<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-039
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
MARCH 31, 1995
THE
LEGG MASON
TAX-FREE
INTERMEDIATE-
TERM
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
Tax-Free Intermediate-Term 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 Tax-Free Intermediate-Term Trust had
a 30-day annualized yield of 4.84%, an average weighted maturity of 7.5
years and net assets per share of $15.06.
The Trust continues to seek a high level of current income exempt from
federal income taxes, consistent with prudent investment risk. We purchase
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 54.2%
Aa 27.6%
A 16.9%
Short-term securities 1.3%
</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 3.98% (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% maximum initial sales charge.
Normally, the average weighted maturity of the portfolio will be kept
within a range of 2-10 years. Because of the portfolio's intermediate-term
maturity, we expect that in most market periods the Trust will offer higher
yields than shorter-term municipal bond funds and greater price stability
than municipal bond funds with longer maturities. However, shareholders
should keep in mind that net asset value per share will fluctuate -- both
up and down -- in response to changes in interest rates, unlike money
market funds which attempt to maintain a constant net asset value of $1 per
share.
We believe that the Tax-Free Intermediate-Term Trust's emphasis on
portfolio quality, tax-free income, and intermediate-term maturities
continues to be a sensible investment combination for many investors.
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
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
For the fiscal year ended March 31, 1995, the fund performed well
relative to other intermediate municipal bond funds. For the 12-month
period ending March 31, 1995, the Tax-Free Intermediate-Term Income Trust
had a total return of 5.65% (excluding the maximum 2.00% sales charge)
versus 5.59% for the average tax free intermediate 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 nine months of the fiscal year, we kept the average
maturity of your fund under 7 years and then extended the average maturity
of the fund to 7.5 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 through
October, we kept the average life of the fund at approximately 5.5 years.
Starting in November, we extended the average life of the fund, ending the
fiscal year at a 6.4 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 have to
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
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
Performance Comparison of a $10,000 Investment as of March 31, 1995(dagger)
(graph appears here--plot points listed below)
<TABLE>
<CAPTION>
11/09/92 3/31/93 9/30/93 3/31/94 9/30/94 3/31/95
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Intermediate Trust 9,800 10,226 10,829 10,634 10,804 11,234
Lehman Brothers 7-Year
Municipal Bond Index(1) 10,000 10,559 11,166 10,874 11,094 11,564
</TABLE>
Average Annual Total Return
1 Year Life of Fund*
3.50% 4.99%
* Fund Inception--November 9, 1992
(dagger) Includes maximum sales charge of 2.00%.
(1) The Lehman Brothers 7-year Municipal Bond Index is a total return
performance benchmark for investment-grade tax-exempt bonds with
maturities ranging from six to eight years.
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
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
MARCH 31, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
MUNICIPAL BONDS -- 97.2%
