Investment Manager Report to Shareholders
Legg Mason Fund Adviser, Inc. For the Six Months Ended
Baltimore, MD September 30, 1996
Board of Trustees
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore
Charles F. Haugh The
Arnold L. Lehman Legg Mason
Dr. Jill E. McGovern Tax-Free
T. A. Rodgers Intermediate-
Edward A. Taber, III Term
Income Trust
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Putting Your Future First
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel [Legg Mason Logo]
Kirkpatrick & Lockhart LLP
Washington, D.C. FUNDS
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
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111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
[Recycle Logo] Printed on Recycled Paper
LMF-039
11/96
<PAGE>
To Our Shareholders,
On September 30, 1996, the Legg Mason Tax-Free Intermediate-Term Trust had
a 30-day annualized SEC yield of 4.37% and an average weighted maturity of 7.3
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 54.2%
Aa 28.5%
A 12.8%
Short-term securities 4.5%
At September 30, the Trust's net asset value per share was $15.30, compared
to $15.34 six months earlier. Total return in the six month period (not
annualized) was 1.97%. (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 2%
maximum initial sales charge, which applied to purchases of Trust shares prior
to August 1, 1995. In this regard, shareholders should be aware that the Trust's
initial sales charge has been waived since that time, and that the waiver will
continue at least through December 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.
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
November 8, 1996
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust
September 30, 1996
(Amounts in Thousands) (Unaudited)
Principal
Amount Value
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Municipal Bonds -- 94.8%
Arizona -- 5.4%
Arizona Transportation Board
Subordinated Highway Revenue
Series 1992 A
$ 500 6.00% 7/1/00 $ 526
Salt River Project Agricultural
Improvement and Power District,
Electric System Refunding Revenue
1993 Series A
1,000 5.30% 1/1/03 1,028
Scottsdale Street and Highway User
Revenue Refunding Series 1993
1,000 5.00% 7/1/02 1,012
University of Arizona Board of Regents
7.20% 6/1/01
500 (Pre-refunded 6/1/98(A)) 534
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3,100
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Connecticut -- 1.9%
State of Connecticut Special
Tax Obligation, Transportation
Infrastructure 1990 Series A
7.10% 6/1/04
1,000 (Pre-refunded 6/1/01(A)) 1,109
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Florida -- 3.6%
Florida State Board of Education
Capital Outlay Series A
1,000 5.60% 1/1/08 1,021
Northwest Florida Water Management
District Land Acquisition Revenue
Refunding Series 1992 (FGIC insured)
1,000 5.50% 4/1/02 1,039
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2,060
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Illinois -- 2.3%
State of Illinois Sales Tax Revenue
Series O
1,220 5.90% 6/15/01 1,283
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Indiana -- 0.9%
State of Indiana Toll Finance Authority
Toll Road Revenue Refunding
Series 1987
500 7.00% 7/1/07 514
Principal
Amount Value
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Kentucky -- 1.8%
Turnpike Authority of Kentucky,
Economic Development
Road Revenue and Revenue
Refunding (Revitalization Projects)
Series 1993 (AMBAC insured)
$1,000 5.30% 7/1/04 $ 1,027
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Louisiana -- 1.8%
City of New Orleans Audubon Park
Commission Aquarium Series 1993
(FGIC insured)
1,000 6.00% 10/1/08 1,041
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Maine -- 1.8%
Maine Municipal Bond Bank Refunding
1993 Series A
1,000 5.20% 11/1/05 1,008
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Maryland -- 23.0%
Baltimore County, GO Pension
Refunding 1991
1,000 6.70% 7/1/16 1,052
Cecil County, GO Consolidated Public
Improvement and Refunding 1993
(FGIC insured)
850 6.50% 12/1/99 902
Howard County, Consolidated Public
Improvement and Refunding 1993
Series A
1,000 4.80% 8/15/01 1,013
Maryland Department of
Transportation Consolidated
Transportation Refunding
Series 1993
