INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF TRUSTEES
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore REPORT TO SHAREHOLDERS
Charles F. Haugh FOR THE YEAR ENDED
Arnold L. Lehman MARCH 31, 1996
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA THE
CUSTODIAN LEGG MASON
State Street Bank & Trust Company TAX-FREE
Boston, MA INTERMEDIATE-
COUNSEL TERM
Kirkpatrick & Lockhart LLP INCOME TRUST
Washington, D.C.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD PUTTING YOUR FUTURE FIRST
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] PRINTED ON RECYCLED PAPER [LEGG MASON FUNDS LOGO]
LMF-039
5/96
<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, 1996 are included in this report.
On March 31, 1996, the Legg Mason Tax-Free Intermediate-Term Trust had a
30-day annualized SEC yield of 4.34% and an average weighted maturity of 7.0
years.
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:
Aaa 52.9%
Aa 27.3%
A 12.3%
Short-term securities 7.5%
During the six months ended March 31, the Trust's net asset value per
share declined from $15.37 to $15.34 in response to a moderate increase in
interest rates. This decline was more than offset by interest earnings and
the Trust's total return in the six month period (not annualized) was 1.91%.
(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, which applied to purchases of Trust shares
prior to August 1, 1995. In this regard, the initial sales charge has been
waived since August 1 and the waiver will continue at least through July 31,
1996.)
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,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
May 10, 1996
<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, 1996, the fund's total return was
6.47%. Compared to other intermediate-term municipal bond funds, the Tax-
Free Intermediate-Term Income Trust ranked 80 of 135 funds according to
LIPPER ANALYTICAL SERVICES. The fund's performance was attributable
primarily to the relatively short average maturity we maintained during
the strong market in 1995 and our emphasis on higher quality bonds. Since
its inception in November, 1992, this conservative philosophy has served
the portfolio well resulting in the fund ranking 19 out of 49 similar
funds according to LIPPER. Performance comparisons with some other funds
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 fiscal year, we gradually shortened the fund's average
maturity from 7.5 years to 7.0 years to protect it from any reversal of
Federal Reserve Board monetary policy that could make the net asset value
of the fund decline. We did not attempt to make a major change in the
average maturity of the fund because this would have necessitated
realizing significant capital gains. The bond market rally did result in a
shortening of the fund's average life from 6.4 years to 5.0 years as more
bonds traded on a yield to call basis rather than to their final maturity.
This shortening of the average life contributed to the relative under-
performance of the fund.
Interest rates declined on tax-exempt bonds through 1995 in response
to signs of weakness in the economy and the easing of the federal funds
rate by the Federal Reserve Board. Rates reached their low point of the
cycle at the end of the year. The first quarter of 1996 saw a reversal of
the declining interest rate trend we had experienced since late 1994. By
the end of the quarter, rates had risen across all maturities by 40 to 50
basis points from their year end lows (100 basis points = 1%). The market
experienced increased volatility as economic fundamentals, tax reform
issues and market technicals caused shifts in market sentiment. At the
beginning of 1996, most investors expected that the Fed would continue to
cut interest rates to help spur the economy in a non-inflationary
environment. However, when some of the economic statistics began to hint
at a reemergence of economic growth, the expectation for a Fed ease was
forgotten. Some economists even began talking about a need to tighten
before year end. None of this was conducive to a strong bond market.
On the positive side for municipal bonds, talk about flat tax and tax
reform in general has all but disappeared since Steve Forbes pulled out of
the Presidential race. Tax reform, although likely at some future time,
has probably been pushed off into 1997 or later. As a result, yields on
municipal bonds along the entire maturity spectrum are richer to
Treasuries than they were at the end of 1995. For example, the yield on a
five year AAA municipal bond was 77% of the yield of a five year Treasury
at year end, but now only yields 72% of the Treasury. This demonstrates
that municipal bonds have suffered less of a price decline in this rising
interest rate environment than have Treasuries of similar maturity.
Despite this good relative performance, the fund still is an attractive
investment when compared to taxable alternatives. The 30-day SEC yield on
March 31, 1996 was 4.34%. For an investor in the 31% tax bracket, the
taxable equivalent yield was 6.29%, higher than the 6.09% yield then
available on a taxable five year Treasury note.
