<PAGE>
INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF TRUSTEES
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr.
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart
Washington, DC
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR ACCOMPANIED BY A
PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(recycle logo appears here) PRINTED ON RECYCLED PAPER
LMF-034
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
MARCH 31, 1995
THE
LEGG MASON
PENNSYLVANIA
TAX-FREE
INCOME TRUST
PUTTING YOUR FUTURE FIRST
--Legg Mason logo appears here--<PAGE>
<PAGE>
TO OUR SHAREHOLDERS,
We are pleased to report to you on the progress of the Legg Mason
Pennsylvania Tax-Free Income Trust. Coopers & Lybrand L.L.P., the Trust's
independent accountants, recently completed their annual examination of the
Trust, and audited financial statements for the fiscal year ended March 31,
1995 are included in this report.
On March 31, 1995, the Legg Mason Pennsylvania Tax-Free Income Trust
had a 30-day annualized yield of 5.17%, an average weighted maturity of
17.3 years and net assets per share of $16.02.
The Trust seeks a high level of current income exempt from federal and
Pennsylvania state and local income taxes, consistent with prudent
investment risk and preservation of capital. It purchases only securities
which have received investment grade ratings from Moody's Investors Service
or Standard & Poor's Corporation or which are judged by the Trust's
investment advisor to be of comparable quality. Moody's ratings of
securities we currently own are:
<TABLE>
<S> <C>
Aaa 69.9%
Aa 12.1%
A 13.6%
Short-term securities 4.4%
</TABLE>
During the six months ended March 31, the value of the Trust's
portfolio holdings rose as interest rates declined for the first time since
early 1994. This increase in portfolio value, plus dividends paid from
interest earnings, produced a total return for shareholders of 5.55% (not
annualized) in the six-month period. Total return measures investment
performance in terms of appreciation or depreciation in net asset value per
share plus dividends and any capital gain distributions. It assumes that
dividends and distributions were reinvested at the time they were paid, and
does not reflect the effect of the Trust's 2.75% maximum initial sales
charge.
Normally, the average weighted maturity of the Trust will be kept
within a range of 12-24 years. Because of the portfolio's relatively long
average weighted maturity, the Trust offers higher yields than short-term
and intermediate-term tax free bond funds. However, shareholders should
keep in mind that for the same reason, the Trust's net asset value per
share typically will decline more when interest rates rise and gain more
when interest rates fall than the net asset values per share of tax free
bond funds with short-term and intermediate-term average weighted
maturities.
Some shareholders regularly add to their Trust holdings by authorizing
automatic, monthly transfers from their bank checking accounts or Legg
Mason money market funds. Your Investment Executive will be happy to help
you make these arrangements if you would like to purchase shares in this
convenient way.
Sincerely,
(signature of John F. Curley, Jr. appears here)
John F. Curley, Jr.
Chairman
May 9, 1995
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
For the fiscal year ended March 31, 1995, the fund performed well
relative to other Pennsylvania municipal bond funds. For the 12-month
period ending March 31, 1995, the Pennsylvania Tax-Free Income Trust
ranked 14th of 47 Pennsylvania funds according to Lipper Analytical
Services, with a total return of 7.03% (excluding the maximum 2.75% sales
charge) versus 6.39% for the average Pennsylvania fund. Our favorable
relative performance was attributable primarily to the short average
maturity maintained in the fund during last year's market decline.
Performance comparisons with some other funds also benefited from the
limitations on the fund's fees and expenses described in the Notes to
Financial Statements at the end of this report.
During the first eight months of the fiscal year, we allowed the
average maturity of your fund to remain at approximately 16 years and then
extended the average maturity of the fund to 17.3 years by the end of
March. The average life of a fund is a somewhat more accurate measure of
potential volatility of the net asset value of a fund than average
maturity because average life reflects the time to call or maturity,
whichever is appropriate. From March until October, we kept the average
life of the fund at approximately 12.5 years. Starting in November, we
extended the average life of the fund, ending the fiscal year at a 15.2
year average life. This strategy was adopted to allow the fund to benefit
from any decline in longer-term interest rates which would make the net
asset value of the fund increase. We continue to focus investments in high
quality municipal bond issues and have not invested in any derivative
securities.