Arizona -- 6.2%
Arizona Transportation Board
Subordinated Highway Revenue Series
1992 A
$ 500 6.00% 7/1/00 $ 523
Salt River Project Agricultural
Improvement and Power District,
Electric System Refunding Revenue
1993 Series A
1,000 5.30% 1/1/03 1,000
Scottsdale Street and Highway User
Revenue Refunding Series 1993
1,000 5.00% 7/1/02 987
University of Arizona Board of
Regents
7.20% 6/1/01
500 (Pre-refunded 6/1/98(|)) 542
3,052
Connecticut -- 2.3%
State of Connecticut Special Tax
Obligation, Transportation
Infrastructure 1990 Series A
7.10% 6/1/04
1,000 (Pre-refunded 6/1/01(|)) 1,114
Florida -- 2.1%
Northwest Florida Water Management
District Land Acquisition Revenue
Refunding Series 1992 (FGIC
insured)
1,000 5.50% 4/1/02 1,026
Illinois -- 4.7%
State of Illinois, GO
Series April 1986
1,000 6.90% 4/1/01 1,038
State of Illinois Sales Tax Revenue
Series O
1,220 5.90% 6/15/01 1,262
2,300
Indiana -- 1.1%
State of Indiana Toll Finance
Authority Toll Road Revenue
Refunding
Series 1987
500 7.00% 7/1/07 521
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
Kentucky -- 2.0%
Turnpike Authority of Kentucky,
Economic Development Road Revenue
and Revenue Refunding
(Revitalization Projects) Series
1993
(AMBAC insured)
$ 1,000 5.30% 7/1/04 $ 994
Louisiana -- 2.1%
City of New Orleans Audubon Park
Commission Aquarium Series 1993
(FGIC insured)
1,000 6.00% 10/1/08 1,023
Maine -- 2.0%
Maine Municipal Bond Bank Refunding
1993 Series A
1,000 5.20% 11/1/05 968
Maryland -- 24.3%
Cecil County, GO Consolidated Public
Improvement and Refunding 1993
(FGIC insured)
850 6.50% 12/1/99 901
Howard County, Consolidated Public
Improvement and Refunding 1993
Series A
1,000 4.80% 8/15/01 985
Maryland Department of
Transportation Consolidated
Transportation Series 1991
1,000 6.00% 9/1/00 1,049
Refunding Series 1993
1,000 4.375% 6/15/04 903
Maryland Health and Higher
Educational Facilities Authority
Refunding Revenue
Francis Scott Key Medical Center
Series 1993 (FGIC insured)
1,000 4.80% 7/1/01 978
Johns Hopkins University Issue
Series 1988
1,300 7.50% 7/1/20 1,405
Maryland Transportation Authority
Transportation Facilities Projects
Revenue Series 1992 (FGIC insured)
1,000 5.70% 7/1/05 1,019
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
</TABLE>
MUNICIPAL BONDS -- Continued
<TABLE>
<C> <S> <C>
Maryland -- Continued
Mayor and City Council of Baltimore
GO Consolidated Public Improvement
Refunding 1995 Series A (FGIC
insured)
$ 750 0%* 10/15/06 $ 386
Project and Refunding Revenue
(Water Projects) Series 1990-A
(MBIA insured)
6.50% 7/1/20
1,000 (Pre-refunded 7/1/00(|)) 1,069
Montgomery County, GO Consolidated
Public Improvement Series B
1,000 6.80% 11/1/99 1,082
6.80% 11/1/07
1,000 (Pre-refunded 11/1/99(|)) 1,093
Northeast Maryland Waste Disposal
Authority Solid Waste Revenue
(Montgomery County Resource
Recovery Project) Series 1993 A AMT
1,000 5.60% 7/1/02 988
11,858
Massachusetts -- 1.1%
Commonwealth of Massachusetts, GO
Refunding 1986 Series A
7.125% 10/1/05
500 (Pre-refunded 10/1/96(|)) 528
Missouri -- 1.0%
Missouri Health and Educational
Facilities Authority Refunding
Revenue, (SSM Health Care)
Series 1992 AA (MBIA insured)
500 4.90% 6/1/98 500
Nebraska -- 2.1%
Nebraska Public Power District
Revenue
1,000 5.70% 1/1/04 1,011
Nevada -- 1.1%
State of Nevada, GO LT (Nevada
Municipal Bond Bank Refunding
Project No. 4) Series 1989 B
500 6.70% 2/1/01 538
New Hampshire -- 2.1%
New Hampshire Municipal Bond Bank, GO
Refunding 1991 Series H
1,000 5.70% 2/15/01 1,023
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
New Jersey -- 4.3%
New Jersey Turnpike Authority,
Turnpike Revenue Series 1991 C
