Annual Report
March 31, 1997
Legg Mason
Tax-Free
Income Fund
Maryland Tax-Free
Pennsylvania Tax-Free
Tax-Free
Intermediate-Term
Putting Your Future First
[Legg Mason Logo]
FUNDS
<PAGE>
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
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart 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 o 539 o 0000
[Recycle Logo] Printed on Recycled Paper
LMF-030
5/97
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's annual
report for its fiscal year ended March 31, 1997, combining reports for the Legg
Mason Maryland Tax-Free Income Trust, Pennsylvania Tax-Free Income Trust and the
Tax-Free Intermediate-Term Income Trust. If you own more than one Trust of the
Tax-Free Income Fund, this will eliminate extra mailings to your home. If you
own only one portfolio, you may be interested in information on other portfolios
of the Fund.
The following table summarizes key statistics for each Trust, as of March 31,
1997:
Average Net Asset Value
SEC Yield* Weighted Maturity Per Share
---------- ----------------- ---------------
Maryland Tax-Free 4.88% 16.10 years $15.91
Pennsylvania Tax-Free 4.92% 17.63 years 15.80
Tax-Free Intermediate 4.28% 7.46 years 15.22
Each of the Trusts seeks a high level of current income exempt from federal
income tax. Maryland Tax-Free also seeks income which is exempt from Maryland
state and local income taxes. Pennsylvania Tax-Free also seeks income which is
exempt from Pennsylvania personal income tax. The Trusts purchase only
securities which have received investment grade ratings from Moody's Investors
Service or Standard & Poor's Corporation or which are judged by each Trust's
investment adviser to be of comparable quality. Moody's ratings of securities we
currently own are:
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
-------- ------------ -----------------
Aaa 40.34% 71.56% 53.94%
Aa 40.49 12.38 32.65
A 14.63 13.36 10.52
Baa 2.91 -- --
Short-term securities 1.63 2.70 2.89
Net asset values per share for each of the Trusts declined slightly from
their September 30, 1996 levels in response to increases in interest rates. For
the full twelve month period, total returns for Maryland Tax-Free, Pennsylvania
Tax-Free and Tax-Free Intermediate-Term were 4.73%, 4.61% and 3.71%,
respectively. (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
maximum initial sales charge of 2.75% for Maryland Tax-Free and Pennsylvania
Tax-Free. The maximum sales charge of 2.00% for Tax-Free Intermediate-Term is
being waived through July 31, 1997 and no sales charge is reflected in the
Trust's total return calculation.)
Normally, the average weighted maturity for Maryland Tax-Free and
Pennsylvania Tax-Free will be kept within a range of 12-24 years. Because of
their relatively long weighted average maturities, these Trusts offer higher
yields than short-term and intermediate-term tax free bond funds. However, their
net asset values per share typically will decline more when interest rates rise
and gain more when interest rates fall than net asset values per share of tax
free bond funds with short-term and intermediate-term average weighted
maturities. Tax-Free Intermediate-Term's weighted average maturity is normally
kept within an intermediate-term maturity range of 2-10 years. We expect that,
in most market periods, the Trust will offer greater price stability than
municipal bond funds with longer maturities while earning somewhat lower yields.
Some shareholders regularly add to their Trust holdings by authorizing
monthly transfers from their bank checking or Legg Mason accounts. Your
Financial Advisor will be happy to help you make these arrangements if you would
like to purchase shares in this convenient way.
Sincerely,
/s/ John F. Curley
------------------
John F. Curley, Jr.
Chairman
May 12, 1997
- -----------
*SEC yields reported are for the 30 days ended March 31, 1997.
1
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Portfolio Manager's Comments
Legg Mason Tax-Free Income Fund
Market Overview
The twelve months ended March 31, 1997, resulted in modest returns for the
municipal bond market. Despite relatively benign inflation data, renewed
strength in the economy created increased volatility as participants struggled
to determine the outlook for Fed policy. When the market focused on the
inflation data, rates trended downwards, reaching a cyclical low in mid-February
of 1997. However, despite only mild indications of inflation, statistical data
in the fourth quarter of 1996 and the first quarter of 1997 pointed to strong
growth in the economy, especially in the housing and employment numbers. In
light of these numbers, the Fed increased the Fed Funds rate 25 basis points
(100 basis points = 1%) on March 25 in a preemptive attempt to fight inflation.
This action led to higher interest rates across the entire yield curve over the
final six weeks of our Fund's fiscal year. The final result was slightly higher
municipal rates compared to the beginning of the period, with total returns
close to the coupon rate.