1,000 4.375% 6/15/04 957
Series 1991
1,000 6.00% 9/1/00 1,054
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 l,006
Johns Hopkins University Issue
Series 1988
1,300 7.50% 7/1/20 1,390
Maryland Transportation Authority
Transportation Facilities Projects
Revenue Series 1992
1,000 5.70% 7/1/05 1,047
2
<PAGE>
Principal
Amount Value
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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 $ 446
Project and Refunding Revenue
(Water Projects) Series 1990-A
(MBIA insured)
6.50% 7/1/20
1,000 (Pre-refunded 7/1/00(A)) 1,069
Montgomery County, GO Consolidated
Public Improvement Series B
1,000 6.80% 11/1/99 1,072
6.80% 11/1/07
1,000 (Pre-refunded 11/1/99(A)) 1,087
Northeast Maryland Waste Disposal
Authority Solid Waste Revenue
(Montgomery County Resource
Recovery Project) Series 1993 A AMT
1,000 5.60% 7/1/02 1,023
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13,118
Massachusetts -- 0.9%
Commonwealth of Massachusetts,
GO Refunding 1986 Series A
7.125% 10/1/05
500 (Pre-refunded 10/1/96(A)) 510
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Missouri -- 0.9%
Missouri Health and Educational
Facilities Authority Refunding
Revenue, (SSM Health Care)
Series 1992 AA (MBIA insured)
500 4.90% 6/1/98 506
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Nebraska -- 1.8%
Nebraska Public Power District
Revenue
1,000 5.70% 1/1/04 l,036
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Nevada -- 0.9%
State of Nevada, GO LT (Nevada
Municipal Bond Bank Refunding
Project No. 4) Series 1989 B
500 6.70% 2/1/01 537
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Principal
Amount Value
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New Hampshire -- 1.8%
New Hampshire Municipal Bond
Bank, GO Refunding 1991
Series H
$1,000 5.70% 2/15/01 $ 1,040
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New Jersey -- 3.7%
New Jersey Turnpike Authority,
Turnpike Revenue Series 1991 C
(AMBAC insured)
2,000 6.40% 1/1/07 2,132
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North Carolina -- 4.3%
Durham, North Carolina GO
Series 1986
1,500 4.90% 2/1/10 1,427
North Carolina Eastern Municipal
Power Agency, Power System
Revenue Refunding Series 1987 A
1,000 7.30% 1/1/04 1,027
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2,454
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Ohio -- 4.4%
City of Franklin Ohio GOLT
Series 1993
2,000 5.50% 12/1/11 2,004
State of Ohio Higher Education
Facilities Revenue Series 1988 A
500 7.00% 11/1/01 523
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2,527
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Pennsylvania -- 1.8%
Pennsylvania Intergovernmental
Cooperation Authority Special Tax
Revenue (City of Philadelphia
Refunding Program) Series 1992
(FGIC insured)
1,000 5.75% 6/15/99 1,036
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South Carolina -- 3.8%
Berkeley County Water and Sewer
Revenue Refunding and
Improvement (MBIA insured)
1,000 6.50% 6/1/06 1,087
South Carolina Public Service
Authority Revenue, 1991 Refunding
and Improvement Series B
1,000 6.70% 7/1/02 1,095
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2,182
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3
<PAGE>
Statement of Net Assets--Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust
September 30, 1996
(Amounts in Thousands)
Principal
Amount Value
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Municipal Bonds -- Continued
Tennessee -- 3.5%
Metro Government Nashville Tennessee
Water Sewer Revenue Refunding
(MBIA Insured)
$1,000 5.50% 1/l/13 $ 994
State of Tennessee GO, 1994 Series A
1,000 5.25% 3/1/02 1,031
2,025
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Texas -- 7.0%
City of Austin Combined Utility
Systems Revenue Refunding
Series 1992 A (MBIA insured)
1,000 6.00% 11/15/04 1,071
City of Houston Water and Sewer
System Junior Lien Revenue
Refunding Series 1992 C
(MBIA insured)
1,000 5.40% 12/1/01 1,035
Texas Public Finance Authority,
GO Refunding (Superconducting
Super Collider Project)
Series 1992 C (FGIC insured)
1,000 0%(B) 4/1/02 764
United Independent School District
(Webb County Texas) Unlimited Tax
School Building Bonds, Series 1995
(PSFG insured)
1 ,000 7.10% 8/15/06 1,149