Interest rates rose on tax-exempt bonds through most of 1994 in
response to the Federal Reserve Board's raising of the federal funds rate.
Rates peaked in November and then the bond market rallied significantly
through the end of March 1995, as it became more apparent that the economy
is beginning to slow. The expectation that the Fed will not continue
tightening monetary policy to control inflation has also contributed to
the strength in the bond market.
Our conservative strategy of maintaining a relatively short average
maturity and average life in your fund had a major positive impact on the
performance of the fund through most of last year. As the market rallied,
that strategy did not help the fund perform as well as those funds which
had significantly longer average maturities. Our actions to extend the
average maturity and average life of the fund slowly as we perceive a more
stable market environment are in keeping with our philosophy of making
conservative moves in the portfolio rather than trading actively in an
attempt to time the market.
2
<PAGE>
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
Performance Comparison of a $10,000 Investment as of March 31, 1995(dagger)
(graph appears here--plot points listed below)
<TABLE>
<CAPTION>
8/1/91 9/91 3/92 9/92 3/93 9/93 3/94 9/94 3/31/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free Income Trust 9,722 10,241 10,629 11,076 11,715 12,628 12,161 12,331 13,016
Lehman Brothers Municipal Bond
Index(1) 10,000 10,264 10,639 11,337 11,972 12,781 12,249 12,469 13,160
</TABLE>
Average Annual Total Return
1 Year Life of Fund*
4.07% 7.45%
* Fund Inception--August 1, 1991
(dagger) Includes maximum sales charge of 2.75%.
(1) The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market.
The results shown above are based on historical results and are not intended
to indicate future performance. The investment return and principal value of an
investment in the fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average annual
returns tend to smooth out variations in the fund's return, so they differ from
actual year-to-year results. No adjustment has been made for any income taxes
payable by shareholders.
3
<PAGE>
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
MARCH 31, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
MUNICIPAL BONDS -- 94.2%
Allegheny County, Airport Revenue
1992-B AMT (FSA insured)
$ 1,000 6.625% 1/1/22 $1,025
1992-D AMT (FGIC insured)
1,500 7.75% 1/1/19 1,593
Allegheny County, Baldwin-Whitehall
School District, GO Series 1992-A
(FGIC insured)
1,000 6.60% 8/15/10 1,053
Allegheny County, GO Series C-38
(AMBAC insured)
6.50% 9/1/10
750 (Pre-refunded 9/1/01(|)) 808
Allegheny County Hospital
Development Authority, Children's
Hospital (MBIA insured)
1,000 6.875% 7/1/14 1,046
Allegheny County Hospital
Development Authority,
Presbyterian University Health
System, Inc. Project Series 1992-B
(MBIA insured)
3,000 6.00% 11/1/23 2,936
Allegheny County, North Allegheny
School District Refunding Revenue
Series A (AMBAC insured)
1,095 6.35% 11/1/12 1,122
Allegheny County, West Jefferson
Hills School District, GO
(FGIC insured)
1,000 7.10% 2/1/11 1,103
Beaver County, IDA PCR Ohio Edison
Company (FGIC insured)
1,000 7.00% 6/1/21 1,069
Berks County, GO (FGIC insured)
500 5.85% 11/15/01 519
Bethlehem Authority Water Revenue
Series 1992 (MBIA insured)
6.25% 11/15/11
1,000 (Pre-refunded 11/15/01(|)) 1,065
Bucks County, Council Rock School
District, GO (FGIC insured)
250 6.75% 3/1/11 263
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
Bucks County, Council Water and