We believe that the market has declined further than is warranted by
economic fundamentals. We feel that the economy is, at best, in a slow
growth mode and that the outlook for inflation is still positive. The
recent decline in the bond market which has produced negative total
returns in your fund should be reversed over time as economic statistics
have less "noise" in them from non-recurring events such as blizzards and
government shutdowns. The recent rise in interest rates represents a DE
FACTO tightening by the Fed which in and of itself hurt economic growth.
Although housing statistics have shown some strength recently, we believe
that much of that is weather-related. Mortgage rates have also risen,
which could put a slight dampener on housing.
While we feel it is possible that the market may remain at these
levels for some time, we still believe that interest rates will be
trending lower by the end of the year. We will, therefore, begin to extend
average maturity in the fund slowly as we
2
<PAGE>
find attractively priced high quality bonds in keeping with our philosophy
of making conservative moves in the portfolio rather than attempting to
time the market through high portfolio turnover.
Victoria M. Schwatka
April 29, 1996
PERFORMANCE INFORMATION
Performance Comparison as of March 31, 1996 of a $10,000 Investment
made at the Fund's inception on November 9, 1992(dagger)
Average Annual Total Return
1 Year Life of Fund*
4.32% 4.65%
[graph appears here--plot points listed below]
<TABLE>
<CAPTION>
11/09/92 3/93 9/93 3/94 9/94 3/95 9/95 3/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Intermediate Trust 9,800 10,226 10,829 10,634 10,804 11,234 11,737 11,961
Lehman Brothers 7-Year
Municipal Bond Index(1) 10,000 10,559 11,166 10,874 11,094 11,564 12,243 12,498
</TABLE>
* 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 returns for the index do not include
any expenses or transaction costs. The returns for the Fund include such
expenses.
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>
STATEMENT OF NET ASSETS
LEGG MASON TAX-FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
MARCH 31, 1996
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
MUNICIPAL BONDS -- 93.3%
<S> <C> <C>
Arizona -- 5.2%
Arizona Transportation Board
Subordinated Highway Revenue Series
1992 A
$ 500 6.00% 7/1/00 $ 530
Salt River Project Agricultural
Improvement and Power District,
Electric System Refunding Revenue
1993 Series A
1,000 5.30% 1/1/03 1,031
Scottsdale Street and Highway User
Revenue Refunding Series 1993
1,000 5.00% 7/1/02 1,015
University of Arizona Board of
Regents
7.20% 6/1/01
500 (Pre-refunded 6/1/98A) 541
3,117
Connecticut -- 1.9%
State of Connecticut Special Tax
Obligation, Transportation
Infrastructure 1990 Series A
7.10% 6/1/04
1,000 (Pre-refunded 6/1/01A) 1,124
Florida -- 1.7%
Northwest Florida Water Management
District Land Acquisition Revenue
Refunding Series 1992 (FGIC insured)
1,000 5.50% 4/1/02 1,045
Illinois -- 3.9%
State of Illinois Sales Tax Revenue
Series O
1,220 5.90% 6/15/01 1,292
State of Illinois, GO
Series April 1986
1,000 6.90% 4/1/01 1,020
2,312
Indiana -- 0.9%
State of Indiana Toll Finance
Authority Toll Road Revenue
Refunding
Series 1987
500 7.00% 7/1/07 517
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Kentucky -- 1.7%
Turnpike Authority of Kentucky,
Economic Development Road Revenue
and Revenue Refunding
(Revitalization Projects) Series
1993
(AMBAC insured)
$ 1,000 5.30% 7/1/04 $ 1,030
Louisiana -- 1.8%
City of New Orleans Audubon Park
Commission Aquarium Series 1993
(FGIC insured)
