<PAGE>
NAVIGATOR TAX-FREE INCOME FUNDS
PROSPECTUS
JULY 31, 1995
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST
Shares of Navigator Maryland Tax-Free Income Trust, Navigator Pennsylvania
Tax-Free Income Trust and Navigator Tax-Free Intermediate-Term Income Trust
(collectively referred to as "Navigator Shares") represent separate classes
(each a "Navigator Class") of interest in Legg Mason Maryland Tax-Free Income
Trust ("Maryland Tax-Free"), Legg Mason Pennsylvania Tax-Free Income Trust
("Pennsylvania Tax-Free") and Legg Mason Tax-Free Intermediate-Term Income Trust
("Tax-Free Intermediate") (each separately referred to as a "Fund" and
collectively referred to as the "Funds"), respectively. Each Fund is a separate
series of Legg Mason Tax-Free Income Fund, ("Trust"), an open-end management
investment company.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they act in
a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust Company")
for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with such Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated July 31, 1995 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by this reference. The Statement of Additional Information
is available without charge upon request from the Funds' distributor, Legg Mason
Wood Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
on the next page).
SHARES OF MARYLAND TAX-FREE ARE REGISTERED FOR SALE TO INVESTORS ONLY IN THE
STATES OF MARYLAND, DELAWARE, FLORIDA, PENNSYLVANIA, TEXAS, VIRGINIA, AND
WYOMING. SHARES OF PENNSYLVANIA TAX-FREE ARE REGISTERED FOR SALE TO INVESTORS
ONLY IN THE STATES OF PENNSYLVANIA, DELAWARE, FLORIDA, MARYLAND, NEW JERSEY, NEW
YORK, OHIO, AND WYOMING. THESE FUNDS ARE NOT BEING OFFERED FOR SALE TO INVESTORS
IN ANY OTHER STATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NAVIGATOR SHARES ARE SOLD AND REDEEMED WITHOUT ANY PURCHASE OR REDEMPTION
CHARGE IMPOSED BY THE FUNDS, ALTHOUGH INSTITUTIONAL CLIENTS MAY CHARGE THEIR
CUSTOMER ACCOUNTS FOR SERVICES PROVIDED IN CONNECTION WITH THE PURCHASE OR
REDEMPTION OF SHARES. SEE "HOW TO PURCHASE AND REDEEM SHARES." EACH FUND PAYS
MANAGEMENT FEES TO LEGG MASON FUND ADVISER, INC., BUT NAVIGATOR CLASSES PAY NO
DISTRIBUTION FEES.
MARYLAND TAX-FREE is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal and Maryland state
and local income taxes, consistent with prudent investment risk and preservation
of capital. In attempting to achieve the Fund's objective, the Funds' investment
adviser, Legg Mason Fund Adviser, Inc. ("Adviser"), invests primarily in debt
instruments issued by or on behalf of the State of Maryland, its political
subdivisions, municipalities, agencies, instrumentalities or public authorities,
the interest on which, in the opinion of counsel to the issuer, is exempt from
federal and Maryland state and local
<PAGE>
income taxes ("Maryland municipal obligations") and which are investment grade,
i.e., securities rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") or, if
unrated by Moody's or S&P, deemed by the Adviser to be of comparable quality.
Under normal circumstances, the dollar-weighted average maturity of the Fund's
portfolio is expected to be between 12 and 24 years. The Fund also may engage in
hedging transactions.
PENNSYLVANIA TAX-FREE is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal income tax and
Pennsylvania personal income tax, consistent with prudent investment risk and
preservation of capital. In attempting to achieve the Fund's objective, the
Adviser invests primarily in debt instruments issued by or on behalf of the
Commonwealth of Pennsylvania, its political subdivisions, municipalities,
agencies, instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax and
Pennsylvania personal income tax ("Pennsylvania municipal obligations") and
which are investment grade, i.e., securities rated within the four highest
grades by Moody's, S&P or, if unrated by Moody's or S&P, securities deemed by
the Adviser to be of compa-rable quality. The Fund's shares are exempt from
Pennsylvania county personal property tax to the extent that the Fund invests in
Pennsylvania municipal obligations. Under normal circumstances, the
dollar-weighted average maturity of the Fund's portfolio is expected to be
between 12 and 24 years. The Fund also may engage in hedging transactions.
TAX-FREE INTERMEDIATE is a non-diversified, professionally managed portfolio
seeking a high level of current income exempt from federal income tax,
consistent with prudent investment risk. In attempting to achieve the Fund's
objective, the Adviser invests primarily in debt instruments issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel to the
issuer, is exempt from federal income tax and which are investment grade, i.e.
securities rated within the four highest grades by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch") or, if unrated by Moody's, S&P or Fitch
("unrated securities"), deemed by the Adviser to be of comparable quality, while
maintaining an average dollar-weighted maturity of between 2 and 10 years. The
Fund also may engage in hedging transactions.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 7
Investment Objectives and Policies 8
How To Purchase and Redeem Shares 13
How Shareholder Accounts are
Maintained 15
How Net Asset Value is Determined 15
Dividends and Other Distributions 15
Taxes 16
Shareholder Services 18
The Funds' Management and Investment Adviser 19
The Funds' Distributor 19
Description of the Trust and
and Its Shares 19
Legg Mason Wood Walker, Incorporated
111 South Calvert Street, P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
2
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth in the table are based on estimated expenses for the initial
period of operations of the Navigator Classes.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR EACH
FUND
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
</TABLE>
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
<S> <C> <C> <C>
Management fees(A) 0.21% 0.09% 0.16%
12b-1 fees None None None
Other expenses 0.14% 0.21% 0.24%
Total operating
expenses(A)
(after fee
waivers) 0.35% 0.30% 0.40%
</TABLE>
(A) Pursuant to a voluntary expense limitation, the Adviser has agreed to
waive the management fees and assume certain other expenses such that
total operating expenses relating to Navigator Shares (exclusive of
taxes, interest, brokerage fees and extraordinary expenses) will not
exceed annual rates of: 0.35% of average daily net assets of Maryland
Tax-Free until January 31, 1996 or until the Fund's net assets reach
$200 million, whichever occurs first; 0.30% of average daily net assets
of Pennsylvania Tax-Free until January 31, 1996 or until the Fund's net
assets reach $125 million, whichever occurs first; and 0.40% of average
daily net assets of Tax-Free Intermediate until January 31, 1996 or
until the Fund's net assets reach $100 million, whichever occurs first.
In the absence of such waivers, the expense ratios for Navigator
Maryland Tax-Free, Pennsylvania Tax-Free and Tax-Free Intermediate would
be 0.69%, 0.76% and 0.79%, respectively.