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4,019
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Vermont -- 2.7%
State of Vermont, GO 1990 Series A
6.75% 2/1/03
1,400 (Pre-refunded 2/1/00(A)) 1,521
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Virginia -- 14.8%
Commonwealth of Virginia
Transportation Board, Transportation
Contract Revenue Refunding
Series 1992 (Route 28 Project)
1,000 6.00% 4/1/06 1,055
1,000 5.75% 4/1/00 1,040
Fairfax County Public Improvement
Refunding Series 1994 A
1,000 7.25% 6/1/01 1,112
Principal
Amount Value
- --------------------------------------------------------------------------------
Virginia-- Continued
Fairfax County Public Improvement
Refunding Series 1992 C
$2,000 5.50% 10/1/03 $ 2,061
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 1,045
Virginia State Public School Authority
Series B
6.75% 1/1/99
1,000 (Pre-refunded 1/1/97(A)) 1,027
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8,437
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Total Municipal Bonds
(Identified Cost--$53,186) 54,222
Variable-Rate Demand Obligations(C)-- 4.2%
Allegheny County, PA Hospital
Development Authority
(Presbyterian Hospital)
Series A, B & D
100 3.85% 10/3/96 100
Carlton Wisconsin PCR Refunding
Bonds (Wisconsin Power and
Light Company Projects)
Series 1991 B & C
800 3.90% 10/1/96 800
East Baton Rouge Parish, Louisiana
PCR Refunding Bonds Exxon
Corporation
1,500 4.00% 10/1/96 1,500
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Total Variable Rate Demand Obligations
(Identified Cost--$2,400) 2,400
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Total Investments -- 99.0%
(Identified Cost--$55,586) 56,622
Other Assets Less Liabilities-- 1.0% 566
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Net assets--100.0% $57,188
4
<PAGE>
Net Assets Consisting of:
Accumulated paid-in capital
applicable to 3,737 shares
outstanding $56,380
Accumulated net realized loss
on investments (228)
Unrealized appreciation of
investments 1,036
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Net assets $57,188
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Net asset value and redemption price
per share $15.30
Maximum offering price per share
(net asset value plus sales charge of
2% of offering price) $15.30(D)
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% of Market
Net Assets Value
- --------------------------------------------------------------------------------
(000)
Sector Diversification
General Obligation-- Local 27.7% $15,813
Ground Transportation Revenue 18.1 10,362
Pre-refunded Bonds 12.0 6,858
Public Utilities 9.2 5,257
Water and Sewer Revenue 7.3 4,155
Education Revenue 5.3 3,062
General Obligation-- State 4.9 2,816
Special Tax Revenue 4.1 2,319
Hospital Revenue 2.6 1,512
Lease Revenue 1.8 1,045
Solid Waste Revenue 1.8 1,023
Short-Term Investments 4.2 2,400
Other Assets Less Liabilities 1.0 566
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100.0% $57,188
Investment Abbreviations
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
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 September 30, 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 December
31, 1996.
See notes to financial statements.
5
<PAGE>
Statement of Operations
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust
For the Six Months Ended September 30, 1996 (Unaudited)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Investment Income:
Interest $1,469
Expenses:
Investment advisory fee $ 159
Distribution and service fees 72
Custodian fee 34
Legal and audit fees 16
Transfer agent and shareholder servicing expense 15
Registration fees 9
Organization expense 7
Reports to shareholders 6
Trustees' fees 2
Other expenses 3
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323
Less: fees waived (134)
compensating balance credits (1)
Total expenses, net of waivers and compensating
balance credits 188
- --------------------------------------------------------------------------------
Net Investment Income 1,281
Decrease in Unrealized Appreciation of Investments (161)
- --------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations $1,120
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See notes to financial statements.
