INVESTMENT MANAGER REPORT TO SHAREHOLDERS
Legg Mason Fund Adviser, Inc. FOR THE YEAR ENDED
Baltimore, MD MARCH 31, 1996
BOARD OF TRUSTEES
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore THE
Charles F. Haugh
Arnold L. Lehman LEGG MASON
Dr. Jill E. McGovern PENNSYLVANIA
T. A. Rodgers TAX-FREE
Edward A. Taber, III INCOME TRUST
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, D.C.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR
ACCOMPANIED BY A PROSPECTUS.
PUTTING YOUR FUTURE FIRST
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-034
5/96 FUNDS
<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,
1996 are included in this report.
On March 31, 1996, the Legg Mason Pennsylvania Tax-Free Income Trust
had a 30-day annualized SEC yield of 5.20%, and an average weighted
maturity of 19.3 years.
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 72.7%
Aa 13.5%
A 13.4%
Short-term securities .4%
</TABLE>
During the six months ended March 31, the Trust's net asset value per
share declined from $16.28 to $16.10 in response to a moderate increase in
interest rates. This decline was more than offset by interest earnings and
the Trust's total return for the six month period (not annualized) was
2.05%. (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.
The Board of Directors has approved a long-term capital gain
distribution of $0.19 per share, payable on May 15 to shareholders of
record on May 10. Most shareholders will receive this distribution in the
form of additional shares credited to their accounts.
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
PENNSYLVANIA TAX-FREE INCOME TRUST
For the fiscal year ended March 31, 1996, the fund's total return was
6.52% (excluding the maximum 2.75% sales charge). Compared to other
Pennsylvania municipal bond funds, the Pennsylvania Tax-Free Income Trust
ranked 54 of 62 funds according to LIPPER ANALYTICAL SERVICES. Its
underperformance 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 August, 1991,
this conservative philosophy has served the portfolio well resulting in
the fund ranking 7 of 23 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 increased the fund's average
maturity from 17.3 years to 19.3 years to allow it to benefit from any
decline in longer-term interest rates that would make the net asset value
of the fund increase. We did not attempt to make a major change in the
average maturity of the fund because this would have necessitated taking
significant capital gains on the shorter bonds sold to extend maturity.
Furthermore, in most cases those shorter bonds had higher coupons than the
bonds that we could have purchased which would have resulted in a
reduction of income to the fund. The bond market rally did result in a
shortening of the fund's average life from 15.2 years to 13.5 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
underperformance 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 until 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
ten year AAA municipal bond was 83% of the yield of a ten year Treasury at
year-end, but now only yields 79% 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 5.20%. For an investor in the 31% tax bracket, the
taxable equivalent yield was 7.54%, significantly higher than the 6.67%
yield then available on a taxable thirty year Treasury bond.
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 could 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.
2
<PAGE>
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 continue to extend average
maturity in the fund slowly as we 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
3
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
Performance Comparison as of March 31, 1996 of a $10,000 Investment
made at the Fund's inception on August 1, 1991(dagger)
Average Annual Total Return
1 Year Life of Fund*
3.61% 7.25%
[Graph Appears Here--Plot Points are listed below]
Pennsylvania Tax-Free Lehman Brothers Municipal
Income Trust Bond Index(1)
08/01/91 9,725 10,000
9/91 9,963 10,264
3/92 10,334 10,639
9/92 11,079 11,337
3/93 11,718 11,972
9/93 12,631 12,781
3/94 12,165 12,249
9/94 12,335 12,469
3/95 13,014 13,160
9/95 13,584 13,864
3/31/96 13,864 14,262
* 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 returns for the index do not include any expenses or transaction
costs. The returns for the fund include such expenses.