For further information concerning the expenses of each Fund,
please see "The Funds' Management and Investment Adviser" and "The Funds'
Distributor," page 19.
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming
(1) a 5% annual rate of return and (2) redemption at the end of each time
period. As noted in the table above, the Funds charge no redemption fees
of any kind.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Maryland Tax-Free $4 $11 $20 $44
Pennsylvania Tax-Free $3 $10 $17 $38
Tax-Free Intermediate $4 $13 $22 $51
</TABLE>
This example assumes that all dividends and capital gain distributions
are reinvested and that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT,
THE PROJECTED OR ACTUAL PERFORMANCE OF NAVIGATOR SHARES OF THE FUNDS. THE
ABOVE TABLES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The actual expenses attributable to Navigator Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which Navigator Shares
incur variable expenses, such as transfer agency costs, and whether the
Adviser reimburses all or a portion of a Fund's expenses.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Effective August 1, 1995, the Funds will commence the sale of Navigator
Shares. Navigator Shares pay no 12b-1 distribution fees. The information
below is for Primary Shares (the other class of shares currently offered)
and reflects 12b-1 fees paid by that class and not by Navigator Shares.
The financial highlights tables that follow have been derived from each
Fund's financial statements which have been audited by Coopers & Lybrand
L.L.P., independent accountants. Each Fund's financial statements for the
year ended March 31, 1995 and the report of Coopers & Lybrand L.L.P.
thereon are included in that Fund's annual report and are incorporated by
reference into the Statement of Additional Information. The annual report
for each Fund is available to shareholders without charge by calling an
investment executive at Fairfield, Legg Mason or Legg Mason's Funds
Marketing Department at 800-822-5544.
MARYLAND TAX-FREE
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended March 31, 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $15.69 $15.97 $15.03 $14.70
Net investment income(B) .828 .839 .877 .823
Net realized and unrealized gain (loss) on investments .180 (.275) .947 .333
Total from investment operations 1.008 .564 1.824 1.156
Distributions to shareholders from:
Net investment income (.828) (.839) (.877) (.823)
Net realized gain on investments -- -- (.007) (.003)
In excess of net realized gain on investments -- (.005) -- --
Net asset value, end of period $15.87 $15.69 $15.97 $15.03
Total return(D) 6.60% 3.51% 12.47% 8.04%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 0.54% 0.46% 0.40% 0.18%(E)
Net investment income(B) 5.32% 5.10% 5.61% 5.91%(E)
Portfolio turnover rate 9.5% 6.6% -- 5.4%(E)
Net assets, end of period (in thousands) $142,314 $145,578 $128,566 $83,052
</TABLE>
(A) FOR THE PERIOD MAY 1, 1991 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1992.
(B) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: ALL EXPENSES UNTIL OCTOBER 20,
1991; 0.25% OF AVERAGE DAILY NET ASSETS UNTIL DECEMBER 31, 1991; 0.35%
UNTIL JUNE 30, 1992; 0.40% UNTIL DECEMBER 31, 1992; 0.45% UNTIL DECEMBER
31, 1993; 0.50% UNTIL JUNE 30, 1994; 0.55% UNTIL JULY 31, 1995; AND 0.60%
UNTIL JANUARY 31, 1996.
(C) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 8.76%.
(D) EXCLUDING SALES CHARGE.
(E) ANNUALIZED.
4
<PAGE>
PENNSYLVANIA TAX-FREE
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended March 31, 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $15.80 $16.03 $14.99 $14.70
Net investment income(B) .85 .86 .91 .63
Net realized and unrealized gain (loss) on investments .22 (.23) 1.04 .29
Total from investment operations 1.07 .63 1.95 .92
Distributions to shareholders from net investment income (.85) (.86) (.91) (.63)
Net asset value, end of period $16.02 $15.80 $16.03 $14.99
Total return(D) 7.03% 3.81% 13.31% 6.36%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 0.49% 0.40% 0.32% 0.12%(E)
Net investment income(B) 5.42% 5.16% 5.74% 6.11%(E)
Portfolio turnover rate 2.1% -- -- --
Net assets, end of period (in thousands) $63,929 $62,904 $49,959 $28,873
</TABLE>
(A) FOR THE PERIOD AUGUST 1, 1991 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1992.
(B) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: ALL EXPENSES UNTIL NOVEMBER 30,
1991; 0.20% OF AVERAGE DAILY NET ASSETS UNTIL MARCH 31, 1992; 0.25% UNTIL
JUNE 30, 1992; 0.30% UNTIL DECEMBER 31, 1992; 0.35% UNTIL JULY 31, 1993;
0.40% UNTIL DECEMBER 31, 1993; 0.45% UNTIL JUNE 30, 1994; 0.50% UNTIL
JULY 31, 1995; AND 0.55% UNTIL JANUARY 31, 1996.
(C) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 9.55%.
(D) EXCLUDING SALES CHARGE.
(E) ANNUALIZED.
5
<PAGE>
TAX-FREE INTERMEDIATE
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended March 31, 1995 1994 1993(A)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $14.96 $15.06 $14.70
Net investment income(B) .72 .70 .28
Net realized and unrealized gain (loss) on investments .10 (.09) .36
Total from investment operations .82 .61 .64
Distributions to shareholders from:
Net investment income (.72) (.70) (.28)
Net realized gain on investments -- (.01) --
Net asset value, end of period $15.06 $14.96 $15.06
Total return(D) 5.65% 3.99% 4.35%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 0.34% 0.30% 0.20%(E)
Net investment income(B) 4.83% 4.44% 4.71%(E)
Portfolio turnover rate 24.8% 6.6% --
Net assets, end of period (in thousands) $48,837 $54,032 $37,138
</TABLE>
(A) FOR THE PERIOD NOVEMBER 9, 1992 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1993.
(B) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.20% OF AVERAGE DAILY NET
ASSETS UNTIL MARCH 31, 1993; 0.30% UNTIL JUNE 30, 1994; 0.35% UNTIL JULY
31, 1995; AND 0.65% UNTIL JANUARY 31, 1996.
(C) NOT ANNUALIZED. THE ANNUALIZED TOTAL RETURN FOR THE PERIOD WOULD HAVE
BEEN 11.10%.
(D) EXCLUDING SALES CHARGE.
(E) ANNUALIZED.
6
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the total return of each class
of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
Cumulative total return shows the fund's performance over a specific
period of time. Average annual total return is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns.