1,000 6.00% 10/1/08 1,053
Maine -- 1.7%
Maine Municipal Bond Bank Refunding
1993 Series A
1,000 5.20% 11/1/05 1,012
Maryland -- 22.0%
Baltimore County, GO Pension
Refunding 1991 AMT
1,000 6.70% 7/1/16 1,061
Cecil County, GO Consolidated Public
Improvement and Refunding 1993
(FGIC insured)
850 6.50% 12/1/99 910
Howard County, Consolidated Public
Improvement and Refunding 1993
Series A
1,000 4.80% 8/15/01 1,016
Maryland Department of
Transportation Consolidated
Transportation Refunding
Series 1993
1,000 4.375% 6/15/04 961
Series 1991
1,000 6.00% 9/1/00 1,061
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 1,009
Johns Hopkins University Issue
Series 1988
1,300 7.50% 7/1/20 1,403
Maryland Transportation Authority,
Transportation Facilities Projects
Revenue Series 1992 (FGIC insured)
1,000 5.70% 7/1/05 1,053
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
MUNICIPAL BONDS -- Continued
Maryland -- Continued
Mayor and City Council of Baltimore
GO Consolidated Public Improvement
Refunding 1995 Series A (FGIC
insured)
$ 750 0%(B) 10/15/06 $ 427
Project and Refunding Revenue
(Water Projects) Series 1990-A
(MBIA insured)
6.50% 7/1/20
1,000 (Pre-refunded 7/1/00A) 1,079
Montgomery County, GO Consolidated
Public Improvement Series B
1,000 6.80% 11/1/99 1,085
6.80% 11/1/07
1,000 (Pre-refunded 11/1/99A) 1,099
Northeast Maryland Waste Disposal
Authority Solid Waste Revenue
(Montgomery County Resource
Recovery Project) Series 1993 A AMT
1,000 5.60% 7/1/02 1,024
13,188
Massachusetts -- 0.9%
Commonwealth of Massachusetts, GO
Refunding 1986 Series A
7.125% 10/1/05
500 (Pre-refunded 10/1/96A) 519
Missouri -- 0.8%
Missouri Health and Educational
Facilities Authority Refunding
Revenue, (SSM Health Care)
Series 1992 AA (MBIA insured)
500 4.90% 6/1/98 507
Nebraska -- 1.7%
Nebraska Public Power District
Revenue
1,000 5.70% 1/1/04 1,041
Nevada -- 0.9%
State of Nevada, GO LT (Nevada
Municipal Bond Bank Refunding
Project No. 4) Series 1989 B
500 6.70% 2/1/01 540
New Hampshire -- 1.7%
New Hampshire Municipal Bond Bank, GO
Refunding 1991 Series H
1,000 5.70% 2/15/01 1,046
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
New Jersey -- 3.6%
New Jersey Turnpike Authority,
Turnpike Revenue Series 1991 C
(AMBAC insured)
$ 2,000 6.40% 1/1/07 $ 2,138
North Carolina -- 4.1%
Durham North Carolina GO, Series 1986
1,500 4.90% 2/1/10 1,423
North Carolina Eastern Municipal
Power Agency, Power System Revenue
Refunding Series 1987 A
1,000 7.30% 1/1/04 1,039
2,462
Ohio -- 4.2%
City of Franklin, Ohio, GO LT Series
1993
2,000 5.50% 12/1/11 1,994
State of Ohio Higher Education
Facilities Revenue Series 1988 A
500 7.00% 11/1/01 526
2,520
Pennsylvania -- 2.6%
City of Philadelphia Gas Works
Revenue, 10th Series (BIGI insured)
7.20% 7/1/01
500 (Pre-refunded 7/1/96A) 514
Pennsylvania Intergovernmental
Cooperation Authority Special Tax
Revenue (City of Philadelphia
Refunding Program) Series 1992
(FGIC insured)
1,000 5.75% 6/15/99 1,040
1,554
South Carolina -- 5.4%
Berkeley County Water and Sewer
Revenue Refunding and Improvement
(MBIA insured)
1,000 6.50% 6/1/06 1,086
South Carolina Public Service
Authority Revenue, 1991 Refunding
and Improvement Series B
1,000 6.70% 7/1/02 1,101
State of South Carolina, State
Capital Improvement Series S
6.75% 8/1/01
1,000 (Pre-refunded 8/1/96A) 1,031
3,218
</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
<S> <C> <C>
MUNICIPAL BONDS -- Continued
Tennessee -- 1.7%
State of Tennessee GO, 1994 Series A
$ 1,000 5.25% 3/1/02 $ 1,038
Texas -- 6.7%
City of Austin Combined Utility
Systems Revenue Refunding Series