4
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
MARCH 31, 1996
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
MUNICIPAL BONDS -- 98.3%
Pennsylvania -- 98.3%
Allegheny County, Airport Revenue
1992-B AMT (FSA insured)
$ 1,000 6.625% 1/1/22 $1,039
1992-D AMT (FGIC insured)
1,500 7.75% 1/1/19 1,570
Allegheny County, Baldwin-Whitehall
School District, GO Series 1992-A
(FGIC insured)
1,000 6.60% 8/15/10 1,106
(Pre-refunded 8/15/02(A))
Allegheny County Hospital
Development Authority, Children's
Hospital (MBIA insured)
1,000 6.875% 7/1/14 1,055
Allegheny County Hospital
Development Authority,
Presbyterian University Health
System, Inc. Project Series 1992-B
3,000 6.00% 11/1/23 3,010
Allegheny County, North Allegheny
School District Refunding Revenue
Series A (AMBAC insured)
1,095 6.35% 11/1/12 1,145
Allegheny County, West Jefferson
Hills School District, GO
(FGIC insured)
1,000 7.10% 2/1/11 1,109
(Pre-refunded 2/1/01(A))
Bangor, Pennsylvania Area School
District GO (AMBAC insured)
1,000 5.40% 3/1/17 955
Beaver County, IDA PCR Ohio Edison
Company (FGIC insured)
1,000 7.00% 6/1/21 1,097
Bucks County, Council Rock School
District, GO (FGIC insured)
250 6.75% 3/1/11 265
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
Bucks County, Council Water and
Sewer Collection Sewer System
(FGIC insured)
$1,000 5.375% 12/1/13 $ 962
Butler County, Seneca Valley School
District, GO Series 1991-B
(MBIA insured)
500 6.50% 1/1/03 525
Chester County, GO
600 7.00% 12/15/11 668
(Pre-refunded 8/1/01(A))
Commonwealth of Pennsylvania, GO
First Series
1,000 6.125% 9/15/03 1,078
Second Series
1,000 6.50% 11/1/09 1,088
Dauphin County Hospital Authority,
Polyclinic Medical Center
(MBIA insured)
500 6.90% 8/15/11 540
(Pre-refunded 8/15/99(A))
Delaware County Authority,
University Revenue, Villanova
University (MBIA insured)
500 6.85% 8/1/11 535
2,000 5.50% 8/1/23 1,902
Delaware County, GO
1,000 6.00% 11/15/22 1,005
Delaware River Port Authority
(FGIC insured)
1,000 5.50% 1/1/26 951
Lower Providence Township
Guaranteed Sewer
Revenue (MBIA insured)
2,000 5.25% 5/1/22 1,843
Montgomery County, GO Refunding
Series 1991
1,000 6.10% 7/15/00 1,049
</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>
MUNICIPAL BONDS -- Continued
Pennsylvania -- Continued
Montgomery County, IDA PCR
Philadelphia Electric Company
Series 1991-B (MBIA insured)
$1,500 6.70% 12/1/21 $1,609
Montgomery County Higher
Education and Health Authority,
Saint Joseph's University Revenue
Series 1992 (Connie Lee insured)
500 6.25% 12/15/04 539
Montgomery Township Municipal
Sewer Authority Guaranteed
Sewer Revenue Series 1991-A
(MBIA insured)
250 6.70% 5/15/21 263
Montgomery County, Upper
Gwynedd-Towamencin
Guaranteed Sewer Revenue
(MBIA insured)
250 6.75% 10/15/06 272
New Kensington Arnold School
District GO (AMBAC insured)
2,000 5.375% 5/15/20 1,890
Pennsylvania Higher Educational
Facilities Authority Series H
(AMBAC insured)
1,000 5.375% 6/15/18 932
Pennsylvania Higher Educational
Facilities Authority, Allegheny
General Hospital Series 1991-A
500 7.25% 9/1/17 532
Pennsylvania Higher Education
Facilities Authority, Temple
University Revenue (MBIA insured)
250 6.50% 4/1/21 267
Pennsylvania Higher Educational
Facilities Authority, University
Revenue, University of
Pennsylvania Series 1987-A
1,000 6.625% 1/1/17 1,012
Pennsylvania Housing Finance Agency,
Rental Housing Refunding Revenue
Series 1992-C
750 6.50% 7/1/23 777
Series 1993-C
1,000 5.80% 7/1/22 981
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
Pennsylvania Housing Finance
Agency, Single Family Mortgage
Non-AMT
Series 1991-32
$ 500 7.15% 4/1/15 $ 533
Series 1992-33
500 6.90% 4/1/17 524
Pennsylvania Higher Education
Assistance Agency, Student Loan
Revenue Series 1991-C AMT
(AMBAC insured)
1,000 7.15% 9/1/21 1,049
Pennsylvania IDA Economic
Development Revenue
Series 1991-A
1,000 7.00% 1/1/11 1,121
(Pre-refunded 1/1/01(A))
Series 1994-A (AMBAC insured)