Maryland Tax-Free Income Trust
For the fiscal year ended March 31, 1997, the Fund's total return was 4.73%
(excluding the maximum 2.75% sales charge). Compared to other Maryland municipal
bond funds for the same period, the Maryland Tax-Free Income Trust's total
return ranked 16 of 33 funds with similar investment objectives according to
Lipper Analytical Services, Inc. The average maturity of the fund decreased
slightly to 16.10 years from 16.28 years over the last twelve months as we
maintained caution in light of the strong growth evident in the economy and the
Fed's apparent bias to tighten. Our conservative strategy has served the Fund
well over the longer term, as the Fund has ranked 4 of 13 similar funds over the
five years ended March 31, 1997, according to Lipper.
Pennsylvania Tax-Free Income Trust
For the fiscal year ended March 31, 1997, the Fund's total return was 4.61%
(excluding the maximum 2.75% sales charge). The Fund ranked 43 of 63
Pennsylvania municipal bond funds according to Lipper Analytical Services, Inc.
for the same period. We gradually shortened the average maturity of the Fund
from 19.32 years to 17.63 years in light of the near-term risks stemming from
strong economic growth and uncertainty regarding Fed policy. Our focus on income
and higher quality bonds has enabled the Fund to perform competitively as a
long-term investment, its total return ranking 12 of 24 similar funds over the
five year period ended March 31, 1997 according to Lipper.
Tax-Free Intermediate-Term Income Trust
The Tax-Free Intermediate-Term Income Trust's total return was 3.71% for the
fiscal year ended March 31, 1997. For the same period, the Fund's total return
ranked 100 of 139 intermediate-term municipal funds according to Lipper
Analytical Services, Inc. The Fund's performance was attributable to our focus
on high coupon bonds combined with a relatively short average maturity of 7.5
years during the winter bond rally. However, our cautious stance in light of
uncertain Fed policy seems appropriate, and we will look to extend the average
maturity gradually with attractively priced high quality bonds when the
opportunities present themselves.
Market Commentary
Following the trend established in the fourth quarter of 1996, municipal
bonds have fared better than the taxable market as a whole so far this year,
albeit for different reasons. Municipal performance in the fourth quarter was
buoyed by a benign political picture following the elections and the resulting
de-emphasis on tax reform. Municipal bond returns in the first quarter of 1997
have been influenced primarily by the lack of new issue supply in the market,
especially in January and February, which historically have been the lightest
months in terms of gross municipal new issuance.
However, March provided a new set of challenges. The highly anticipated Fed
tightening became a reality at the same time municipal issuance began to pick
up. The market had a hard time absorbing the new supply in an environment
dominated by fears of tighter Fed policy. As a result, the broad municipal
market surrendered its gains from early in the quarter and posted a mild decline
of 0.24%. That decline was 32 basis points less than the taxable market. The
municipal market continues to show strength relative to the
2
<PAGE>
Treasury market, with 10 and 30 year Aaa issues yielding 74% and 81% of
comparable Treasuries, slightly below twelve month averages of 76% and 83%,
respectively.
Outlook
We view the recent tightening of monetary policy as a positive for the
market. Although we do believe that there will be one or possibly two more
increases in short rates, the Fed has given direction to a market which had been
floundering for several years. Rates along the entire yield curve will most
likely rise into the third quarter, and we expect the curve to flatten more. We
believe that by year end, however, rates will be below their current levels.
Looking forward, we will be monitoring several critical factors in the coming
months which we feel could have a great impact on the direction of interest
rates: consumer confidence and spending, the stock market, the strength of the
dollar, and wage and price inflation.
We believe the consumer will be an early indicator of the impact of Fed
policy on the economy. If the consumer curtails spending in anticipation of
rising rates, this will depress economic growth more quickly than is normally
seen following a tightening of monetary policy. The blast of media attention
both before and after the Fed's most recent move might exaggerate the extent of
the interest rate increase in the average consumer's mind and hasten the cutback
in spending. In the past, consumers rushed to buy goods and services due to
fears of inflation. Now consumers recognize that although we are in a period of
relatively low inflation and ordinarily there would be no reason to accelerate
buying, the cost of financing major purchases via mortgages, credit cards or
auto loans is likely to rise. These phenomena could accelerate the impact of the
Fed tightening, accomplish the goal of forestalling inflation through a
controlled economic pause more quickly, and obviate the need for more than one
additional increase in short-term rates later this year.
The stock market has paused recently in its pursuit of newer higher levels.