Sewer Collection Sewer System
(FGIC insured)
$1,000 5.375% 12/1/13 $ 938
Butler County, Seneca Valley School
District, GO Series 1991-B
(MBIA insured)
500 6.50% 1/1/03 524
Chester County, GO
600 7.00% 12/15/11 663
Commonwealth of Pennsylvania, GO
First Series
1,000 6.125% 9/15/03 1,060
Second Series
1,000 6.50% 11/1/09 1,051
Dauphin County Hospital Authority,
Polyclinic Medical Center
(MBIA insured)
6.90% 8/15/11
500 (Pre-refunded 8/15/99(|)) 539
Delaware County, GO
1,000 6.00% 11/15/22 995
Delaware County Authority,
University Revenue, Villanova
University (MBIA insured)
500 6.85% 8/1/11 529
Erie County, GO Series 1991-B
(FGIC insured)
6.25% 9/1/11
500 (Pre-refunded 9/1/01(|)) 533
6.75% 9/1/16
1,000 (Pre-refunded 9/1/01(|)) 1,092
Erie County Prison Authority,
Commonwealth Lease Revenue
(MBIA insured)
1,500 6.25% 11/1/11 1,590
1,000 6.625% 11/1/14 1,080
Lycoming County, GO Series 1991-A
(FGIC insured)
6.40% 8/15/11
1,000 (Pre-refunded 8/15/01(|)) 1,072
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
MUNICIPAL BONDS -- Continued
Montgomery County Higher
Education and Health Authority,
Saint Joseph's University Revenue
Series 1992 (Connie Lee insured)
$ 500 6.25% 12/15/04 $ 527
Montgomery County, IDA PCR
Philadelphia Electric Company
Series 1991-B (MBIA insured)
1,500 6.70% 12/1/21 1,572
Montgomery County, Upper
Gwynedd-Towamencin
Guaranteed Sewer Revenue
(MBIA insured)
250 6.75% 10/15/06 268
Montgomery County, GO Refunding
Series 1991
1,000 6.10% 7/15/00 1,047
Montgomery Township Municipal
Sewer Authority Guaranteed
Sewer Revenue Series 1991-A
(MBIA insured)
250 6.70% 5/15/21 260
Pennsylvania Higher Educational
Facilities Authority, Allegheny
General Hospital Series 1991-A
500 7.25% 9/1/17 528
Pennsylvania Higher Educational
Facilities Authority, State System of
Higher Education Revenue
Series E (MBIA insured)
6.80% 6/15/04
1,000 (Pre-refunded 6/15/01(|)) 1,092
Pennsylvania Higher Education
Facilities Authority, Temple
University Revenue (MBIA insured)
250 6.50% 4/1/21 257
Pennsylvania Higher Educational
Facilities Authority, University
Revenue, University of
Pennsylvania Series 1987-A
1,000 6.625% 1/1/17 1,008
Pennsylvania Higher Education
Assistance Agency, Student Loan
Revenue Series 1991-C AMT
(AMBAC insured)
1,000 7.15% 9/1/21 1,052
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
Pennsylvania Housing Finance
Agency, Rental Housing Refunding
Revenue
Series 1992-C
$ 750 6.50% 7/1/23 $ 759
Series 1993
1,000 5.80% 7/1/22 933
Pennsylvania Housing Finance
Agency, Single Family Mortgage
Non-AMT
Series 1991-32
500 7.15% 4/1/15 529
Series 1992-33
500 6.90% 4/1/17 521
Pennsylvania IDA Economic
Development Revenue
Series 1991-A
7.00% 1/1/11
1,000 (Pre-refunded 1/1/01(|)) 1,115
Series 1994-A (AMBAC insured)
1,250 5.50% 1/1/14 1,191
Pennsylvania Infrastructure
Investment Authority Revenue
Series 1990-A
500 7.15% 9/1/10 530
Pennsylvania Intergovernmental
Co-op Authority (MBIA insured)
1,000 5.60% 6/15/15 947
1,000 5.60% 5/15/16 945
Pennsylvania State University
6.75% 7/1/14
2,000 (Pre-refunded 7/1/99(|)) 2,170
1,000 5.50% 8/15/16 942
1,500 5.10% 3/1/18 1,303
Pennsylvania Turnpike Commission
Revenue
Series I (FGIC insured)
500 7.20% 12/1/17 568
Series L (AMBAC insured)
750 6.25% 6/1/11 767
Series N
1,000 5.50% 12/1/17 914
Series N (FGIC insured)
1,000 5.50% 12/1/19 936
</TABLE>
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
</TABLE>
MUNICIPAL BONDS -- Continued
<TABLE>
<C> <S> <C>
Philadelphia Gas Works Series B
(MBIA insured)
$ 500 7.00% 5/15/20 $ 586
Philadelphia Municipal Authority,
Justice Lease Revenue Series
