INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF TRUSTEES
John F. Curley, Jr., Chairman REPORT TO SHAREHOLDERS
Edmund J. Cashman, Jr., President FOR THE YEAR ENDED
Richard G. Gilmore MARCH 31, 1996
Charles F. Haugh
Arnold L. Lehman THE
Dr. Jill E. McGovern LEGG MASON
T. A. Rodgers MARYLAND
Edward A. Taber, III TAX-FREE
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
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.
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-030
5/96
<PAGE>
TO OUR SHAREHOLDERS,
We are pleased to report to you on the progress of the Legg Mason
Maryland 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 Maryland Tax-Free Income Trust had
a 30-day annualized SEC yield of 5.00%, and an average weighted maturity
of 16.3 years.
The Trust seeks a high level of current income exempt from federal
and Maryland 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:
Aaa 39.0%
Aa 40.7%
A 14.2%
Baa 4.7%
Short-term securities 1.4%
During the six months ended March 31, the Trust's net asset value
per share declined from $16.19 to $16.07 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 2.25%. (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 show greater
fluctuations -- both up and down -- in response to changes in interest
rates than tax free bond funds with shorter 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 $0.06 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
MARYLAND TAX-FREE INCOME TRUST
For the fiscal year ended March 31, 1996, the fund's total return was
7.11% (excluding the maximum 2.75% sales charge). Compared to other
Maryland municipal bond funds, the Maryland Tax-Free Income Trust ranked
30 of 32 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 the fund's inception in May, 1991,
this conservative philosophy has served the portfolio well resulting in
the fund ranking 2 out of 11 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 15.0 years to 16.3 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
realizing 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 13.2 years to 11.0
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 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 a 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 5.00%. For an investor in the 31% tax bracket, the
taxable equivalent yield was 7.25%, 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
LEGG MASON MARYLAND TAX-FREE INCOME TRUST
Performance Comparison as of March 31, 1996 of a $10,000 Investment
made at the Fund's inception on May 1, 1991(dagger)
Average Annual Total Return
1 Year Life of Fund*
4.15% 7.04%
[graph appears here--plot points are listed below]
<TABLE>
<CAPTION>
5/1/91 9/91 3/92 9/92 3/93 9/93 3/94 9/94 3/95 9/95 3/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maryland Tax-Free Income Trust 9,722 10,157 10,503 11,143 11,813 12,655 12,227 12,418 13,034 13,660 13,961
Lehman Brothers Municipal Bond Index(1) 10,000 10,471 10,854 11,565 12,213 13,039 12,496 12,721 13,425 14,143 14,550
</TABLE>
* Fund Inception -- May 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
MARYLAND TAX-FREE INCOME TRUST
MARCH 31, 1996
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
MUNICIPAL BONDS -- 97.3%
<S> <C> <C>
Maryland -- 97.3%
Annapolis (City of), Public
Improvement, GO
$ 350 6.50% 8/1/10 $ 374
Anne Arundel County, Consolidated
Water and Sewer, GO
1,350 6.90% 1/15/09 1,466
1,000 5.30% 4/15/17 954
Anne Arundel County, PCR Refunding
4,500 6.00% 4/1/24 4,505
Baltimore City Municipal Capital
Projects (MBIA insured)