2,250 5.50% 1/1/14 2,183
Pennsylvania Infrastructure
Investment Authority Revenue
Series 1990-A
500 7.15% 9/1/10 536
Pennsylvania Intergovernmental
Co-op Authority (MBIA insured)
1,000 5.60% 6/15/15 974
2,000 5.60% 6/15/16 1,946
Pennsylvania State University
2,000 6.75% 7/1/14 2,181
(Pre-refunded 7/1/99(A))
1,000 5.50% 8/15/16 960
1,500 5.10% 3/1/18 1,359
Pennsylvania Turnpike
Commission Revenue
Series L (AMBAC insured)
750 6.25% 6/1/11 786
Series N
1,000 5.50% 12/1/17 948
Series N (FGIC insured)
1,000 5.50% 12/1/19 936
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
MUNICIPAL BONDS -- Continued
Pennsylvania -- Continued
Philadelphia Gas Works Series B
(MBIA insured)
$ 500 7.00% 5/15/20 $ 583
Philadelphia Hospital and Higher
Education Facilities, Hospital
Revenue Refunding, Childrens
Hospital Project Series 1993-A
1,000 5.00% 2/15/21 866
Philadelphia Municipal Authority,
Justice Lease Revenue Series
1991-B (FGIC insured)
500 7.00% 11/15/04 568
(Pre-refunded 11/15/01(A))
500 7.10% 11/15/05 570
(Pre-refunded 11/15/01(A))
Philadelphia Municipal Authority,
Lease Revenue Series 1993-A
(FGIC insured)
1,000 5.625% 11/15/14 977
Philadelphia Water and Wastewater
Revenue (MBIA insured)
2,000 5.60% 8/1/18 1,931
Sayre, PA Healthcare Revenue
Volunteer Hospital Authority,
Guthrie Healthcare System
(AMBAC insured)
500 7.20% 12/1/20 554
Schuylkill County Redevelopment
Authority, Commonwealth Lease
Revenue (FGIC insured)
750 7.125% 6/1/13 830
Somerset County General Authority,
Commonwealth Lease Revenue
(FGIC insured)
500 7.00% 10/15/13 559
(Pre-refunded 10/15/01(A))
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
Swarthmore Borough Authority,
Swarthmore College Revenue
Series 1992
$ 1,000 6.00% 9/15/12 $ 1,013
2,000 6.00% 9/15/20 1,995
University of Pittsburgh Series
1992-A
(MBIA insured)
1,000 6.125% 6/1/21 1,021
Washington County Hospital
Authority, Hospital Refunding
Revenue, Shadyside Hospital
Project Series 1992
(AMBAC insured)
1,000 5.875% 12/15/13 1,015
1,000 6.00% 12/15/18 1,003
Westmoreland County
(AMBAC insured)
2,000 0%(B) 8/1/13 727
1,000 0%(B) 8/1/14 343
Total Municipal Bonds
(Identified Cost -- $62,214) 64,162
VARIABLE RATE DEMAND OBLIGATIONS(C) -- 0.3%
Allegheny County, Hospital
Development Revenue
(Presbyterian Hospital)
Series C
200 3.35% 4/4/96 200
Total Variable Rate Demand Obligations
(Identified Cost -- $200) 200
Total Investments -- 98.6%
(Identified Cost -- $62,414) 64,362
Other Assets Less Liabilities -- 1.4% 913
NET ASSETS -- 100% $65,275
</TABLE>
7
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
(Amounts in Thousands)
<TABLE>
<S> <C> <C>
Net Assets Consisting of:
Accumulated paid-in capital
applicable to 4,054 shares
outstanding $62,559
Undistributed net realized gain
on investments 768
Unrealized appreciation of
investments 1,948
NET ASSETS -- 100.0% $65,275
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE $16.10
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus sales
charge of 2.75% of offering
price) $16.56
</TABLE>
<TABLE>
<CAPTION>
% of Market
Net Assets Value
(000)
<S> <C> <C>
SECTOR DIVERSIFICATION
Educational Revenue 17.7% $11,535
Pre-refunded Bonds 15.4 10,076
Hospital Revenue 12.3 8,036
Transportation Revenue 9.6 6,231
Water and Sewer Revenue 8.9 5,806
General Obligation -- School 7.3 4,781
District
Other Special Taxes 4.5 2,919
Housing Revenue 4.3 2,815
Utility Revenue 4.2 2,706
Small Business Administration 3.3 2,182
Revenue
General Obligation -- State 3.3 2,165
General Obligation -- Local 3.1 2,055
Lease Revenue 2.8 1,807
Student Loan Revenue 1.6 1,048
Short-term Investments 0.3 200
Other Assets Less Liabilities 1.4 913
100.0% $65,275
</TABLE>
INVESTMENT ABBREVIATIONS
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
(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 THE CALL DATE THE BOND WILL "MATURE." THE PRE-REFUNDED DATE
IS USED IN DETERMINING WEIGHTED AVERAGE PORTFOLIO MATURITY.