1992 A (MBIA insured)
1,000 6.00% 11/15/04 1,075
City of Houston Water and Sewer
System Junior Lien Revenue
Refunding Series 1992 C
(MBIA insured)
1,000 5.40% 12/1/01 1,041
Texas Public Finance Authority GO,
Refunding (Superconducting Super
Collider Project) Series 1992 C
(FGIC insured)
1,000 0%(B) 4/1/02 740
United Independent School District
(Webb County Texas) Unlimited Tax
School Building Bonds, Series 1995
(PSFG insured)
1,000 7.10% 8/15/06 1,155
4,011
Utah -- 0.8%
Intermountain Power Agency Power
Supply Revenue Refunding 1988
Series B
500 6.90% 7/1/96 504
Vermont -- 2.5%
State of Vermont, GO 1990 Series A
6.75% 2/1/03
1,400 (Pre-refunded 2/1/00A) 1,536
Virginia -- 14.1%
Commonwealth of Virginia
Transportation Board,
Transportation Contract Revenue
Refunding Series 1992 (Route 28
Project)
1,000 6.00% 4/1/06 1,061
1,000 5.75% 4/1/00 1,046
Fairfax County Public Improvement
Refunding
Series 1994 A
1,000 7.25% 6/1/01 1,123
Series 1992 C
2,000 5.50% 10/1/03 2,068
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Virginia -- Continued
Henrico County GO Public Improvement
Refunding Series 1993
$ 1,100 5.25% 1/15/09 $ 1,097
Virginia Public Building Authority
State Building Revenue Refunding
Series 1992 B
1,000 5.625% 8/1/02 1,050
Virginia State Public School
Authority Series B
6.75% 1/1/99
1,000 (Pre-refunded 1/1/97A) 1,043
8,488
Wisconsin -- 0.8%
State of Wisconsin, GO 1989 Series B
500 6.90% 5/1/96 502
Total Municipal Bonds --
(Identified Cost -- $54,825) 56,022
VARIABLE RATE DEMAND OBLIGATIONS -- 5.3%
Saint Charles Parish Louisiana PCR
Refunding Bonds (Shell Oil Company
Projects) Series 1992 B
500 3.70%(C) 4/1/96 500
Harris County Texas Health Facilities
Development Corp. Hospital Revenue
Bonds (Methodist Hospital) Series
1994
1,500 3.85%(C) 4/1/96 1,500
Emery County Utah PCR Refunding Bonds
(PacifiCorp Projects) Series 1994
400 3.70%(C) 4/1/96 400
Carlton, Wisconsin PCR Refunding
Bonds (Wisconsin Power and Light
Company Projects) Series 1991 B & C
800 3.80%(C) 4/1/96 800
Total Variable Rate Demand
Obligations --
(Identified Cost -- $3,200) 3,200
</TABLE>
<TABLE>
<S> <C> <C>
Total Investments -- 98.6%
(Identified Cost -- $58,025) 59,222
Other Assets Less Liabilities -- 1.4% 820
NET ASSETS -- 100.0% $60,042
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
Net Assets Consisting of:
Accumulated paid-in capital
applicable to 3,914 shares
outstanding $59,073
Accumulated net realized
loss on investments (228)
Unrealized appreciation of
investments 1,197
NET ASSETS -- 100.0% $60,042
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE $15.34
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus
sales charge of 2% of
offering price) $15.34(D)
</TABLE>
<TABLE>
<CAPTION>
% of Market
Net Assets Value
(000)
<S> <C> <C>
SECTOR DIVERSIFICATION
General Obligation -- Local 26.4% $15,856
Transportation Revenue 17.3 10,414
Pre-refunded Bonds 14.1 8,486
Utilities 9.7 5,791
General Obligation -- State 5.5 3,300
Water and Sewer Revenue 5.3 3,171
Education Revenue 5.1 3,085
Hospital Revenue 2.5 1,516
Sales Tax Revenue 2.2 1,291
Lease Revenue 1.8 1,050
Special Tax Revenue 1.7 1,039
Solid Waste Revenue 1.7 1,023
Short-term Investments 5.3 3,200
Other Assets Less Liabilities 1.4 820
100.0% $60,042
</TABLE>
INVESTMENT ABBREVIATIONS
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
PSFG Permanent School Fund Guaranty
(A) 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.
(B) 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.
(C) THE RATE SHOWN IS THE RATE AS OF MARCH 31, 1996, 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.