7.375% 4/1/01
2,000 (Pre-refunded 4/1/98A) 2,125
Baltimore City Waste Water
(MBIA insured)
6.50% 7/1/20
1,500 (Pre-refunded 7/1/00A) 1,618
Baltimore City Water Utility
(MBIA insured)
6.50% 7/1/20
1,250 (Pre-refunded 7/1/00A) 1,348
Baltimore County, Consolidated
Public Improvement, GO
2,000 6.125% 7/1/09 2,127
Baltimore County, Nursing Home
(Stella Maris) Series A
890 7.25% 3/1/11 933
Baltimore County, Pension Funding,
GO
1,000 6.70% 7/1/09 1,062
2,900 6.70% 7/1/11 3,080
2,000 6.70% 7/1/16 2,122
Calvert County Consolidated Sanitary
District
1,000 5.00% 7/15/19 904
Carroll County, Consolidated Public
Improvement, GO
1,395 5.375% 11/1/20 1,327
1,855 5.375% 11/1/25 1,749
Charles County, GO
6.60% 6/1/06
1,000 (Pre-refunded 6/1/01A) 1,109
Frederick County, GO
Series 1990
6.625% 8/1/20
250 (Pre-refunded 8/1/03A) 282
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Frederick County, GO Public Facility
1991
6.50% 5/1/06
$ 500 (Pre-refunded 5/1/01A) $ 552
6.50% 5/1/07
650 (Pre-refunded 5/1/01A) 717
Frederick County, GO Public
Facilities Refunding 1993
1,000 5.55% 7/1/07 1,025
Harford County, GO
6.40% 12/1/10
500 (Pre-refunded 12/1/00A) 549
1,500 5.00% 3/1/12 1,415
Howard County, Consolidated Public
Improvement, GO Series A
6.50% 2/15/11
700 (Pre-refunded 2/15/00A) 750
Howard County, Metropolitan District
Refunding Series B
1,000 0%B 8/15/07 553
1,500 6.00% 8/15/19 1,518
Laurel (City of), GO Public
Improvement and Refunding
(MBIA insured)
250 7.00% 7/1/09 276
1,000 7.00% 7/1/11 1,103
Maryland Community Development
Administration
Single Family AMT
Second Series
1,000 6.65% 4/1/04 1,033
Fourth Series
1,000 7.45% 4/1/32 1,046
Fifth Series
1,890 7.625% 4/1/29 1,966
Sixth Series
515 7.125% 4/1/14 529
Single Family Non-AMT
Third Series
670 7.25% 4/1/27 700
Multi-Family Insured Mortgage
Series B
1,500 5.80% 5/15/26 1,462
Multi-Family Insured Mortgage
Series G
150 7.10% 5/15/23 157
</TABLE>
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TAX-FREE INCOME FUND
MARYLAND TAX-FREE INCOME TRUST
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
MUNICIPAL BONDS -- Continued
Maryland -- Continued
Maryland Department of
Transportation Consolidated
Transportation Series 1989-1991
$ 1,500 6.60% 11/1/00 $1,614
2,000 6.25% 9/1/03 2,138
6.90% 11/15/04
750 (Pre-refunded 11/15/98A) 815
Maryland Health and Higher
Educational Facilities Authority
Easton Memorial Hospital
(MBIA insured)
1,000 6.50% 7/1/15 1,044
Francis Scott Key Medical Center
2,000 5.00% 7/1/18 (FGIC insured) 1,788
2,000 5.00% 7/1/23 (FGIC insured) 1,767
6.75% 7/1/23 (FGIC insured)
1,500 (Pre-refunded 7/1/00A) 1,657
1,000 5.625% 7/1/25 935
Greater Baltimore Medical Center
7.10% 7/1/17
50 (Pre-refunded 7/1/96A) 51
2,000 5.00% 7/1/19 (FGIC insured) 1,795
6.75% 7/1/19
2,000 (Pre-refunded 7/1/01A) 2,234
Howard County General Hospital
8.25% 7/1/18
1,100 (Pre-refunded 7/1/98A) 1,217
2,500 5.50% 7/1/21 2,186
Johns Hopkins Hospital
Series 1990
4,000 0%B 7/1/19 1,013
Series 1993
3,250 5.00% 7/1/23 2,880
Johns Hopkins University
Series 1988
3,000 7.50% 7/1/20 3,239
Kennedy Institute Series 1991
630 7.40% 7/1/11 662
1,000 6.75% 7/1/22 1,007
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Union Memorial Hospital
Series A and B (MBIA insured)
$ 600 6.75% 7/1/11 $ 646
1,900 6.75% 7/1/21 2,036
University of Maryland Medical
System Series 1993
(FGIC insured)
2,000 5.375% 7/1/13 1,908
Maryland Industrial Development
Financing Authority Revenue
(American Center for Physics
Headquarters Facility) Series 1992
2,500 6.375% 1/1/12 2,538
Maryland National Capital Park and