Total returns of Primary Shares as of March 31, 1995 were as follows:
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
<S> <C> <C> <C>
One Year +3.70% +4.07% +3.50%
Life of Class +30.34(A) +30.16(B) +12.34(C)
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
MARYLAND PENNSYLVANIA TAX-FREE
TAX-FREE TAX-FREE INTERMEDIATE
<S> <C> <C> <C>
One Year +3.70% +4.07% +3.50%
Life of Class +7.00(A) +7.45(B) +4.99(C)
</TABLE>
(A) INCEPTION OF MARYLAND TAX-FREE -- MAY 1, 1991.
(B) INCEPTION OF PENNSYLVANIA TAX-FREE -- AUGUST 1, 1991.
(C) INCEPTION OF TAX-FREE INTERMEDIATE -- NOVEMBER 9, 1992.
As of the date of this Prospectus, Navigator Shares have no
performance record. Because Navigator Shares have lower total expenses,
they will generally have a higher return than Primary Shares.
Each Fund also may advertise its yield or tax equivalent yield. Yield
reflects investment income net of expenses over a 30-day (or one-month)
period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share at the end of the period. Tax equivalent
yield shows the taxable yield an investor would have to earn before taxes
to equal the Fund's tax-exempt yield. A tax equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus a stated
federal, state and local income tax rate. The effective yield, although
calculated similarly, will be slightly higher than the yield because it
assumes that income earned from the investment is reinvested (i.e., the
compounding effect of reinvestment). Yield computations differ from other
accounting methods and therefore may differ from dividends actually paid
or reported net income.
Total return and yield information reflect past performance and are
not predictions or guarantees of future results. Yields and total returns
of Primary Shares of the Funds would be lower if the Adviser and Legg
Mason had not waived a portion of the fees and reimbursed certain expenses
during the fiscal years 1992 through 1995. Investment return and share
price will fluctuate, and the value of your shares, when redeemed, may be
worth more or less than their original cost.
Further information about each Fund's performance is contained in that
Fund's Annual Report to Shareholders, which may be obtained without charge
by calling an investment executive at Fairfield, Legg Mason or Legg
Mason's Funds Marketing Department at 800-822-5544.
WHO SHOULD INVEST
Maryland Tax-Free is designed for longer-term investors who are able
to benefit from income exempt from federal and Maryland state and local
income taxes. Pennsylvania Tax-Free is designed for longer-term investors
who are able to benefit from income exempt from federal income tax and
Pennsylvania personal income tax. Tax-Free Intermediate is designed for
intermediate-term investors who are able to benefit from income exempt
from federal income tax. The value of Navigator Shares can generally be
expected to fluctuate inversely with changes in interest rates and,
because of the potential negative impact of rising interest rates and
other risks, the Funds would not be appropriate for investors whose
primary goal is stability of principal. Each Fund is not intended to be a
balanced investment program. Each Fund is not an appropriate investment
for "substantial users" of certain facilities financed by industrial
development or private activity bonds or related persons thereof. See
"Taxes-Federal Income Tax," page 16.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Trust's Board
of Trustees without a shareholder vote. There can be no assurance that any
Fund will achieve its investment objective.
MARYLAND TAX-FREE'S investment objective is to earn a high level of
current income exempt from federal and Maryland state and local income
taxes, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the State of
Maryland, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal and Maryland
state and local income taxes. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Maryland municipal obligations, exclusive of any such obligations the
interest on which is a tax preference item for purposes of the federal
alternative minimum tax ("Tax Preference Item"). See "Temporary
Investments," page 9.
PENNSYLVANIA TAX-FREE'S investment objective is to earn a high level
of current income exempt from federal income tax and Pennsylvania personal
income tax, consistent with prudent investment risk and preservation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in debt instruments issued by or on behalf of the Commonwealth
of Pennsylvania, its political subdivisions, municipalities, agencies,
instrumentalities or public authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax and
Pennsylvania personal income tax. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
Pennsylvania municipal obligations, exclusive of any Tax Preference Items.
See "Temporary Investments" page 9.
TAX-FREE INTERMEDIATE'S investment objective is to earn a high level
of current income exempt from federal income tax, consistent with prudent
investment risk. The Fund seeks to achieve its investment objective by
investing primarily in debt instruments issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia
and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest on which, in the opinion of counsel
to the issuer, is exempt from federal income tax ("municipal
obligations"), while maintaining an average dollar-weighted maturity of
between 2 and 10 years. As a fundamental policy, under normal
circumstances, the Fund will maintain at least 80% of its total assets in
municipal obligations exclusive of any Tax Preference Items. See
"Temporary Investments," page 9.
Maryland Tax-Free and Pennsylvania Tax-Free each invest in securities
that, in the opinion of the Adviser, present acceptable credit risks and
that, at the time of purchase, are rated:
"Baa" or higher by Moody's or "BBB" or higher by S&P in the case of
bonds;
"P1" or higher by Moody's or "A1" or higher by S&P in the case of
commercial paper;
"MIG-1" or higher by Moody's or "SP-1" or higher by S&P in the case of
notes; and
"VMIG-1" or higher by Moody's in the case of variable rate demand
notes.
Tax-Free Intermediate invests in securities that, in the opinion of
the Adviser, present acceptable credit risks and that, at the time of
purchase, are rated:
"Baa" or higher by Moody's, "BBB" or higher by S&P or Fitch in the
case of bonds;
"MIG-1" or higher by Moody's, "SP-1" or higher by S&P or "F-1" or
higher by Fitch in the case of notes;
"P1" or higher by Moody's, "A1" or higher by S&P or "F-1" or higher by
Fitch in the case of commercial paper; and
"VMIG-1" or higher by Moody's in the case of variable rate demand
notes.
Each Fund also invests in securities unrated by any of the above
services which are deemed by the Adviser to be of comparable quality.
The bond ratings noted above are considered "investment grade" by the
respective rating agencies. A rating of a municipal obligation represents
the rating agency's opinion regarding its quality and is not a guarantee
of quality. Moody's considers that bonds rated in its fourth highest
category (i.e., Baa) have speculative characteristics; changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for the issuers of such securities to make principal and interest
payments than is the case for higher rated bonds. In the event the rating
on an issue held in
8
<PAGE>
a Fund's portfolio is changed by Moody's, S&P or (with respect to Tax-Free
Intermediate) Fitch, such change will be considered by the Adviser in its
evaluation of the overall investment merits of that security. If, as a
result of any downgradings by Moody's, S&P or (with respect to Tax-Free
Intermediate) Fitch or, for unrated securities, any determinations by the
Adviser that securities are no longer of comparable quality to investment
grade securities, more than 5% of a Fund's total assets are represented by
securities rated below investment grade or the equivalent, the Adviser
will, as soon as practicable consistent with achieving an orderly
disposition of the securities, sell such holdings until they represent 5%
or less of the Fund's total assets. A discussion of the ratings outlined
above is included in the Statement of Additional Information.