With long interest rates above 7% and the prospect for additional Fed moves
likely to push those rates slightly higher, the stock market now faces a more
attractive alternative. We could see a shift in asset allocation away from
equities in favor of bonds above and beyond the rebalancing flows seen thus far.
This could support the bond market and help keep interest rates from rising
significantly.
The strength of the dollar has been a de facto tightening of monetary policy,
making exports more expensive and imports more attractive. It has also provided
foreign investors a sizeable unhedged return on their U.S. investments. Should
the dollar weaken appreciably, those investors might choose to sell their
investments to lock in any gains remaining which would put downward pressure on
our market.
On the wage front, we believe that gains in worker productivity have enabled
companies to hold prices firm while still allowing wages to increase. If
productivity gains were to abate, increases in wages if any, would most likely
have to be passed along in the form of higher prices, forming the base for
higher inflation.
Overall, we believe that the fundamentals supporting a move toward lower
interest rates outweigh the negatives. We do not anticipate any tax reform or
budget surprises in the foreseeable future which could adversely affect
municipal bonds. With the Fed now following a pre-emptive monetary policy, as
the economy begins to slow later in the year, the expectation of a continued low
inflationary environment, so critical to a strong bond market, will be
supported.
Strategy
Our strategy in the Funds currently is to gradually extend duration and
increase positive convexity in order to take advantage of the lower rates which
we expect to see toward the end of the year. Municipal bond funds are more
difficult to redirect than taxable bond funds since there is such a finite
supply of bonds at attractive prices which can be used to implement a change in
strategy. For that reason, we have started now to change the investment profile
of the Funds, knowing that it will take some time to arrive at our goals.
Victoria M. Schwatka
April 30, 1997
3
<PAGE>
Performance Information
Legg Mason Tax-Free Income Fund
Performance Comparison of a $10,000 Investment as of March 31, 1997
The returns shown on these pages are based on historical results and
are not intended to indicate future performance. The investment return and
principal value of an investment in each of these Funds 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 a fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The following graphs compare each Fund's total returns against that of
the most closely matched broad-based securities market index. The lines
illustrate the cumulative total return of an initial $10,000 investment
for the periods indicated after subtracting each Fund's maximum sales
load. The line for each Legg Mason Fund represents the total return after
deducting all Fund investment management and other administrative expenses
and the transaction costs of buying and selling securities. The line
representing the securities market index does not include any transaction
costs associated with buying and selling securities in the index or other
administrative expenses. Both the Legg Mason Funds' results and the
indices' results assume reinvestment of all dividends and distributions.
Maryland Tax Free Income Trust
Cumulative Average Annual
Total Return* Total Return*
- -----------------------------------------------------
One Year +1.88% +1.88%
Five Years +35.32 +6.23
Life of Fund(dagger) +46.20 +6.63
- -----------------------------------------------------
(dagger) Fund inception -- May 1, 1991
* Includes maximum sales charge of 2.75%
[Graph appears here--see plot points below]
Maryland Tax-Free Lehman Brothers Municipal
Years ended March 31, Income Trust Bond Index (1)
- --------------------- ----------------- -------------------------
1991(dagger) 9,722 10,000
1992 10,503 10,854
1993 11,813 12,213
1994 12,227 12,496
1995 13,034 13,425
1996 13,960 14,550
1997 14,620 15,343
(1) The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment grade tax-exempt bond market.
(dagger) Fund inception -- May 1, 1991.
4
<PAGE>
Pennsylvania Tax-Free Income Trust
Cumulative Average Annual
Total Return* Total Return*
- -----------------------------------------------------
One Year +1.71% +1.71%
Five Years +36.46 +6.41
Life of Fund(dagger) +45.03 +6.78
- -----------------------------------------------------
(dagger) Fund inception -- August 1, 1991
* Includes maximum sales charge of 2.75%
[Graph appears here--see plot points below]
Pennsylvania Tax-Free Lehman Brothers Municipal
Years ended March 31, Income Trust Bond Index (1)
- --------------------- --------------------- -------------------------
1991(dagger) 9,725 10,000
1992 10,334 10,639
1993 11,718 11,972
1994 12,165 12,249
1995 13,014 13,160
1996 13,864 14,262
1997 14,503 15,037
(1) The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment grade tax-exempt bond market.
(dagger) Fund inception -- August 1, 1991.