(B) A 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.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TAX-FREE INCOME FUND
PENNSYLVANIA TAX-FREE INCOME TRUST
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $3,937
EXPENSES:
Investment advisory fee $ 364
Distribution and service fees 165
Custodian fee 62
Transfer agent and shareholder servicing expense 26
Legal and audit fees 19
Reports to shareholders 15
Organization expense 12
Registration fees 5
Trustees' fees 3
Other expenses 4
675
Less: fees waived (320)
compensating balance credits (3)
Total expenses, net of waivers and compensating balance credits 352
NET INVESTMENT INCOME 3,585
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on investments 1,082
Decrease in unrealized appreciation of investments (519)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 563
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,148
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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) 1996 1995
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 3,585 $ 3,377
Net realized gain (loss) on investments 1,082 (47)
Change in unrealized appreciation (depreciation) of investments (519) 869
Increase in net assets resulting from operations 4,148 4,199
Distributions to shareholders from net investment income (3,585) (3,377)
Distribution to shareholders from net realized gain on investments (267) --
Increase in net assets from Fund share transactions 1,050 203
Change in net assets 1,346 1,025
NET ASSETS:
Beginning of year 63,929 62,904
End of year $ 65,275 $ 63,929
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<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>
For the Years Ended March 31,
1996 1995 1994 1993 1992*
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $16.02 $15.80 $16.03 $14.99 $14.70
Net investment income(A) 0.89 0.85 0.86 0.91 0.63
Net realized and unrealized gain (loss) on investments 0.15 0.22 (0.23) 1.04 0.29
Total from investment operations 1.04 1.07 0.63 1.95 0.92
Distributions to shareholders from:
Net investment income (0.89) (0.85) (0.86) (0.91) (0.63)
Net realized gains on investments (0.07) -- -- -- --
Total distributions (0.96) (0.85) (0.86) (0.91) (0.63)
Net asset value, end of period $16.10 $16.02 $15.80 $16.03 $14.99
Total return(D) 6.52% 7.03% 3.81% 13.31% 6.36%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses(A,E) 0.54% -- -- -- --
Net expenses(A,F) 0.53% 0.49% 0.40% 0.32% 0.12%(B)
Net investment income(A) 5.42% 5.42% 5.16% 5.74% 6.11%(B)
Portfolio turnover rate 17.21% 2.08% -- -- --
Net assets, end of period (in thousands) $65,275 $63,929 $62,904 $49,959 $28,873
</TABLE>
* FOR THE PERIOD AUGUST 1, 1991 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1992.
(A) 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;
0.40% UNTIL DECEMBER 31, 1993; 0.45% UNTIL JUNE 30, 1994; 0.50% UNTIL JULY
31, 1995; 0.55% UNTIL MARCH 31, 1996 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.
11
<PAGE>
NOTES TO FINANCIAL 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, 1996, dividends payable of $164 were accrued.
Net income for dividend purposes consists of interest accrued less 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.
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:
<TABLE>
<S> <C>
Purchases $13,999
Proceeds from sales 10,745
</TABLE>
At March 31, 1996, the cost of securities for federal income tax
purposes was $62,414. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $2,599
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $651.
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:
<TABLE>
<CAPTION>
For the Years Ended March 31,
1996 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 458 $ 7,487 521 $ 8,185
Reinvestment of
distributions 163 2,654 150 2,349
Repurchased (556) (9,091) (662) (10,331)
Net increase 65 $ 1,050 9 $ 203
</TABLE>
12
<PAGE>
(Amounts in Thousands)
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 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, 0.50% until July 31, 1995, 0.55% through March 31, 1996 and
0.65% until July 31, 1996, or until the Fund's net assets reach $125
million, whichever occurs first. For the year ended March 31, 1996,
advisory fees of $320 were waived and $3 was payable to the Adviser at
March 31, 1996.
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 $14 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 $9 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.
13
<PAGE>
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, 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 four 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, 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 Pennsylvania Tax-Free 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
14