In addition to the agency ratings, there are other criteria which will
be used by the Adviser in selecting securities for a portfolio.
Consideration will be given to the maturity and duration of each bond as
well as its effect on the overall average maturity and duration of the
portfolio. Analysis of the current and historical yield spreads is done to
determine the relative value in any bond considered for purchase. The
coupon level and call features also figure in the decision on the relative
merits of an investment. Consideration is also given to the type of
bond -- whether it is a general obligation or a revenue bond. In addition
to this examination of bond characteristics, significant effort is devoted
to analysis of the creditworthiness of the bond issuer at the time of
purchase and on an ongoing basis.
Each Fund is permitted to invest in municipal securities of any
maturity. The maturities of a Fund's portfolio securities will reflect the
Adviser's judgment concerning current and future market conditions as well
as other factors, such as the Fund's liquidity needs. Under normal
circumstances, the dollar-weighted average maturities of Maryland
Tax-Free's and Pennsylvania Tax-Free's portfolios are expected to be
between 12 and 24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be between 2 and 10
years.
Each Fund does not expect its portfolio turnover rate to exceed 90%
per year.
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities. Interest on certain
tax-exempt PABs will constitute a Tax Preference Item. Accordingly, under
normal circumstances, each Fund's investment in obligations, the interest
on which is such an item, including PABs, will be limited to a maximum of
20% of its total assets.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to a
Fund. Certificates of Participation are participations in municipal lease
obligations or installment sales contracts. Each certificate represents a
proportionate interest in or right to the lease purchase payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
TEMPORARY INVESTMENTS
During unusual market conditions, including if, in the Adviser's
opinion, there are insufficient suitable Maryland municipal obligations
(with
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respect to Maryland Tax-Free), Pennsylvania municipal obligations (with
respect to Pennsylvania Tax-Free) or municipal obligations (with respect
to Tax-Free Intermediate) available that pay interest that is not a Tax
Preference Item, a Fund temporarily may invest more than 20% of its total
assets in municipal obligations the interest on which is exempt from
federal income tax but is such an item (with respect to Tax-Free
Intermediate) and/or is subject to Maryland state and local income taxes
(with respect to Maryland Tax-Free) and/or is subject to Pennsylvania
personal income tax (with respect to Pennsylvania Tax-Free). Each Fund
expects that under normal circumstances it will maintain needed liquidity
through the purchase of short-term municipal securities. However, for
liquidity purposes, or pending the investment of the proceeds of the sale
of shares, a Fund temporarily may invest in taxable short-term investments
consisting of: obligations of the U.S. Government, its agencies and
instrumentalities; certificates of deposit and bankers' acceptances of
U.S. domestic banks with assets of one billion dollars or more; commercial
paper or other corporate notes of high quality; and any of such items
subject to short-term repurchase agreements. Each Fund may invest without
limit in such instruments for temporary, defensive purposes, when in the
Adviser's opinion, no suitable municipal securities are available. No more
than 10% of a Fund's net assets will be invested in repurchase agreements
maturing in more than seven days and other illiquid securities. Interest
earned from such taxable investments will be taxable to investors as
ordinary income when distributed to them.
As a fundamental policy, each Fund may borrow money solely for
temporary purposes from banks or by engaging in reverse repurchase
agreements in an amount up to 10% of the value of its total assets;
however, borrowings by a Fund in excess of 5% of the value of a Fund's
total assets may be made only from banks.
YIELD AND RISK FACTORS
Yield
The yield of a municipal obligation is dependent on a variety of
factors, including general municipal securities market conditions, general
fixed-income market conditions, the financial condition of the issuer, the
size of the particular offering, the maturity of the obligation, the
credit quality and rating of the issue and expectations regarding changes
in income tax rates.
Interest Rate Risk
If general market interest rates increase, the prices of municipal
obligations ordinarily will decrease. In a market of decreasing interest
rates, the opposite generally will be true. Although longer-term bonds
generally offer higher yields than shorter-term bonds, their prices are
more sensitive to changes in interest rates than bonds with shorter
maturities. Under normal circumstances, the dollar-weighted average
maturities of Maryland Tax-Free's and Pennsylvania Tax-Free's portfolios
are expected to be 12-24 years and the dollar-weighted average maturity of
Tax-Free Intermediate's portfolio is expected to be 2-10 years. Therefore,
the value of a Fund's portfolio securities, and hence of that Fund's
shares, will be more sensitive to changes in interest rates and will
fluctuate more than the value of a portfolio of shorter-term municipal
obligations.
For Maryland Tax-Free:
Changes in economic conditions in or governmental policies of the
state of Maryland could have a significant impact on the performance of
the Fund. For example, services (including mining), wholesale and retail
trade, government, and manufacturing (primarily printing and publishing,
food and kindred products, instruments and related products, electronic
equipment, industrial machinery and transportation equipment) are the
leading areas of employment in the State of Maryland. In contrast to the
nation as a whole, more people in Maryland are employed in government than
in manufacturing. The relatively high concentration of governmental
employment in Maryland makes the state potentially vulnerable to any
decreases in federal, including military, and state governmental spending.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The outlook for those sectors is
subject to question given disclosures indicating continuing financial
weakness in major banking and insurance companies having their corporate
headquarters in Maryland and the general regional decline in real estate
activity and values.
The Fund may invest in certain municipal obligations with unique
risks. These include, but are not limited to, securities issued by
hospitals and other health care providers. The hospital industry
throughout the nation has been subjected to pressure to reduce expenses
and to limit lengths of stay. That pressure may adversely affect the
financial health of some hospitals.
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An expanded discussion of certain investment considerations relating
to debt obligations of Maryland and its political subdivisions is
contained in the Statement of Additional Information.
For Pennsylvania Tax-Free:
Changes in economic conditions in, or governmental policies of, the
Commonwealth of Pennsylvania could have a significant impact on the
performance of the Fund. For example, Pennsylvania's continued dependence
on manufacturing, mining and steel has made Pennsylvania vulnerable to
cyclical industry fluctuations, foreign imports and environmental
concerns. However, growth in the service and trade sectors has helped
diversify Pennsylvania's economy and reduce its unemployment rate below
the national average. Changes in local economic conditions or local
governmental policies within Pennsylvania, which can vary substantially by
region, could also have a significant impact on the performance of
municipal obligations held by the Fund. The City of Philadelphia, for
example, recently experienced severe financial problems which impaired its
ability to borrow money and adversely affected the ratings of its
obligations and their marketability. While the Fund may invest in
obligations that are secured by obligors other than Pennsylvania or its
political subdivisions (such as hospitals, universities, corporate
obligors and corporate credit and liquidity providers) and obligations
limited to specific revenue pledges (such as sewer authority bonds), the
creditworthiness of these obligors may be partly dependent on the
creditworthiness of Pennsylvania or its municipal authorities.