Tax-Free Intermediate-Term Income Trust
Cumulative Average Annual
Total Return* Total Return*
- -----------------------------------------------------
One Year +1.66% +1.66%
Life of Fund(dagger) +24.05 +5.03
- -----------------------------------------------------
(dagger) Fund inception -- November 9, 1992
* Includes maximum sales charge of 2.00%
[Graph appears here--see plot points below]
Tax-Free Lehman Brothers 7-Year
Years ended March 31, Intermediate Trust Municipal Bond Index (1)
- --------------------- ------------------ ------------------------
1992(dagger) 9,800 10,000
1993 10,226 10,559
1994 10,634 10,874
1995 11,234 11,564
1996 11,961 12,498
1997 12,405 13,074
(1) The Lehman Brothers 7-year Municipal Bond Index is a total return
performance benchmark for investment grade tax-exempt bonds with
maturities from six to eight years.
(dagger) Fund inception -- November 9, 1992.
5
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1997
(Amounts in Thousands)
Maryland Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 96.9%
Annapolis (City of), Public Improvement, GO 6.50% 8/1/10 $ 350 $ 373
Anne Arundel County, Consolidated
Water and Sewer, GO (Pre-refunded 1/15/99) 6.90% 1/15/09 1,350 1,434(A)
Anne Arundel County, Consolidated
Water and Sewer, GO 5.30% 4/15/17 1,000 951
Anne Arundel County, PCR Refunding
(Baltimore Gas & Electric Project) 6% 4/1/24 4,500 4,516
Baltimore City Municipal Capital Projects
(MBIA Insured) (Pre-refunded 4/1/98) 7.375% 4/1/01 2,000 2,069(A)
Baltimore City Waste Water (MBIA insured)
(Pre-refunded 7/1/00) 6.50% 7/1/20 2,750 2,908(A)
Baltimore County, Consolidated Public
Improvement, GO 6.125% 7/1/09 2,000 2,105
Baltimore County, Nursing Home (Stella Maris)
Series A 7.25% 3/1/11 890 938
Baltimore County, Pension Funding, GO 6.70% 7/1/09 1,000 1,045
Baltimore County, Pension Funding, GO 6.70% 7/1/11 2,900 3,033
Baltimore County, Pension Funding, GO 6.70% 7/1/16 2,000 2,092
Baltimore, Maryland Revenue Refunding Waste
Water Project Series A (FGIC insured) 5.50% 7/1/26 1,000 951
Calvert County Consolidated Sanitary District 5% 7/15/19 1,000 912
Calvert County, Maryland PCR
(Baltimore Gas & Electric Project) 5.55% 7/15/14 750 730
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/20 1,395 1,314
Carroll County, Consolidated Public
Improvement, GO 5.375% 11/1/25 1,855 1,733
Charles County, GO (Pre-refunded 6/1/01) 6.60% 6/1/01 1,000 1,087(A)
Frederick County, GO Series 1990
(Pre-refunded 8/1/03) 6.625% 8/1/20 250 278(A)
Frederick County, GO Public Facility 1991
(Pre-refunded 5/1/01) 6.50% 5/1/06 500 541(A)
Frederick County, GO Public Facility 1991
(Pre-refunded 5/1/01) 6.50% 5/1/07 650 704(A)
Frederick County, GO Public Facilities
Refunding 1993 5.55% 7/1/07 1,000 1,024
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Harford County, GO (Pre-refunded 12/1/00) 6.40% 12/1/10 $ 500 $ 539(A)
Harford County, GO 5% 3/1/12 1,500 1,411
Howard County, Consolidated Public Improvement
GO Series A 5.50% 2/15/27 1,000 962
Howard County, Consolidated Public Improvement
GO Series A (Pre-refunded 2/15/00) 6.50% 2/15/11 700 737(A)
Howard County, Metropolitan District Refunding
Series A 5.50% 2/15/09 1,000 1,013
Howard County, Metropolitan District Refunding
Series B 0% 8/15/07 1,000 582(B)
Howard County, Metropolitan District Refunding
Series B 6% 8/15/19 1,500 1,530
Laurel (City of), GO Public Improvement and
Refunding (MBIA insured)
(Pre-refunded 7/1/01) 7% 7/1/09 250 276(A)
Laurel (City of), GO Public Improvement and
Refunding (MBIA insured) (Pre-refunded 7/1/01) 7% 7/1/11 1,000 1,104(A)
Maryland Community Development Administration
Single Family AMT
Second Series 6.65% 4/1/04 1,000 1,035
Fourth Series 7.45% 4/1/32 925 967
Fifth Series 7.625% 4/1/29 1,810 1,876