(AMBAC insured)
$ 2,000 6.40% 1/1/07 $ 2,122
North Carolina -- 2.2%
North Carolina Eastern Municipal
Power Agency, Power System Revenue
Refunding Series 1987 A
1,000 7.30% 1/1/04 1,056
Ohio -- 1.1%
State of Ohio Higher Education
Facilities Revenue Series 1988 A
500 7.00% 11/1/01 530
Pennsylvania -- 3.2%
City of Philadelphia Gas Works
Revenue, 10th Series (BIGI insured)
7.20% 7/1/01
500 (Pre-refunded 7/1/96(|)) 526
Pennsylvania Intergovernmental
Cooperation Authority Special Tax
Revenue (City of Philadelphia
Funding Program) Series 1992
(FGIC insured)
1,000 5.75% 6/15/99 1,029
1,555
South Carolina -- 6.6%
Berkeley County Water and Sewer
Revenue Refunding and Improvement
(MBIA insured)
1,000 6.50% 6/1/06 1,068
State of South Carolina, State
Capital Improvement Series S
6.75% 8/1/01
1,000 (Pre-refunded 8/1/96(|)) 1,049
South Carolina Public Service
Authority Revenue, 1991 Refunding
and Improvement Series B
1,000 6.70% 7/1/02 1,083
3,200
Tennessee -- 2.1%
State of Tennessee GO, 1994 Series A
1,000 5.25% 3/1/02 1,019
</TABLE>
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TAX-FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
</TABLE>
MUNICIPAL BONDS -- Continued
<TABLE>
<C> <S> <C>
Texas -- 5.6%
City of Austin Combined Utility
Systems Revenue Refunding Series
1992 A (MBIA insured)
$ 1,000 6.00% 11/15/04 $ 1,051
City of Houston Water and Sewer
System Junior Lien Revenue
Refunding Series 1992 C
(MBIA insured)
1,000 5.40% 12/1/01 1,018
Texas Public Finance Authority, GO
Refunding (Superconducting Super
Collider Project) Series 1992 C
(FGIC insured)
1,000 0%* 4/1/02 684
2,753
Utah -- 1.0%
Intermountain Power Agency Power
Supply Revenue Refunding 1988
Series B
500 6.90% 7/1/96 513
Vermont -- 3.1%
State of Vermont, GO 1990 Series A
6.75% 2/1/03
1,400 (Pre-refunded 2/1/00(|)) 1,525
Virginia -- 12.8%
Commonwealth of Virginia
Transportation Board,
Transportation Contract Revenue
Refunding Series 1992 (Route 28
Project)
1,000 5.75% 4/1/00 1,035
Fairfax County Public Improvement
Refunding Series 1992 C
2,000 5.50% 10/1/03 2,046
Henrico County GO Public Improvement
Refunding Series 1993
1,100 5.25% 1/15/09 1,064
Virginia Public Building Authority
State Building Revenue Refunding
Series 1992 B
1,000 5.625% 8/1/02 1,031
<CAPTION>
Principal
Amount Value
<C> <S> <C>
Virginia -- Continued
Virginia State Public School
Authority Series B
6.75% 1/1/99
$ 1,000 (Pre-refunded 1/1/97(|)) $ 1,053
6,229
Wisconsin -- 1.0%
State of Wisconsin, GO 1989 Series B
500 6.90% 5/1/96 512
Total Municipal Bonds
(Identified Cost -- $47,170) 47,470
<CAPTION>
</TABLE>
VARIABLE RATE DEMAND OBLIGATIONS -- 1.8%
<TABLE>
<C> <S> <C>
Sweetwater County, WY PCR Refunding
(PacifiCorp Projects)
Series 1988B (AMBAC insured)
500 4.50%** 4/3/95 500
Jackson County, MS PCR Refunding
(Chevron USA Inc. Project)
Series 1993
400 4.55%** 4/3/95 400
Total Variable Rate Demand
Obligations
(Identified Cost -- $900) 900
</TABLE>
<TABLE>
<S> <C> <C>
Total Investments -- 99.0%
(Identified Cost -- $48,070) 48,370
Other Assets Less
Liabilities -- 1.0% 467
Net Assets Consisting of:
Accumulated paid-in capital
applicable to 3,244 shares
outstanding $48,765
Accumulated net realized
loss on investments (228)
Unrealized appreciation of
investments 300
NET ASSETS -- 100.0% $48,837
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE $15.06
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus
sales charge of 2% of
offering price) $15.37
</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 THAT CALL DATE, THE BOND WILL "MATURE". THE
PRE-REFUNDED DATE IS USED IN DETERMINING WEIGHTED AVERAGE PORTFOLIO
MATURITY.