An expanded discussion of certain investment considerations relating
to debt obligations of Pennsylvania and its political subdivisions is
contained in the Statement of Additional Information.
Concentration
Each Fund may invest 25% or more of its total assets in a particular
segment of the municipal securities market, such as hospital revenue
bonds, housing agency bonds, IDBs or airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project. In
such circumstances, economic, business, political or other changes
affecting one issue of bonds (such as proposed legislation affecting
healthcare or the financing of a project, shortages or price increases of
needed materials, or declining markets or needs for the projects) would
most likely affect other bonds in the same segment, thereby potentially
increasing market risk. As a result, each Fund is subject to greater risk
than other funds that do not follow this practice.
Non-Diversification
Each Fund has registered as a "non-diversified" investment company.
Therefore, the percentage of Fund assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
each Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"). To
qualify as a RIC, a Fund generally must meet the following diversification
requirements at the close of each quarter of its taxable year: (1) at
least 50% of the value of its total assets must consist of cash,
securities of the U.S. Government and other RICs and holdings of other
securities, which, with respect to any one issuer, do not have a value
greater than 5% of the value of the Fund's total assets; and (2) no more
than 25% of the value of its total assets may be invested in the
securities of a single issuer. For these purposes, the term "issuer" does
not include the U.S. Government or other RICs. To the extent that a Fund's
assets are invested in the obligations of a limited number of issuers, the
value of that Fund's shares will be more susceptible to any single
economic, political or regulatory occurrence affecting one or more of
those issuers than the shares of a diversified investment company would
be.
Other Risks
Current efforts to restructure the federal budget and the relationship
between the federal government and state and local governments may impact
the financing of some issuers of municipal securities. Some states and
localities are experiencing substantial deficits and may find it difficult
for political or economic reasons to increase taxes. Some local
jurisdictions have invested heavily in derivative instruments and may now
hold portfolios of uncertain valuation. Each of these factors may affect
the ability of an issuer of municipal securities to meet its obligations.
Efforts by Congress to restructure the federal income tax system could
adversely affect the value of municipal securities.
INVESTMENT TECHNIQUES
Each Fund may employ the investment techniques described below, among
others. Use of certain of these techniques may give rise to taxable
income.
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When-Issued Securities
Each Fund may enter into commitments to purchase municipal obligations
or other securities on a when-issued basis. A Fund may purchase
when-issued securities because such securities are often the most
efficiently priced and have the best liquidity in the bond market. As with
the purchase of any security, when a Fund purchases securities on a
when-issued basis, it assumes the risks of ownership at the time of
purchase, not at the time of receipt. However, the Fund does not have to
pay for the obligations until they are delivered to it, normally 15 to 45
days later. To meet that payment obligation, the Fund will set aside cash
or marketable high-quality debt securities equal to the payment that will
be due. Depending on market conditions, a Fund's when-issued purchases
could cause its share value to be more volatile, because they may increase
the amount by which the Fund's total assets, including the value of the
when-issued securities held by it, exceed the Fund's net assets. Each Fund
does not expect that its commitment to purchase when-issued securities
will at any time exceed, in the aggregate, 25% of total assets.
Callable Bonds
Callable municipal bonds are municipal bonds which carry a provision
permitting the issuer to redeem the bonds prior to their maturity dates at
a specified price which typically reflects a premium over the bonds'
original issue price. If the proceeds of a bond owned by a Fund called
under circumstances favorable to the issuer are reinvested, the result may
be a lower overall yield on such proceeds upon reinvestment because of
lower prevailing interest rates. If the purchase price of such bonds
included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the
Funds, depending on the price at which such bonds were redeemed.
Each callable bond is "marked-to-market" daily based on the bond's
call date so that the call of some or all of a Fund's callable bonds is
not expected to have a material impact on that Fund's net asset value. In
light of the previously described pricing policies and because each Fund
follows certain amortization procedures required by the Internal Revenue
Service, each Fund does not expect to suffer any material adverse impact
in connection with a call of bonds purchased at a premium. Notwithstanding
such policies, however, as with any investment strategy, there is no
guarantee that a call may not have a more substantial impact than
anticipated.
Stand-By Commitments
Each Fund may acquire "stand-by commitments" with respect to its
investments in municipal obligations. A stand-by commitment is a put (that
is, the right to sell the underlying security within a specified period of
time at a specified exercise price) that may be sold, transferred or
assigned only with the underlying security. Under a stand-by commitment, a
broker, dealer or bank agrees to purchase, at the Fund's option, specified
municipal obligations at a specified price. The total amount paid for
outstanding stand-by commitments held by a Fund will not exceed 25% of
that Fund's total assets calculated immediately after each stand-by
commitment is acquired.
Securities Lending, Zero Coupon and Deferred Interest Bonds
Each Fund may engage in securities lending and may invest in zero
coupon and deferred interest bonds. However, each Fund does not currently
intend to loan securities with a value exceeding 5% of its total assets or
to invest more than 5% of its total assets in zero coupon and deferred
interest bonds. Any income from securities lending would be taxable when
distributed to shareholders. For further information concerning securities
lending, zero coupon and deferred interest bonds, see the Statement of
Additional Information.
Variable Rate and Floating Rate Obligations
Each Fund may invest in variable rate municipal obligations and notes.
Variable rate obligations have a yield that is adjusted periodically based
upon market conditions.
Each Fund may also invest in floating rate and variable rate demand
notes. Demand notes provide that the holder may demand payment of the note
at its par value plus accrued interest. The notes may be supported by an
unconditional bank letter of credit guaranteeing payment of the principal
or both the principal and accrued interest. Floating rate demand notes
have an interest rate related to a known lending rate, such as the prime
rate, and are automatically adjusted when such rate changes. With respect
to Maryland Tax-Free and Pennsylvania Tax-Free, 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. With respect to
Tax-Free Intermediate, in calculating its dollar-weighted average
maturity, the 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.
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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 and debt securities (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. No Fund may 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.
Each Fund may seek to enhance its income by writing (selling) covered
call options and covered put options. A Fund may write puts and calls only
on a covered basis, which means, in the case of calls, that the Fund will
own the underlying instrument while the call is outstanding and, in the
case of puts, that the Fund will have cash, U.S. government securities or
other high-grade, liquid debt instruments in a segregated account in an
amount not less than the exercise price while the put is outstanding. Any
gains from futures and options transactions would be taxable.