Sixth Series 7.125% 4/1/14 465 479
Single Family Non-AMT Third Series 7.25% 4/1/27 670 700
Multi-Family Insured Mortgage Series G 7.10% 5/15/23 150 156
Multi-Family Insured Mortgage Series B 5.80% 5/15/26 1,500 1,451
Maryland Department of Transportation
Consolidated Tranportation
Series 1989 (Pre-refunded 11/15/98) 6.90% 11/15/04 750 797(A)
Series 1990 6.60% 11/1/00 1,500 1,590
Series 1991 6.25% 9/1/03 2,000 2,104
Maryland Health and Higher Educational
Facilities Authority
Easton Memorial Hospital (MBIA insured) 6.50% 7/1/15 1,000 1,034
Francis Scott Key Medical Center (FGIC insured) 5% 7/1/18 2,000 1,788
Francis Scott Key Medical Center (FGIC insured) 5% 7/1/23 2,000 1,763
Francis Scott Key Medical Center (FGIC insured) 5.625% 7/1/25 1,000 949
Francis Scott Key Medical Center (FGIC insured)
(Pre-refunded 7/1/00) 6.75% 7/1/23 1,500 1,621(A)
Loyola College Series A 5.375% 10/1/26 3,000 2,821
Greater Baltimore Medical Center (FGIC Insured) 5% 7/1/19 2,000 1,781
</TABLE>
7
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Maryland Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Health and Higher Educational
Facilities Authority--(Continued)
Greater Baltimore Medical Center
(Pre-refunded 7/1/01) 6.75% 7/1/19 $ 1,000 $ 1,092(A)
Howard County General Hospital
(Pre-refunded 7/1/98) 8.25% 7/1/18 1,100 1,177(A)
Howard County General Hospital 5.50% 7/1/21 2,500 2,258
Johns Hopkins Hospital Series 1990 0% 7/1/19 4,000 1,076(B)
Johns Hopkins Hospital Series 1993 5% 7/1/23 3,250 2,846
Johns Hopkins University Series 1988 7.50% 7/1/20 3,000 3,167
Kennedy Institute Series 1991 7.40% 7/1/11 630 667
Kennedy Institute Series 1991 6.75% 7/1/22 1,000 1,021
Union Memorial Hospital Series A 6.75% 7/1/11 100 108
Union Memorial Hospital Series A 6.75% 7/1/21 600 647
Union Memorial Hospital Series B 6.75% 7/1/11 500 539
Union Memorial Hospital Series B 6.75% 7/1/21 1,300 1,401
University of Maryland Medical System
Series 1993 (FGIC Insured) 5.375% 7/1/13 2,000 1,946
Maryland National Capital Park and Planning
Commission (Prince George's County) Series L2
(Pre-refunded 7/1/02) 6% 7/1/05 500 535(A)
Maryland Stadium Authority Sports Facilities
Lease Revenue AMT Series D 7.50% 12/15/10 5,000 5,417
Maryland Stadium Authority Sports Facilities
Lease Revenue AMT Series D 7.60% 12/15/19 2,200 2,390
Maryland Transportation Authority Series 1985 5.75% 7/1/15 5,250 5,191
Maryland Water Quality Financing Administration,
Revolving Loan Fund Revenue Series 1993A 5.40% 9/1/11 1,500 1,463
Maryland Water Quality Financing Administration,
Revolving Loan Fund Revenue Series 1993A 5.40% 9/1/12 1,500 1,460
Mayor and City Council of Baltimore (FGIC insured)
Baltimore City Consolidated Public Improvement 0% 10/15/11 2,000 867(B)
Baltimore City Parking Revenue 6.25% 7/1/21 500 518
Baltimore City Water Projects 5% 7/1/24 2,000 1,807
Montgomery County, Consolidated Public
Improvement, GO Series A 5.80% 7/1/07 2,750 2,904
Montgomery County, Consolidated Public
Improvement, GO Series A 0% 7/1/10 3,000 1,451(B)
Montgomery County, HOC Single Family 6.80% 7/1/17 945 977
Montgomery County, Parking Revenue Refunding
(Silver Spring Parking Lot) 1992 Series A
(FGIC insured) 6.25% 6/1/07 2,000 2,122
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Montgomery County, PCR Refunding
(Potomac Electric Project) 1994 Series 5.375% 2/15/24 $ 1,000 $ 930
Morgan State University Academic and Auxiliary
Fees Revenue (MBIA insured)
(Pre-refunded 7/1/00) 7% 7/1/20 1,000 1,089(A)
Northeast Maryland Waste Disposal Authority
Solid Waste Revenue (Montgomery County
Resource Recovery Project) AMT Series 1993A 6.30% 7/1/16 3,000 3,044
Port Facilities Revenue (Consolidated Coal Sales
Co. Project) Series A & B 6.50% 10/1/11 6,000 6,516