Planning Commission (Prince
George's County) Series L2
500 6.00% 7/1/05 543
Maryland Stadium Authority Sports
Facilities Lease Revenue AMT
Series D
5,000 7.50% 12/15/10 5,473
2,030 7.60% 12/15/19 2,229
Maryland Transportation Authority
Series 1985
5,250 5.75% 7/1/15 5,171
Maryland Water Quality Financing
Administration, Revolving Loan
Fund Revenue Series 1993A
1,500 5.40% 9/1/11 1,483
1,500 5.40% 9/1/12 1,474
Mayor and City Council of Baltimore
(FGIC insured)
Baltimore City Consolidated Public
Improvement
2,000 0%(B) 10/15/11 802
Baltimore City Parking Revenue
500 6.25% 7/1/21 515
Baltimore City Water Projects
1,000 5.00% 7/1/24 904
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
MUNICIPAL BONDS -- Continued
Maryland -- Continued
Montgomery County, Consolidated
Public Improvement, GO
Series A
$ 2,750 5.80% 7/1/07 $ 2,925
3,000 0%(B) 7/1/10 1,365
Series B
6.80% 11/1/09
850 (Pre-refunded 11/1/99A) 934
Montgomery County, HOC Single Family
965 6.80% 7/1/17 997
Montgomery County, Parking Revenue
Refunding (Silver Spring Parking
Lot District) 1992 Series A
(FGIC insured)
2,000 6.25% 6/1/07 2,151
Montgomery County, PCR Refunding
(Potomac Electric Project) 1994
Series
1,000 5.375% 2/15/24 929
Morgan State University Academic and
Auxiliary Fees Revenue
(MBIA insured)
7.00% 7/1/20
1,000 (Pre-refunded 7/1/00A) 1,114
Northeast Maryland Waste Disposal
Authority Solid Waste Revenue
(Montgomery County Resource
Recovery Project) AMT Series 1993A
3,000 6.30% 7/1/16 3,012
Port Facilities Revenue
(Consolidated Coal Sales Co.
Project) Series A and B
6,000 6.50% 10/1/11 6,496
Prince George's County, Consolidated
Public Improvement, GO
585 6.70% 7/1/04 642
7.20% 2/1/08
500 (Pre-refunded 2/1/99A) 543
585 6.75% 7/1/11 628
Prince George's County, PCR
Refunding (Potomac Electric
Project) 1993 Series
2,250 6.375% 1/15/23 2,365
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Prince George's County, Solid Waste
Management Systems Revenue
Series 1990
6.75% 6/30/02
$ 250 (Pre-refunded 6/30/00A) $ 276
6.90% 6/30/06
750 (Pre-refunded 6/30/00A) 833
Series 1993
1,000 5.25% 6/15/13 912
State of Maryland, GO
500 6.70% 7/15/02 543
1,500 6.70% 3/1/04 1,639
(Pre-refunded 3/1/00A)
2,000 5.40% 6/1/07 2,048
Talbot County, Bank Qualified, GO
500 6.70% 5/1/10 537
415 6.70% 5/1/11 444
University of Maryland Systems
(Auxiliary Facilities and Tuition
Revenue) Series A
1,000 6.30% 2/1/10 1,061
2,000 6.50% 4/1/11 2,182
(Pre-refunded 4/1/00A)
1,000 5.60% 4/1/15 993
Series B
7.00% 10/1/07
1,000 (Pre-refunded 10/1/99A) 1,104
1,000 6.375% 4/1/09 1,078
Washington County Public Facilities
Revenue, GO
6.60% 12/1/02
750 (Pre-refunded 12/1/98A) 810
Washington Suburban Sanitary
District
1,000 6.10% 6/1/07 1,080
1,000 5.25% 6/1/11 973
2,000 5.25% 6/1/12 1,938
1,000 5.50% 6/1/13 988
6.90% 6/1/13
400 (Pre-refunded 6/1/01A) 449
6.90% 6/1/14
1,300 (Pre-refunded 6/1/01A) 1,459
1,000 5.25% 6/1/15 951
Worcester County Sanitary District,
GO
115 6.75% 5/1/15 128
Total Municipal Bonds
(Identified Cost -- $135,694) 142,727
</TABLE>
7
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TAX-FREE INCOME FUND
MARYLAND TAX-FREE INCOME TRUST
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.3%
Repurchase Agreement -- 0.1%
State Street Bank & Trust Company
4.00% dated 3/29/96 to be
repurchased at $101 on 4/1/96
(Collateral: U.S. Treasury Note,
$ 101 5.75% due 9/30/97, value $104) $ 101
Variable Rate Demand Obligations(C) --
1.2%
Allegheny County, PA Hospital
Development Authority
(Presbyterian Hospital)
Series B
900 3.35% 4/4/96 900
Harris County, TX Health Facilities