(D) SALES CHARGES ARE BEING WAIVED FOR THE PERIOD AUGUST 1, 1995 TO JULY 31,
1996.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TAX-FREE INCOME FUND
TAX-FREE INTERMEDIATE-TERM INCOME TRUST
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $2,715
EXPENSES:
Investment advisory fee $ 301
Distribution and service fees 137
Custodian fee 59
Legal and audit fees 27
Registration fees 25
Transfer agent and shareholder servicing expense 18
Organization expense 14
Reports to shareholders 10
Trustees' fees 3
Other expenses 3
597
Less: fees waived (287)
compensating balance credits (4)
Total expenses, net of waivers and compensating balance credits 306
Net Investment Income 2,409
Increase in Unrealized Appreciation of Investments 897
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,306
</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,
(Amounts in Thousands) 1996 1995
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 2,409 $ 2,456
Net realized loss on investments -- (221)
Increase in unrealized appreciation of investments 897 450
Increase in net assets resulting from operations 3,306 2,685
Distributions to shareholders from net investment income (2,409) (2,456)
Change in net assets from Fund share transactions 10,308 (5,424)
Change in net assets 11,205 (5,195)
NET ASSETS:
Beginning of year 48,837 54,032
End of year $ 60,042 $ 48,837
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<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
common stock 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 March 31,
1996 1995 1994 1993*
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $15.06 $14.96 $15.06 $14.70
Net investment income(A) 0.68 0.72 0.70 0.28
Net realized and unrealized gain (loss) on investments 0.28 0.10 (0.09) 0.36
Total from investment operations 0.96 0.82 0.61 0.64
Distributions to shareholders from:
Net investment income (0.68) (0.72) (0.70) (0.28)
Net realized gain -- -- (0.01) --
Total distributions (0.68) (0.72) (0.71) (0.28)
Net asset value, end of period $15.34 $15.06 $14.96 $15.06
Total return(D) 6.47% 5.65% 3.99% 4.35%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses(A,E) 0.57% -- -- --
Net expenses(A,F) 0.56% 0.34% 0.30% 0.20%(B)
Net investment income(A) 4.41% 4.83% 4.44% 4.71%(B)
Portfolio turnover rate -- 24.8% 6.6% --
Net assets, end of period (in thousands) $60,042 $48,837 $54,032 $37,138
</TABLE>
(*) FOR THE PERIOD NOVEMBER 9, 1992 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1993.
(A) 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% UNTIL JUNE 30, 1994; 0.35% UNTIL JULY
31, 1995; AND 0.65% THROUGH JULY 31, 1996.
(B) ANNUALIZED
(C) NOT ANNUALIZED
(D) EXCLUDING SALES CHARGE
(E) PURSUANT TO NEW SECURITIES EXCHANGE COMMISSION REGULATIONS EFFECTIVE
DECEMBER 31, 1995, THIS RATIO REFLECTS TOTAL EXPENSES BEFORE COMPENSATING
BALANCE CREDITS. PREVIOUSLY, THE CREDITS WERE INCLUDED IN THE RATIO.
(F) THIS RATIO REFLECTS TOTAL EXPENSES REDUCED BY THE IMPACT OF COMPENSATING
BALANCE CREDITS.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<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, 1996, dividends payable of $106 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 $228
which expire through 2004.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the year ended March 31, 1996 (excluding
short-term securities) were as follows:
Purchases $ 7,930
Proceeds from sales 0
At March 31, 1996, the cost of securities for federal income tax
purposes was $58,026. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,325
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $128.
3. FUND SHARE TRANSACTIONS:
At March 31, 1996, there were unlimited shares authorized at $.001 par
value for the Trust and the Fund. Transactions in Fund shares were as
follows:
For the Years Ended March 31,
1996 1995
Shares Amount Shares Amount
Sold 1,315 $ 20,254 347 $ 5,151
Reinvestment of
distributions 119 1,831 123 1,820
Repurchased (764) (11,777) (839) (12,395)
Net change 670 $ 10,308 (369) $ (5,424)
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
Adviser provides the Fund with investment advisory, management and
administrative services
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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% until June 30, 1994; 0.35% until July
31, 1995; and 0.65% until July 31, 1996 or until the Fund's net assets
reach $100 million, whichever occurs first. For the year ended March 31,
1996, advisory fees of $287 were waived. At March 31, 1996, $3 was payable
to the adviser.
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 services fees of $12 were payable to the
distributor at March 31, 1996. 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, 1996.
In November 1995, the Fund, along with certain other Legg Mason Funds,
entered into a $75 million line of credit ("Credit Agreement") to be
utilized as an emergency source of cash in the event of unanticipated,
large redemption requests by shareholders. Pursuant to the Credit
Agreement, each participating Fund is liable only for principal and
interest payments related to borrowings made by that Fund. Borrowings
under the line of credit bear interest at prevailing short-term interest
rates. For the year ended March 31, 1996, the Fund had no borrowings under
the line of credit.
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, 1996, 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 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, 1996, 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, 1996, 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 29, 1996
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