Prince George's County, Consolidated Public
Improvement, GO 6.70% 7/1/04 585 638
Prince George's County, Consolidated Public
Improvement, GO (Pre-refunded 2/1/99) 7.20% 2/1/08 500 530(A)
Prince George's County, Consolidated Public
Improvement, GO 6.75% 7/1/11 585 631
Prince George's County, PCR Refunding
(Potomac Electric Project) 1993 Series 6.375% 1/15/23 2,250 2,362
Prince George's County, Solid Waste
Management System Revenue
Series 1990 (Pre-refunded 6/30/00) 6.75% 6/30/02 250 271(A)
Series 1990 (Pre-refunded 6/30/00) 6.90% 6/30/06 750 815(A)
Series 1993 5.25% 6/15/13 1,000 924
State of Maryland, GO 6.70% 7/15/02 500 534
State of Maryland, GO (Pre-refunded 3/1/00) 6.70% 3/1/04 1,500 1,608(A)
State of Maryland, GO 5.40% 6/1/07 2,000 2,045
Talbot County, Bank Qualified, GO 6.70% 5/1/10 500 536
Talbot County, Bank Qualified, GO 6.70% 5/1/11 415 444
University of Maryland
(Auxiliary Facilities and Tuition Revenue)
Series A 5.60% 4/1/15 1,000 988
Series A (Pre-refunded 4/1/00) 6.50% 4/1/11 2,000 2,145(A)
Series B (Pre-refunded 10/1/99) 7% 10/1/07 1,000 1,079(A)
Series B 6.375% 4/1/09 1,000 1,087
Washington Suburban Sanitary District 5.50% 6/1/13 1,000 989
Washington Suburban Sanitary District 5.25% 6/1/12 1,000 963
Washington Suburban Sanitary District 5.25% 6/1/11 1,000 973
Washington Suburban Sanitary District 6.10% 6/1/07 1,000 1,070
Washington Suburban Sanitary District
(Pre-refunded 6/1/01) 6.90% 6/1/13 400 439(A)
</TABLE>
9
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Maryland Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Washington Suburban Sanitary District 5.25% 6/1/15 $ 1,000 $ 946
Washington Suburban Sanitary District 5.25% 6/1/16 1,000 958
Worcester County Sanitary District, GO
(Pre-refunded 5/1/01) 6.75% 5/1/15 115 125(A)
--------
Total Municipal Bonds (Identified Cost-- $135,750) 141,530
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 1.6%
Harris County, TX Health Facilities Development
Corporation Hospital Revenue 3.85% 4/1/97 1,500 1,500
Jackson County, Mississippi Port Facilities Revenue
Adjusted Refund Chevron USA Inc. Project 3.80% 4/1/97 800 800
--------
Total Variable Rate Demand Obligations (Identified Cost-- $2,300) 2,300
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 98.5% (Identified Cost-- $138,050) 143,830
Other Assets Less Liabilities-- 1.5% 2,144
--------
Net assets consisting of:
Accumulated paid-in capital applicable to 9,177 shares outstanding $139,840
Undistributed net realized gain on investments 354
Unrealized appreciation of investments 5,780
--------
Net assets-- 100.0% $145,974
========
Net asset value and redemption price per share $15.91
======
Maximum offering price per share $16.36
======
(net asset value plus sales charge of 2.75% of offering price)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A)Pre-refunded bond -- Bonds are referred to as pre-refunded when an 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 "matures". 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, 1997, 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 follows Sector Diversification.
See notes to financial statements.
10
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1997
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 96.2%
Allegheny County, Airport Revenue
1992-D AMT (FGIC insured) 7.75% 1/1/19 $ 1,500 $ 1,534
1992-B AMT (FSA insured) 6.625% 1/1/22 1,000 1,057
Allegheny County, Baldwin-Whitehall School
District, GO Series 1992-A (FGIC insured)
(Pre-refunded 8/15/02) 6.60% 8/15/10 1,000 1,090(A)
Allegheny County Hospital Development Authority,
Children's Hospital (MBIA insured) 6.875% 7/1/14 1,000 1,058
Allegheny County Hospital Development Authority,
Presbyterian University Health System, Inc.