(St. Luke's Episcopal)
900 3.85% 4/1/96 900
1,800
Total Short-term Investments
(Identified Cost -- $1,901) 1,901
Total Investments -- 98.6%
(Identified Cost -- $137,595) 144,628
Other Assets Less
Liabilities -- 1.4% 2,017
NET ASSETS -- 100.0% $146,645
</TABLE>
<TABLE>
<S> <C> <C>
Net Assets Consisting of:
Accumulated paid-in capital applicable
to 9,127 shares outstanding $139,068
Undistributed net realized gain
on investments 544
Unrealized appreciation of investments 7,033
NET ASSETS -- 100.0% $146,645
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE $16.07
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus sales charge
of 2.75% of offering price) $16.52
</TABLE>
(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.
A GUIDE TO ABBREVIATIONS APPEARS ON THE NEXT PAGE.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<TABLE>
<CAPTION>
% of Market
Net Assets Value
(000)
<S> <C> <C>
SECTOR DIVERSIFICATION
Pre-refunded Bonds 19.1% $ 27,961
General Obligation -- Local 17.7 25,957
Hospital Revenue 14.0 20,598
Water and Sewer Revenue 7.7 11,310
Lease Revenue 7.0 10,240
Ground Transportation Revenue 6.1 8,924
Housing Revenue 5.4 7,891
Corporate Utilities 5.3 7,799
Port Facilities Revenue 4.4 6,496
Education Revenue 4.3 6,371
Solid Waste Revenue 2.7 3,924
Parking Revenue 1.8 2,666
General Obligation -- State 1.8 2,590
Short-term Investments 1.3 1,901
Other Assets Less Liabilities 1.4 2,017
100.0% $146,645
</TABLE>
INVESTMENT ABBREVIATIONS
AMBAC AMBAC Indemnity Corporation
AMT Alternative Minimum Tax
FGIC Financial Guaranty Insurance Company
GO General Obligation
HOC Housing Opportunities Commission
MBIA Municipal Bond Insurance Association
PCR Pollution Control Revenue
9
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TAX-FREE INCOME FUND
MARYLAND TAX-FREE INCOME TRUST
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $8,648
EXPENSES:
Investment advisory fee $ 810
Distribution and service fees 368
Custodian fee 87
Transfer agent and shareholder servicing expense 54
Legal and audit fees 35
Reports to shareholders 22
Organization expense 11
Registration fees 4
Trustees' fees 4
Other expenses 9
1,404
Less: fees waived (541)
compensating balance credits (3)
Total expenses, net of waivers and compensating balance credits 860
NET INVESTMENT INCOME 7,788
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments 1,136
Increase in unrealized appreciation of investments 1,072
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,208
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $9,996
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON TAX-FREE INCOME FUND
MARYLAND 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 $ 7,788 $ 7,534
Net realized gain on investments 1,136 124
Increase in unrealized appreciation of investments 1,072 1,212
Increase in net assets resulting from operations 9,996 8,870
Distributions to shareholders:
Net investment income (7,788) (7,534)
Net realized gain on investments (497) --
Change in net assets from Fund share transactions 2,620 (4,600)
Change in net assets 4,331 (3,264)
NET ASSETS:
Beginning of year 142,314 145,578
End of year $146,645 $142,314
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON TAX-FREE INCOME FUND
MARYLAND 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 $15.87 $15.69 $15.97 $15.03 $14.70
Net investment income(A) 0.859 0.828 0.839 0.877 0.823
Net realized and unrealized gain
(loss) on investments 0.251 0.180 (0.275) 0.947 0.333
Total from investment operations 1.11 1.008 0.564 1.824 1.156
Distributions to shareholders:
Net investment income (0.859) (0.828) (0.839) (0.877) (0.823)
Net realized gain on investments (0.055) -- -- (0.007) (0.003)
In excess of net realized gain on investments -- -- (0.005) -- --
Net asset value, end of period $16.07 $15.87 $15.69 $15.97 $15.03
Total return(D) 7.11% 6.60% 3.51% 12.47% 8.04%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses(A,E) 0.59% -- -- -- --
Net expenses(A,F) 0.58% 0.54% 0.46% 0.40% 0.18%(B)
Net investment income(A) 5.29% 5.32% 5.10% 5.61% 5.91%(B)
Portfolio turnover rate 14.1% 9.5% 6.6% -- 5.4%(B)
Net assets, end of period (in thousands) $146,645 $142,314 $145,578 $128,566 $83,052
</TABLE>
(*) FOR THE PERIOD MAY 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 OCTOBER 20,
1991; 0.25% OF AVERAGE DAILY NET ASSETS UNTIL DECEMBER 31, 1991; 0.35%
UNTIL JUNE 30, 1992; 0.40% UNTIL DECEMBER 31, 1992; 0.45% UNTIL DECEMBER
31, 1993; 0.50% UNTIL JUNE 30, 1994; 0.55% UNTIL JULY 31, 1995; 0.60%
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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON TAX-FREE INCOME FUND
MARYLAND TAX-FREE 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 ("Fund"), the Pennsylvania Tax-Free Income
Trust ("Pennsylvania Fund") and the Tax-Free Intermediate-Term Income
Trust ("Intermediate 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
Pennsylvania Fund and the Intermediate 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 March 31, 1996, dividends payable of $329 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. At March 31, 1996, $1,835 was receivable for securities sold but
not yet delivered and $1,831 was payable for securities purchased but not
yet received.
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.
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 $24,183
Proceeds from sales 19,912
At March 31, 1996, the cost of securities for federal income tax
purposes was $137,595. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $7,404
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $371.
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 966 $ 15,669 1,169 $ 18,259
Reinvestment of
distributions 379 6,159 358 5,565
Repurchased (1,183) (19,208) (1,838) (28,424)
Net change 162 $ 2,620 (311) $ (4,600)
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
LEGG MASON TAX-FREE INCOME FUND
MARYLAND TAX-FREE INCOME TRUST
(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 October 20, 1991, 0.25% until
December 31, 1991, 0.35% until June 30, 1992, 0.40% until December 31,
1992, 0.45% until December 31, 1993, 0.50% until June 30, 1994, 0.55%
until July 31, 1995, 0.60% until March 31, 1996, and 0.65% until July 31,
1996, or until the Fund's net assets reach $200 million, whichever occurs
first. For the year ended March 31, 1996 advisory fees of $541 were waived
and $22 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 services fees of $31 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 $18 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.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF LEGG MASON TAX-FREE INCOME FUND AND
SHAREHOLDERS OF THE LEGG MASON MARYLAND TAX-FREE INCOME TRUST:
We have audited the accompanying statement of net assets of the Legg
Mason Maryland 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 three years in the period then ended, and
financial highlights for each of the four years in the period then ended
and for the period May 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 Maryland 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
15