1991-B (FGIC insured)
500 7.00% 11/15/04 561
500 7.10% 11/15/05 564
Philadelphia Municipal Authority,
Lease Revenue Series 1993-A
(FGIC insured)
1,000 5.625% 11/15/14 958
Sayre, PA Healthcare Revenue
Volunteer Hospital Authority,
Guthrie Healthcare System
(AMBAC insured)
500 7.20% 12/1/20 542
Schuylkill County Redevelopment
Authority, Commonwealth Lease
Revenue (FGIC insured)
7.125% 6/1/13
750 (Pre-refunded 6/1/01(|)) 815
Somerset County General Authority,
Commonwealth Lease Revenue
(FGIC insured)
6.25% 10/15/11
500 (Pre-refunded 10/15/01(|)) 530
7.00% 10/15/13
500 (Pre-refunded 10/15/01(|)) 550
Swarthmore Borough Authority,
Swarthmore College Revenue
Series 1992
1,000 6.00% 9/15/12 1,010
2,000 6.00% 9/15/20 1,995
University of Pittsburgh Series
1992-A
(MBIA insured)
1,000 6.125% 6/1/21 998
Washington County Hospital
Authority, Hospital Refunding
Revenue, Shadyside Hospital
Project Series 1992
(AMBAC insured)
1,000 5.875% 12/15/13 981
1,000 6.00% 12/15/18 990
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
Washington County, Trinity Area
School District (FGIC insured)
6.625% 11/1/11
$ 500 (Pre-refunded 11/1/01(|)) $ 540
Westmoreland County
(AMBAC insured)
2,000 0%* 8/1/13 653
Total Municipal Bonds
(Identified Cost -- $57,755) 60,222
SHORT-TERM INVESTMENTS -- 4.3%
Repurchase Agreement -- 0.3%
State Street Bank & Trust Company
4.25% dated 3/31/95, to be
repurchased at $175 on 4/3/95
(Collateral: $175 U.S. Treasury Bonds
175 8.125% due 5/15/21, value: $195) 175
Variable Rate Demand
Obligations -- 4.0%
Allegheny County, Hospital
Development Revenue
Series A
400 4.20%** 4/6/95 400
Series B1
95 4.20%** 4/6/95 95
Series C
800 4.20%** 4/6/95 800
Delaware County, IDA Scott Paper Co.
Series B
1,300 4.30%** 4/5/95 1,300
2,595
Total Short-term Investments
(Identified Cost -- $2,770) 2,770
</TABLE>
<TABLE>
<S> <C>
Total Investments -- 98.5%
(Identified Cost -- $60,525) 62,992
Other Assets Less Liabilities -- 1.5% 937
$63,929
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
Net Assets Consisting of:
Accumulated paid-in capital
applicable to 3,989 shares
outstanding $61,509
Accumulated net realized loss
on investments (47)
Unrealized appreciation of
investments 2,467
NET ASSETS -- 100.0% $63,929
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE $16.02
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus sales
charge of 2.75% of offering
price) $16.47
</TABLE>
<TABLE>
<CAPTION>
% of Market
Net Assets Value
(000)
<S> <C> <C>
</TABLE>
SECTOR DIVERSIFICATION
<TABLE>
<S> <C> <C>
Pre-refunded Bonds 19.3% $12,345
Educational Revenue 13.4 8,569
Hospital Revenue 11.0 7,023
Transportation Revenue 9.1 5,804
Lease Revenue 8.7 5,568
General Obligation -- School 6.4 4,064
District
General Obligation -- Local 5.0 3,223
Housing Revenue 4.3 2,742
Utility Revenue 4.1 2,642
General Obligation -- State 3.3 2,111
Water and Sewer Revenue 3.1 1,996
Other Special Taxes 3.0 1,892
Small Business Administration 1.9 1,191
Revenue
Student Loan Revenue 1.6 1,052
Short-term Investments 4.3 2,770
Other Assets Less Liabilities 1.5 937
100.0% $63,929
</TABLE>
<TABLE>
<S> <C>
INVESTMENT ABBREVIATIONS
</TABLE>
<TABLE>
<S> <C>
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
Connie Lee Connie Lee Insurance Company
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GO General Obligation
IDA Industrial Development Authority
MBIA Municipal Bond Insurance Association
PCR Pollution Control Revenue
</TABLE>
* ZERO-COUPON BOND -- A BOND WITH NO PERIODIC INTEREST PAYMENTS WHICH IS
SOLD AT SUCH A DISCOUNT AS TO PRODUCE A CURRENT YIELD TO MATURITY.