Project Series 1992-B (MBIA insured) 6% 11/1/23 1,250 1,237
Allegheny County, North Allegheny School District
Refunding Revenue Series A (AMBAC insured) 6.35% 11/1/12 1,095 1,145
Allegheny County, West Jefferson Hills School
District, GO (FGIC insured) (Pre-refunded 2/1/01) 7.10% 2/1/11 1,000 1,083(A)
Beaver County, IDA PCR Ohio Edison Company
(FGIC insured) 7% 6/1/21 1,000 1,082
Berks County, PA 5.85% 11/15/18 1,000 996
Bethlehem Authority Water Revenue Refunding
(MBIA insured) 5.30% 11/15/17 2,000 1,851
Bucks County, Council Rock School District, GO
(FGIC insured) (Pre-refunded 3/1/01) 6.75% 3/1/11 250 268(A)
Bucks County, Council Water and Sewer Collection
Sewer System (FGIC insured) 5.375% 12/1/13 1,000 969
Butler County, Seneca Valley School District, GO
Series 1991-B (MBIA insured) 6.50% 1/1/03 500 516
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,061
Second Series (Pre-refunded 11/1/01) 6.50% 11/1/09 1,000 1,083(A)
Dauphin County Hospital Authority, Polyclinic
Medical Center (MBIA insured)
(Pre-refunded 8/15/99) 6.90% 8/15/11 500 528(A)
Deer Lakes School District Pennsylvania
(MBIA insured) 6.45% 1/15/19 1,750 1,817
Delaware River Port Authority (FGIC insured) 5.50% 1/1/26 1,000 960
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 6.85% 8/1/11 500 534
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 5.50% 8/1/23 2,000 1,873
</TABLE>
11
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Delaware County, GO (Pre-refunded 11/15/02) 6% 11/15/22 $ 780 $ 824(A)
Delaware County, GO 6% 11/15/22 220 222
Lehigh County IDA PCR Refunding Bonds
Pennsylvania Power & Light Company Project
1994 Series A (MBIA insured) 5.50% 2/15/27 1,000 930
Montgomery County, GO Refunding
Series 1991 (Pre-refunded 7/15/99) 6.10% 7/15/00 1,000 1,037(A)
Montgomery County Higher Education and Health
Authority, Saint Joseph's University Revenue
Series 1992 (Connie Lee insured) 6.25% 12/15/04 500 534
Montgomery County, IDA PCR Philadelphia Electric
Company Series 1991-B (MBIA insured) 6.70% 12/1/21 1,500 1,606
Montgomery County, Upper Gwynedd-Towamencin
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.75% 10/15/06 250 267
Montgomery Township Municipal Sewer Authority
Guaranteed Sewer Revenue Series 1991-A
(MBIA insured) 6.70% 5/15/21 250 261
Pennsylvania Higher Educational Facilities Authority,
Allegheny General Hospital Series 1991-A 7.25% 9/1/17 500 536
Pennsylvania Higher Educational Facilities Authority,
University Revenue, University of Pennsylvania
Series 1996-A 5.75% 1/1/22 1,000 972
Pennsylvania Higher Educational Facilities Authority,
Temple University Revenue (MBIA insured) 6.50% 4/1/21 250 265
Pennsylvania Higher Educational Facilities Authority,
University Revenue Series H (AMBAC insured) 5.375% 6/15/18 1,000 929
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue Series 1991-C AMT
(AMBAC insured) 7.15% 9/1/21 1,000 1,046
Pennsylvania Higher Education,
University of Pittsburgh (FGIC insured) 5.125% 6/1/22 1,000 901
Pennsylvania Housing Finance Agency,
Rental Housing Refunding Revenue
Series 1992-C 6.50% 7/1/23 750 769
Series 1993-C 5.80% 7/1/22 1,000 991
Pennsylvania Housing Finance Agency,
Single Family Mortgage Non-AMT
Series 1991-32 7.15% 4/1/15 450 474
Series 1992-33 6.90% 4/1/17 430 450
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Pennsylvania IDA Economic Development Revenue
Series 1991-A (Pre-refunded 7/1/01) 7% 1/1/11 $ 1,000 $ 1,097(A)
Series 1994-A (AMBAC insured) 5.50% 1/1/14 2,250 2,195
Pennsylvania Infrastructure Investment Authority
Revenue Series 1990-A 7.15% 9/1/10 500 530
Pennsylvania Intergovernmental Co-op Authority
(MBIA insured) 5.60% 6/15/15 1,000 974
Pennsylvania Intergovernmental Co-op Authority
(MBIA insured) 5.60% 6/15/16 2,000 1,927
Pennsylvania State University (Pre-refunded 7/1/99) 6.75% 7/1/14 2,000 2,133(A)
Pennsylvania State University 5.50% 8/15/16 1,000 962
Pennsylvania State University 5.10% 3/1/18 1,500 1,369
Pennsylvania Turnpike Commission Revenue
Series N 5.50% 12/1/17 1,000 945
Series N (FGIC insured) 5.50% 12/1/19 1,000 948