The success of a Fund's strategies in reducing risks depends on many
factors, the most significant of which is the Adviser's ability to predict
market interest rate changes correctly, which differs from its ability to
select portfolio securities. In addition, a hedge could be unsuccessful if
the changes in the value of its futures contract or option positions do
not correlate to the changes in the value of the Fund's investments. It is
also possible that a Fund may be unable to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or
that a Fund may need to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions. Because the markets
for futures and options are not always liquid, a Fund may be unable to
close out or liquidate its hedged position and may be locked in during a
market decline. The Adviser attempts to minimize the possible negative
effects of these factors through careful selection and monitoring of each
Fund's futures and options positions. The Adviser is of the opinion that a
Fund's investment in futures transactions will not have a material adverse
effect on that Fund's liquidity or ability to honor redemptions.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the portfolios.
While utilization of options, futures contracts and similar instruments
may be advantageous to a Fund, if the Adviser is not successful in
employing such instruments in managing a Fund's investments or in
predicting interest rate changes, that Fund's performance will be worse
than if the Fund did not use such instruments. In addition, a Fund will
pay commissions and other costs in connection with such investments, which
may increase that Fund's expenses and reduce its yield. A more complete
discussion of the possible risks involved in transactions in options and
futures contracts is contained in the Statement of Additional Information.
Each Fund's current policy is to limit options and futures
transactions to those described above. Each Fund currently does not intend
to (i) purchase put and call options having a value in excess of 5% of its
total assets or (ii) write options on portfolio securities having
aggregate exercise prices exceeding 25% of its net assets. Normally,
options will be written, if at all, on those portfolio securities which
the Adviser does not expect to have significant short-term capital
appreciation.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental limitations that, like its
investment objective, can be changed only by the vote of a majority of the
outstanding voting securities of that Fund. For these purposes, a "vote of
a majority of the outstanding voting securities" of a Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund, or (2) 67% or more of the shares present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented in person or by proxy. These investment limitations are set
forth under "Additional Information About Investment Limitations and
Policies" in the Statement of Additional Information. Other Fund policies,
unless described as fundamental, can be changed by the Board of Trustees.
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield Group, Inc. may purchase Navigator
Shares from Fairfield, the
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principal offices of which are located at 200 Gibraltar Road, Horsham,
Pennsylvania 19044. Other investors eligible to purchase Navigator Shares
may purchase them through a brokerage account with Legg Mason. (Legg Mason
and Fairfield are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.)
PURCHASE OF SHARES
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of business of
the New York Stock Exchange ("Exchange") (normally 4:00 p.m. Eastern time)
("close of the Exchange") on any day the Exchange is open will be executed
at the net asset value determined as of the close of the Exchange on that
day. Orders received by Legg Mason or Fairfield after the close of the
Exchange or on days the Exchange is closed will be executed at the net
asset value determined as of the close of the Exchange on the next day the
Exchange is open. See "How Net Asset Value is Determined" on page 15. Each
Fund reserves the right to reject any order for its shares, to suspend the
offering of shares for a period of time, or to waive any minimum
investment requirements.
In addition to Institutional Clients purchasing shares directly from
Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in the Funds. Information
concerning these services and any applicable charges will be provided by
the Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
investment executives or Legg Mason Funds Processing at
1-800-822-5544. Callers should have available the number of shares (or
dollar amount) to be redeemed and their account number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. However, each Fund reserves the
right to take up to seven days to make payment upon redemption if, in the
judgment of the Adviser, that Fund could be adversely affected by
immediate payment. (The Statement of Additional Information describes
several other circumstances in which the date of payment may be postponed
or the right of redemption suspended.) The proceeds of redemption or
repurchase may be more or less than the original cost. If the shares to be
redeemed or repurchased were paid for by check
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(including certified or cashier's checks) within 15 business days of the
redemption or repurchase request, the proceeds may not be disbursed unless
that Fund can be reasonably assured that the check has been collected.
None of the Funds will be responsible for the authenticity of
redemption instructions received by telephone, provided it follows
reasonable procedures to identify the caller. Each Fund may request
identifying information from callers or employ identification numbers.
Each Fund may be liable for losses due to unauthorized or fraudulent
instructions if it does not follow reasonable procedures. Telephone
redemption privileges are available automatically to all shareholders
unless certificates have been issued. Shareholders who do not wish to
have telephone redemption privileges should call their investment
executive for further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to the investor. However, no Fund will redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in an account, the investor will be
notified that the account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having the
account closed.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each investor.
Any shares the investor purchases or receives as a dividend or other
distribution will be credited directly to the account at the time of
purchase or receipt. No certificates are issued unless the shareholder
specifically requests them in writing. Shareholders who elect to receive
certificates can redeem their shares only by mail. Certificates will be
issued in full shares only. No certificates will be issued for shares of
any Fund prior to 15 business days after purchase of such shares by check
unless that Fund can be reasonably assured during that period that payment
for the purchase of such shares has been collected. Fund shares may not be
held in, or transferred to, an account with any brokerage firm other than
Fairfield, Legg Mason or their affiliates.
Every shareholder of record will receive a confirmation of each new
share transaction with that holder's respective Fund, which will also show
the total number of shares being held in safekeeping by the Fund's
transfer agent for the account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers. Institutional
Clients purchasing or holding Navigator Shares on behalf of their
Customers are responsible for the transmission of purchase and redemption
orders (and the delivery of funds) to each Fund on a timely basis.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued based upon appraisals received from an independent pricing
service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities
received from recognized dealers in those securities. Other securities are
valued at fair value as determined by, or under the supervision of, the
Board of Trustees of the Trust. Pursuant to guidelines established by the
Board of Trustees, the fair value of debt securities with remaining
maturities of 60 days or less shall be their amortized cost, unless
conditions otherwise indicate.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income of each Fund are declared daily
and paid monthly. Shareholders begin to earn dividends on their Navigator
Shares as of the settlement date, which is normally the third business day
after their orders are placed with their Legg Mason or affiliated
investment executive. Each Fund also distributes to shareholders
substantially all net capital gain (the excess of net long-term capital
gain over net short-term capital loss) after the end of the taxable year
in which the gain is realized. A second distribution of net capital gain
may be necessary in some years to avoid imposition of the excise tax
described under
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the heading "Additional Tax Information" in the Statement of Additional
Information. Shareholders may elect to:
1. Receive both dividends and capital gain distributions in Navigator
Shares of the distributing Fund;
2. Receive dividends in cash and capital gain distributions in
Navigator Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
capital gain distributions in cash; or
4. Receive both dividends and capital gain distributions in cash.
In certain cases, shareholders may reinvest dividends and capital gain
distributions in the corresponding class of shares of another Navigator
fund. A shareholder should contact his or her investment executive for
additional information about this option. Qualified retirement plans that
obtained Navigator Shares through exchange generally receive dividends and
capital gain distributions in additional shares.
