INVESTMENT OPERATIONS
--------------------------------------------------------
NET REALIZED
FOR THE NET ASSET NET & UNREALIZED TOTAL FROM
YEARS ENDED VALUE, INVESTMENT GAIN (LOSS) ON INVESTMENT
MARCH 31, BEGINNING OF YEAR INCOME INVESTMENTS OPERATIONS
- --------------- --------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
PENNSYLVANIA TAX-FREE -- NAVIGATOR CLASS
1999 $ 16.48 $ .84(C) $ .10 $ .94
1998 (D) 16.44 .05(C) .04 .09
</TABLE>
<TABLE>
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
- --------------- ------------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
PENNSYLVANIA TAX-FREE -- NAVIGATOR CLASS
1999 $ (.84) $ (.05) $ (.89) $ 16.53
1998 (D) (.05) -- (.05) 16.48
</TABLE>
<TABLE>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------
TOTAL EXPENSES
FOR THE TO AVERAGE
YEARS ENDED TOTAL RETURN NET ASSETS (A)
MARCH 31, (%) (%)
- --------------- -------- ----------------------
<S> <C> <C>
PENNSYLVANIA TAX-FREE -- NAVIGATOR CLASS
1999 5.79 .46(C)
1998 (D) .55(E) .45(C,F)
NET EXPENSES NET INVESTMENT
FOR THE TO AVERAGE INCOME TO PORTFOLIO NET ASSETS,
YEARS ENDED NET ASSETS (B) AVERAGE NET ASSETS TURNOVER RATE END OF YEAR
MARCH 31, (%) (%) (%) (THOUSANDS -- $)
- --------------- --------------------- ------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
PENNSYLVANIA TAX-FREE -- NAVIGATOR CLASS
1999 .45(C) 5.04(C) 10.6 $ 276
1998 (D) .45(C,F) 4.82(C,F) 14.1(F) 90
</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 a voluntary expense
limitation of 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, 0.75% and 1998, 0.75%.
(d) March 10, 1998 (commencement of sale of Navigator Class) to March 31, 1998.
(e) Not annualized
(f) Annualized
16 Legg Mason Tax-Free Income Funds
<PAGE>
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<PAGE>
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-158 SEC file number 811-6223