A GUIDE TO ABBREVIATIONS APPEARS ON THE NEXT PAGE.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
% of Market
Net Assets Value
<S> <C> <C>
<CAPTION>
(000)
</TABLE>
SECTOR DIVERSIFICATION
<TABLE>
<S> <C> <C>
General Obligation -- Local 20.5% $10,016
Ground Transportation Revenue 18.7 9,153
Pre-refunded Bonds 17.4 8,499
Public Utilities 11.7 5,714
General Obligation -- State 6.7 3,253
Water and Sewer Revenue 6.4 3,112
Special Tax Revenue 4.7 2,291
Education Revenue 4.0 1,935
Hospital Revenue 3.0 1,478
Lease Revenue 2.1 1,031
Solid Waste Revenue 2.0 988
Short-term Investments 1.8 900
Other Assets Less Liabilities 1.0 467
<CAPTION>
<S> <C> <C>
100.0% $48,837
</TABLE>
INVESTMENT ABBREVIATIONS
<TABLE>
<S> <C>
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
BIGI Bond Investors Guaranty Insurance
FGIC Financial Guaranty Insurance Company
GO General Obligation
LT Limited Tax
MBIA Municipal Bond Insurance Association
PCR Pollution Control Revenue
</TABLE>
7
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TAX-FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
FOR THE YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $2,628
EXPENSES:
Investment advisory fee $ 280
Distribution and service fees 127
Custodian fee 46
Legal and audit fees 24
Transfer agent and shareholder servicing expense 16
Organization expense 15
Reports to shareholders 8
Registration fees 7
Trustees' fees 3
Other expenses 3
529
Less fees waived (357)
Total expenses, net of waivers 172
NET INVESTMENT INCOME 2,456
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized loss on investments (221)
Increase in unrealized appreciation of investments 450
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 229
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,685
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON TAX-FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
<TABLE>
<CAPTION>
For the Years Ended March 31,
<S> <C> <C>
(Amounts in Thousands) 1995 1994
<CAPTION>
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 2,456 $ 2,259
Net realized gain (loss) on investments (221) 28
Change in unrealized appreciation of investments 450 (620)
Increase in net assets resulting from operations 2,685 1,667
Distributions to shareholders from:
Net investment income (2,456) (2,259)
Net realized gain on investments -- (35)
Change in net assets from Fund share transactions (5,424) 17,521
Change in net assets (5,195) 16,894
NET ASSETS:
Beginning of year 54,032 37,138
End of year $ 48,837 $ 54,032
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON TAX FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM 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>
For the Years Ended November 9, 1992*
March 31, to
1995 1994 March 31, 1993
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $14.96 $15.06 $14.70
Net investment income(1) 0.72 0.70 0.28
Net realized and unrealized gain (loss) on investments 0.10 (0.09) 0.36
Total from investment operations 0.82 0.61 0.64
Distributions to shareholders from:
Net investment income (0.72) (0.70) (0.28)
Net realized gain -- (0.01) --
Net asset value, end of period $15.06 $14.96 $15.06
Total return(4) 5.65% 3.99% 4.35%(3)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(1) 0.34% 0.30% 0.20%(2)
Net investment income(1) 4.83% 4.44% 4.71%(2)
Portfolio turnover rate 24.8% 6.6% --
Net assets, end of period (in thousands) $48,837 $54,032 $37,138
</TABLE>
* COMMENCEMENT OF OPERATIONS.
(1) NET OF FEES WAIVED AND EXPENSES REIMBURSED BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.20% OF AVERAGE DAILY NET
ASSETS UNTIL MARCH 31, 1993; 0.30% OF AVERAGE DAILY NET ASSETS UNTIL
JUNE 30, 1994; AND 0.35% UNTIL JULY 31, 1995.
(2) ANNUALIZED.
(3) NOT ANNUALIZED.
(4) EXCLUDING SALES CHARGE.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON TAX-FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
(Amounts in Thousands)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Tax-Free Income Fund ("Trust"), consisting of the
Maryland Tax-Free Income Trust ("Maryland Fund"), the Pennsylvania
Tax-Free Income Trust ("Pennsylvania Fund") and the Tax-Free
Intermediate-Term Income Trust ("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 Pennsylvania 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 is used for debt
obligations with 60 days or less remaining to maturity.
Dividends and Distributions 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 $102 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. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
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 $161
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 $ 11,698
Proceeds from sales 11,932
</TABLE>
At March 31, 1995, the cost of securities for federal income tax
purposes was $48,070. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $547
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $247.
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:
<TABLE>
<CAPTION>
For the Years Ended March 31,
1995 1994
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 347 $ 5,151 2,015 $ 30,926
Reinvestment of
distributions 123 1,820 115 1,770
Repurchased (839) (12,395) (983) (15,175)
Net change (369) $ (5,424) 1,147 $ 17,521
</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: 0.20% until March 31, 1993; 0.30% through June 30,
1994; and 0.35% through July 31, 1995 or until the Fund's net assets reach
$100 million, whichever occurs first. For the year ended March 31, 1995,
advisory fees of $280 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. For
the year ended March 31, 1995, distribution and service fees totalling $77
were waived and distribution and service fees of $21 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 $6 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 TAX-FREE INTERMEDIATE-TERM INCOME TRUST:
We have audited the accompanying statement of net assets of the Legg
Mason Tax-Free Intermediate-Term 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 two years in the period
then ended and for the period November 9, 1992 (commencement of
operations) to March 31, 1993. 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 Tax-Free Intermediate-Term 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
11