If no election is made, both dividends and capital gain distributions
will be credited to the Institutional Client's account in Navigator Shares
at the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also will be credited to the
account at that net asset value. If an investor elects to receive
dividends or capital gain distributions in cash, a check will be sent.
Investors purchasing through Fairfield may elect at any time to change the
distribution option by notifying the applicable Fund in writing at:
[insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland, 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and capital gain distributions paid to
shareholders as of that date.
TAXES
Federal Income Tax
Each Fund intends to continue to qualify for treatment as a RIC under
the Code. If a Fund so qualifies and, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
certain obligations the interest on which is excludable from gross income
under Section 103(a) of the Code, that Fund may pay "exempt-interest"
dividends to its shareholders. Those dividends constitute the portion of
the aggregate dividends (excluding capital gain distributions), as
designated by the Fund, equal to the excess of the excludable interest
over certain amounts disallowed as deductions. Exempt-interest dividends
are excludable from a shareholder's gross income; however, the amount of
such dividends must be reported on the recipient's federal income tax
return.
If and to the extent a Fund receives interest on certain PABs, a
proportionate part of the exempt-interest dividends paid by the Fund will
be treated as a Tax Preference Item. In addition, exempt-interest
dividends received by a corporate shareholder may be indirectly subject to
the federal alternative minimum tax without regard to whether the Fund's
tax-exempt interest is attributable to PABs.
To the extent dividends are derived from taxable income from temporary
investments, from net short-term capital gain or from the use of certain
investment techniques described in "Investment Objective and Policies,"
page 8, they are taxable to shareholders as ordinary income (whether paid
in cash or reinvested in Fund shares). No portion of those dividends will
qualify for the corporate dividends-received deduction. Distributions
derived from net capital gain, if any, are taxable to shareholders as
long-term capital gain regardless of the length of time they have held
their Fund shares (and irrespective of whether those distributions are
paid in cash or reinvested in Fund shares).
Interest on indebtedness incurred or continued by a shareholder in
order to purchase or carry Fund shares generally is not deductible.
Persons who are "substantial users" (or related persons) of facilities
financed by IDBs or PABs should consult their tax advisers before
purchasing shares of a Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, a "substantial user" includes a non-exempt person
who regularly uses in trade or business a part of a facility financed from
the proceeds of IDBs or PABs.
A redemption of 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. An exchange of Fund shares for shares of any other Navigator fund
generally will have similar tax consequences.
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In addition, if Fund shares are purchased within 30 days before or after
redeeming Fund shares at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
For Maryland Tax-Free:
Maryland Taxes
Dividends paid by Maryland Tax-Free to Maryland residents attributable
to interest received or capital gains recognized by the Fund on Maryland
municipal obligations are exempt from Maryland state and local income
taxes. Distributions attributable to interest received or capital gains
recognized by the Fund on certain U.S. government obligations also are
exempt from Maryland state and local income taxes. Distributions
attributable to the Fund's other income or gains, generally are subject to
these taxes.
Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for purposes of either
Maryland state or local income tax. Fund shares held by an individual are
not subject to the Maryland personal property tax. Fund shares held by a
corporation also are not subject to the Maryland personal property tax.
Subject to a three year phase-in period, dividends paid by the Fund with
respect to Maryland municipal obligations and profits 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 taxable by Maryland.
For Pennsylvania Tax-Free:
Pennsylvania Taxes
Individual shareholders of Pennsylvania Tax-Free who are otherwise
subject to the Pennsylvania personal income tax will not be subject to
that tax on distributions by the Fund that are attributable to interest on
Pennsylvania municipal obligations. Distributions attributable to most
other sources, including gains, will not be exempt from Pennsylvania
personal income tax.
Navigator Shares that are held by individual shareholders who are
Pennsylvania residents will be exempt from the Pennsylvania county
personal property tax to the extent that the Fund's portfolio consists of
Pennsylvania municipal obligations on the annual assessment date.
Nonresidents of Pennsylvania are not subject to this tax. Corporations are
not subject to any of these personal property taxes. For shareholders who
are residents of the City of Philadelphia, distributions of interest
derived from Pennsylvania municipal obligations are not taxable for
purposes of the Philadelphia School District investment net income tax,
provided that the Fund reports to its shareholders the percentage of
Pennsylvania municipal obligations held by it for the year. The Fund will
report such percentage to its shareholders.
Distributions of interest, but not gains, realized on Pennsylvania
municipal obligations are not subject to the Pennsylvania corporate net
income tax. The Pennsylvania Department of Revenue also takes the position
that shares of funds similar to the Fund are not considered exempt assets
of a corporation for the purposes of determining its capital stock value
subject to Pennsylvania capital stock and franchise taxes.
General
Shareholders receive information after the close of each year
concerning the tax status of all dividends and capital gain distributions
for their Fund(s). Each Fund is required to withhold 31% of all taxable
dividends, capital gain distributions and redemption proceeds payable to
any individuals and certain other noncorporate shareholders who do not
provide the Fund with a certified taxpayer identification number. Each
Fund also is required to withhold 31% of all taxable dividends and capital
gain distributions payable to such shareholders who otherwise are subject
to backup withholding. Dividends derived from interest on Maryland
municipal obligations may not be exempt from taxation under the laws of
states other than Maryland. Dividends derived from interest on
Pennsylvania municipal obligations may not be exempt from taxation under
the laws of states other than Pennsylvania.
The foregoing is only a summary of some of the important federal
income tax, Maryland income tax, Pennsylvania and certain local income tax
considerations generally affecting the respective Funds and their
shareholders; see the Statement of Additional Information for a further
discussion. In addition to those considerations, which are applicable to
any investment in the Funds, there may be other federal, state or local
tax considerations applicable to a particular investor. Prospective
shareholders are urged to consult their tax advisers with respect to the
effects of this investment on their own tax situations.
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SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Shareholders will receive from Legg Mason a confirmation after each
transaction involving Navigator Shares (except a reinvestment of dividends
and capital gain distributions). An account statement will be sent to each
shareholder monthly unless there has been no activity in the account, in
which case an account statement will be sent quarterly. Reports will be
sent by each Fund to its shareholders at least semiannually showing its
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its independent accountants.
Confirmations for purchases and redemptions of Navigator Shares made
by Institutional Clients acting in a fiduciary, advisory, custodial, or
other similar capacity on behalf of persons maintaining Customer Accounts
at Institutional Clients will be sent to the Institutional Client.
Beneficial ownership of shares by Customer Accounts will be recorded by
the Institutional Client and reflected in the regular account statements
provided by them to their customers.