** THE RATE SHOWN IS THE RATE AS OF MARCH 31, 1995, AND THE MATURITY SHOWN
IS THE LONGER OF THE NEXT INTEREST READJUSTMENT DATE OR THE DATE THE
PRINCIPAL AMOUNT OWED CAN BE RECOVERED THROUGH DEMAND.
(|) PRE-REFUNDED BOND -- BONDS ARE REFERRED TO AS PRE-REFUNDED WHEN THE
ISSUE HAS BEEN ADVANCE REFUNDED BY A SUBSEQUENT ISSUE. THE ORIGINAL
ISSUE IS USUALLY ESCROWED WITH U.S. TREASURY SECURITIES IN AN AMOUNT
SUFFICIENT TO PAY THE INTEREST, PRINCIPAL AND CALL PREMIUM, IF ANY, TO
THE EARLIEST CALL DATE. ON THE CALL DATE THE BOND WILL "MATURE." THE
PRE-REFUNDED DATE IS USED IN DETERMINING WEIGHTED AVERAGE PORTFOLIO
MATURITY.
A GUIDE TO ABBREVIATIONS APPEARS AT RIGHT.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
FOR THE YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $3,681
EXPENSES:
Investment advisory fee $ 343
Distribution and service fees 156
Custodian fee 51
Legal and audit fees 25
Transfer agent and shareholder servicing expense 24
Organization expense 12
Reports to shareholders 7
Registration fees 5
Trustees' fees 3
Other expenses 4
630
Less fees waived (326)
Total expenses, net of waivers 304
NET INVESTMENT INCOME 3,377
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized loss on investments (47)
Increase in unrealized appreciation of investments 869
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 822
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,199
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
<TABLE>
<CAPTION>
For the Years Ended March 31,
(Amounts in Thousands) 1995 1994
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 3,377 $ 3,078
Net realized loss on investments (47) --
Change in unrealized appreciation (depreciation) of investments 869 (1,284)
Increase in net assets resulting from operations 4,199 1,794
Distributions to shareholders from net investment income (3,377) (3,078)
Increase in net assets from Fund share transactions 203 14,229
Change in net assets 1,025 12,945
NET ASSETS:
Beginning of year 62,904 49,959
End of year $ 63,929 $ 62,904
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
Contained below is per share operating performance data for a share of
beneficial interest outstanding, total investment return, ratios to average
net assets and other supplemental data. This information has been derived
from information provided in the financial statements.
<TABLE>
<CAPTION>
August 1, 1991*
For the Years Ended March 31, to
1995 1994 1993 March 31, 1992
<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(1) 0.85 0.86 0.91 0.63
Net realized and unrealized gain (loss) on
investments 0.22 (0.23) 1.04 0.29
Total from investment operations 1.07 0.63 1.95 0.92
Distributions to shareholders
from net investment income (0.85) (0.86) (0.91) (0.63)
Net asset value, end of period $16.02 $15.80 $16.03 $14.99
Total return(4) 7.03% 3.81% 13.31% 6.36%(3)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(1) 0.49% 0.40% 0.32% 0.12%(2)
Net investment income(1) 5.42% 5.16% 5.74% 6.11%(2)
Portfolio turnover rate 2.08% -- -- --
Net assets, end of period (in thousands) $63,929 $62,904 $49,959 $28,873
</TABLE>
* COMMENCEMENT OF OPERATIONS.
(1) 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 SEPTEMBER 30, 1992; 0.35% UNTIL JULY
31, 1993; AND 0.40% UNTIL DECEMBER 31, 1993; 0.45% UNTIL JUNE 30, 1994;
AND 0.50% THROUGH JULY 31, 1995.
(2) ANNUALIZED.
(3) NOT ANNUALIZED.