6
<PAGE>
Statement of Changes in Net Assets
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
(Amounts in Thousands) September 30, 1996 March 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> (Unaudited)
Change in Net Assets:
Net investment income $ 1,281 $ 2,409
Change in unrealized appreciation of investments (161) 897
Increase in net assets resulting from operations 1,120 3,306
Distributions to shareholders from net investment income (1,281) (2,409)
Change in net assets from Fund share transactions (2,693) 10,308
Change in net assets (2,854) 11,205
Net Assets:
Beginning of period 60,042 48,837
- ---------------------------------------------------------------------------------------------------------
End of period $57,188 $60,042
</TABLE>
See notes to financial statements.
7
<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
Six Months Ended For the Years Ended March 31,
September 30, 1996 1996 1995 1994 1993*
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Per Share Operating Performance:
Net asset value, beginning of period $15.34 $15.06 $14.96 $15.06 $14.70
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income(A) 0.34 0.68 0.72 0.70 0.28
Net realized and unrealized gain
(loss) on investments (0.04) 0.28 0.10 (0.09) 0.36
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.30 0.96 0.82 0.61 0.64
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.34) (0.68) (0.72) (0.70) (0.28)
Net realized gain on investments -- -- -- (0.01) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.34) (0.68) (0.72) (0.71) (0.28)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.30 $15.34 $15.06 $14.96 $15.06
- ---------------------------------------------------------------------------------------------------------------------------
Total return(D) 1.97%(C) 6.47% 5.65% 3.99% 4.35%(C)
Ratios/Supplemental Data:
Ratios to average net assets:
Total expenses(A,E) 0.65%(B) 0.57% -- -- --
Net expenses(A,F) 0.65%(B) 0.56% 0.34% 0.30% 0.20%(B)
Net investment income(A) 4.42%(B) 4.41% 4.83% 4.44% 4.71%(B)
Portfolio turnover rate 7.39%(B) -- 24.8% 6.6% --
Net assets, end of period
(in thousands) $57,188 $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 December 31, 1996.
(B) Annualized
(C) Not annualized
(D) Excluding sales charge
(E) Pursuant to new Securities and 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.
8
<PAGE>
Notes to Financial Statements
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Tax-Free Income Fund ("Trust"), consisting of the
Tax-Free Intermediate-Term Income Trust ("Fund"), the Maryland Tax-Free
Income Trust ("Maryland Fund") and the Pennsylvania Tax-Free Income Trust
("Pennsylvania 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, which approximates
market, 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 September 30, 1996, dividends payable of $98 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 and Investment Income
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 in 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 six months ended September 30, 1996
(excluding short-term securities) were as follows:
Purchases $2,018
Proceeds from sales 3,550
At September 30, 1996, the cost of securities for federal income tax
purposes was $55,586. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,172
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $136.
3. Fund Share Transactions:
At September 30, 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 For the
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
- --------------------------------------------------------------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Sold 483 $ 7,367 1,315 $ 20,254
Reinvestment of
distributions 64 985 119 1,831
Repurchased (724) (11,045) (764) (11,777)
- --------------------------------------------------------------------------------
Net change (177) $ (2,693) 670 $ 10,308
================================================================================
9
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
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: 0.20% until March 31, 1993; 0.30% until June 30,
1994; 0.35% until July 31, 1995, and 0.65% through December 31, 1996 or
until the Fund's net assets reach $100 million, whichever occurs first.
For the six months ended September 30, 1996, advisory fees of $134 were
waived. At September 30, 1996, $4 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. At
September 30, 1996, distribution and services fees of $12 were payable to
the distributor. 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 $3 by the transfer agent for the six months ended September
30, 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 participanting 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 six months ended September 30, 1996, the Fund had no
borrowings under the line of credit.
10