Shareholder inquiries should be addressed to: "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or c/o "Fairfield Group, Inc., 200 Gibraltar Road, Horsham,
Pennsylvania 19044."
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for
Navigator Shares of the following funds, provided the shares to be
acquired are eligible for sale under applicable state securities laws:
Navigator Money Market Fund, Inc. -- Prime Obligations Portfolio
A money market fund seeking to provide as high a level of current
interest income as is consistent with liquidity and relative stability of
principal.
Navigator Tax-Free Money Market Fund, Inc.
A money market fund seeking to provide its shareholders with as high a
level of current interest income that is exempt from federal income taxes
as is consistent with liquidity and relative stability of principal.
Navigator Value Trust
A mutual fund seeking long-term growth of capital.
Navigator Total Return Trust
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total investment return consistent with
reasonable risk.
Navigator Special Investment Trust
A mutual fund seeking capital appreciation by investing principally in
issuers with market capitalizations of less than $2.5 billion.
Navigator American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Navigator U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Navigator Maryland Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Navigator Pennsylvania Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Navigator Tax-Free Intermediate-Term Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Investments by exchange into other Navigator funds are made at the per
share net asset value next determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your investment
executive. To effect an exchange by telephone, please call your investment
executive with the information described in the section "How to Purchase
and Redeem
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Shares," page 13. The other factors relating to telephone redemptions
described in that section apply also to telephone exchanges. Please read
the prospectus for the other fund(s) carefully before you invest by
exchange. Each Fund reserves the right to modify or terminate its exchange
privilege upon 60 days' notice to shareholders. There is no assurance the
money market funds will be able to maintain a $1.00 share price. None of
the funds is insured or guaranteed by the U.S. Government.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISER
BOARD OF TRUSTEES
The business and affairs of each Fund are managed under the direction
of the Board of Trustees of the Trust.
ADVISER
Pursuant to separate advisory agreements with each Fund (each an
"Advisory Agreement"), which were approved by the Trust's Board of
Trustees, the Adviser, a wholly owned subsidiary of Legg Mason, Inc.,
serves as each Fund's investment adviser. The Adviser administers and acts
as the portfolio manager for each Fund and is responsible for the actual
investment management of the Funds, including the responsibility for
making investment decisions and placing orders to buy, sell or hold a
particular security. Each Fund pays the Adviser, pursuant to the Advisory
Agreement, a management fee equal to an annual rate of 0.55% of each
Fund's average daily net assets attributable to Navigator Shares. Each
Fund pays all its other expenses which are not assumed by the Adviser.
Pursuant to a voluntary expense limitation, the Adviser has agreed to
waive the management fee and assume certain other expenses relating to
Navigator Shares (exclusive of taxes, interest, brokerage fees and
extraordinary expenses) in excess of: 0.35% (annualized) of average daily
net assets of Maryland Tax-Free until January 31, 1996 or until the Fund's
net assets reach $200 million, whichever occurs first; 0.30% (annualized)
of average daily net assets of Pennsylvania Tax-Free until January 31,
1996 or until the Fund's net assets reach $125 million, whichever occurs
first; and 0.40% (annualized) of average daily net assets of Tax-Free
Intermediate until January 31, 1996 or until the Fund's net assets reach
$100 million.
The Adviser acts as investment adviser, manager or consultant to
sixteen investment company portfolios which had aggregate assets under
management of approximately $4.4 billion as of May 31, 1995. The Adviser's
address is 111 South Calvert Street, Baltimore, Maryland 21202.
Victoria M. Schwatka has been primarily responsible for the day-to-day
management of the Fund since its inception. Mrs. Schwatka is a portfolio
manager and Senior Vice-President of Legg Mason's Fixed Income Group. Mrs.
Schwatka has been employed by Legg Mason since June, 1986.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of the Funds' shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares of the Funds, including any compensation to its
investment executives, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at each
respective Fund's expense, and for any supplementary sales literature and
advertising costs. Legg Mason also assists BFDS with certain of its duties
as transfer agent; for the year ended March 31, 1995, Legg Mason received
from BFDS $19,111, $9,300 and $6,059 for performing such services in
connection with Maryland Tax-Free, Pennsylvania Tax-Free and Tax-Free
Intermediate, respectively.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
is a registered broker-dealer with principal offices located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield may sell Navigator
Shares pursuant to a Dealer Agreement with the Funds' distributor, Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Funds for selling Navigator Shares.
The Chairman, President and Treasurer of the Trust are employed by
Legg Mason.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated November 21, 1990. The Declaration of Trust
authorizes the Trust to issue an unlimited number of shares and to create
additional series, each of which may issue separate classes of shares.
Three series of the Trust currently are being offered. Each series of the
Trust currently offers two Classes of Shares -- Class Y (known as
"Navigator Shares") and Class A (known as "Primary Shares"). The two
Classes represent interests in the
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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. Salespersons and
others entitled to receive compensation for selling or servicing Fund
Shares may receive more with respect to one Class than another.
The initial and subsequent investment minimums for Primary Shares are
$1,000 and $100, respectively. Investments in Primary Shares may be made
through a Legg Mason or affiliated investment executive, through the
Future First Systematic Investment Plan or through automatic investment
arrangements. For information about Primary Shares, call 800-822-5544.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 0.25% of the net assets attributable to Primary
Shares. Investors in Primary Shares may elect to receive dividends and/or
capital gain distributions in cash through the receipt of a check or a
credit to their Legg Mason account. The per share net asset value of
Navigator Shares of each Fund, and dividends and distributions (if any)
paid to Navigator shareholders, are generally expected to be higher than
those of Primary Shares of the Funds, because of the lower expenses
attributable to Navigator Shares. Primary Shares of each Fund may be
exchanged for the corresponding class of shares of other Legg Mason funds.
Investments by exchange into the Legg Mason funds sold with an initial
sales charge are made at the per share net asset value, plus the sales
charge, determined on the same business day as redemption of the fund
shares the investors in Primary Shares wish to redeem.
The Board of Trustees of the Trust does not anticipate that there will
be any conflicts among the interests of the holders of the different
classes of Fund shares. On an ongoing basis, the Board will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the Investment
Company Act of 1940 requires a shareholder vote on certain matters
(including the election of trustees, approval of an advisory contract, and
approval of a plan of distribution pursuant to Rule 12b-1). The Trust will
call a special meeting of the shareholders at the request of 10% or more
of the shares entitled to vote; shareholders wishing to call such a
meeting should submit a written request to their respective Fund at 111
South Calvert Street, Baltimore, Maryland 21202, stating the purpose of
the proposed meeting and the matters to be acted upon. The address of BFDS
is P.O. Box 953, Boston, Massachusetts 02103.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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Notes
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Notes