(4) EXCLUDING SALES CHARGE.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
<PAGE>
NOTES TO F INANCIAL STATEMENTS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
(Amounts in Thousands)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Tax-Free Income Fund ("Trust"), consisting of the
Pennsylvania Tax-Free Income Trust ("Fund"), the Maryland Tax-Free Income
Trust ("Maryland Fund") and the Tax-Free Intermediate-Term Income Trust
("Intermediate-Term Fund"), is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. All
series of the Trust are non-diversified. The financial statements of the
Maryland Fund and the Intermediate-Term Fund are included in separate
reports to shareholders.
Security Valuation
Portfolio securities are valued based upon market quotations. When
market quotations are not readily available, securities are valued based
on prices received from recognized broker-dealers in the same or similar
securities. The amortized cost method of valuation, which approximates
market, is used for debt obligations with 60 days or less remaining to
maturity.
Dividends to Shareholders
Dividends are declared daily and paid monthly. Net capital gain
distributions are declared and paid after the end of the tax year in which
the gain is realized. Dividends payable are recorded on the dividend
record date. At March 31, 1995, dividends payable of $145 were accrued.
Net income for dividend purposes consists of interest accrued and accrued
expenses. Bond premium is amortized for financial reporting and tax
purposes. Bond discount, other than original issue, is not amortized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest.
Federal Income Taxes
No provision for federal income or excise taxes is
required since the Fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income to its
shareholders. The Fund has unused capital loss carryforwards for federal
income tax purposes of $47 which expire in 2003.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the year ended March 31, 1995 (excluding
short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $5,127
Proceeds from sales 1,190
</TABLE>
At March 31, 1995, the cost of securities for federal income tax
purposes was $60,525. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $2,911
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $444.
3. FUND SHARE TRANSACTIONS:
At March 31, 1995, there were unlimited shares authorized at $.001 par
value for the Trust and the Fund. Transactions in Fund shares were as
follows:
[CAPTION]
<TABLE>
<CAPTION>
For the Years Ended March 31,
1995 1994
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 521 $ 8,185 1,118 $18,447
Reinvestment of
distributions 150 2,349 132 2,179
Repurchased (662) (10,331) (387) (6,397)
Net increase 9 $ 203 863 $14,229
</TABLE>
4. TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg Mason
Wood Walker, Incorporated ("Legg Mason"), a member of the New York Stock
Exchange and the distributor for the Fund. Under this agreement, the
10
<PAGE>
<PAGE>
Adviser provides the Fund with investment advisory, management and
administrative services for which the Fund pays a fee at an annual rate of
0.55% of average daily net assets of the Fund calculated daily and payable
monthly. The agreement with the Adviser provides that expense
reimbursements be made to the Fund for expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) which in any month are in
excess of annual rates, based on average daily net assets, according to
the following schedule: all expenses until November 30, 1991, 0.20% until
March 31, 1992, 0.25% until June 30, 1992, 0.30% until September 30, 1992,
0.35% until July 31, 1993, 0.40% until December 31, 1993, 0.45% until June
30, 1994, and 0.50% through July 31, 1995 or until the Fund's net assets
reach $125 million, whichever occurs first. For the year ended March 31,
1995, advisory fees of $326 were waived.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.125% and an annual service fee of 0.125% of the
Fund's average daily net assets, calculated daily and payable monthly.
Distribution and service fees of $18 were payable to the distributor at
March 31, 1995. Legg Mason also has an agreement with the Fund's transfer
agent to assist with certain of its duties. For this assistance, Legg
Mason was paid $9 by the transfer agent for the year ended March 31, 1995.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF LEGG MASON TAX-FREE INCOME FUND AND
SHAREHOLDERS OF THE LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST:
We have audited the accompanying statement of net assets of the Legg
Mason Pennsylvania Tax-Free Income Trust (one of the series comprising the
Legg Mason Tax-Free Income Fund) as of March 31, 1995, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended, and
financial highlights for each of the three years in the period then ended
and for the period August 1, 1991 (commencement of operations) to March
31, 1992. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1995, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Legg Mason Pennsylvania Tax-Free Income Trust as of March
31, 1995, and the results of its operations, changes in its net assets,
and financial highlights for each of the respective periods stated in the
first paragraph, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 28, 1995
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