Philadelphia Gas Works Series B (MBIA insured) 7% 5/15/20 500 579
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding
Children's Hospital Series 1993-A 5% 2/15/21 1,000 864
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B (FGIC insured)
(Pre-refunded 11/15/01) 7% 11/15/04 500 554(A)
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B (FGIC insured)
(Pre-refunded 11/15/01) 7.10% 11/15/05 500 556(A)
Philadelphia Municipal Authority, Lease Revenue
Series 1993-A (FGIC insured) 5.625% 11/15/14 1,000 983
Philadelphia Water and Wastewater Revenue
(MBIA insured) 5.60% 8/1/18 2,000 1,930
Sayre, PA Healthcare Revenue Volunteer Hospital
Authority, Guthrie Healthcare System
(AMBAC insured) 7.20% 12/1/20 500 551
Schuylkill County Redevelopment Authority,
Commonwealth Lease Revenue (FGIC insured) 7.125% 6/1/13 750 818
Somerset County General Authority, Commonwealth
Lease Revenue (FGIC insured)
(Pre-refunded 10/15/01) 7% 10/15/13 500 546(A)
Swarthmore Borough Authority, Swarthmore College
Revenue Series 1992 6% 9/15/12 1,000 1,016
Swarthmore Borough Authority, Swarthmore College
Revenue Series 1992 6% 9/15/20 2,000 2,015
</TABLE>
13
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Pennsylvania Tax-Free Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
University of Pittsburgh Series 1992-A
(MBIA insured) 6.125% 6/1/21 $ 1,000 $ 1,010
Washington County Hospital Authority, Hospital
Refunding Revenue, Shadyside Hospital Project
Series 1992 (AMBAC insured) 5.875% 12/15/13 1,000 1,007
Washington County Hospital Authority, Hospital
Refunding Revenue, Shadyside Hospital Project
Series 1992 (AMBAC insured) 6% 12/15/18 1,000 996
Westmoreland County (AMBAC insured) 0% 8/1/13 2,000 782(B)
Westmoreland County (AMBAC insured) 0% 8/1/14 1,000 366(B)
-------
Total Municipal Bonds (Identified Cost-- $60,883) 62,409
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 2.5%
Allegheny County, Hospital Development Revenue
(Presbyterian Hospital) Series A, C and D 3.50% 4/3/97 1,250 1,250
Valdez Alaska Marine Terminal
(Exxon Pipeline Project) 3.80% 4/1/97 400 400
-------
Total Variable Rate Demand Obligations (Identified Cost-- $1,650) 1,650
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 98.7% (Identified Cost-- $62,533) 64,059
Other Assets Less Liabilities-- 1.3% 816
-------
Net assets consisting of:
Accumulated paid-in capital applicable to 4,107 shares outstanding $63,370
Accumulated net realized loss on investments (21)
Unrealized appreciation of investments 1,526
-------
Net assets-- 100.0% $64,875
=======
Net asset value and redemption price per share $15.80
======
Maximum offering price per share $16.25
======
(net asset value plus sales charge of 2.75% of offering price)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A)Pre-refunded bond -- Bonds are referred to as pre-refunded when an 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 interest, principal and call premium, if any, to the earliest call
date. On that call date the bond "matures." 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, 1997, 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 follows Sector Diversification.
See notes to financial statements.
14
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1997
(Amounts in Thousands)
Tax-Free Intermediate-Term Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Municipal Bonds -- 96.1%
Arizona -- 5.6%
Arizona Transportation Board Subordinated
Highway Revenue Series 1992 A 6% 7/1/00 $ 500 $ 521
Salt River Project Agricultural Improvement
and Power District, Electric System
Refunding Revenue 1993 Series A 5.30% 1/1/03 1,000 1,020
Scottsdale Street and Highway User
Revenue Refunding Series 1993 5% 7/1/02 1,000 1,007
University of Arizona Board of Regents
(Pre-refunded 6/1/98) 7.20% 6/1/01 500 528(A)
------
3,076
------
Connecticut -- 2.0%
State of Connecticut Special Tax Obligation,
Transportation Infrastructure 1990 Series A
(Pre-refunded 6/1/01) 7.10% 6/1/04 1,000 1,096(A)
------
Florida -- 4.6%
Northwest Florida Water Management District
Land Acquisition Revenue Refunding
Series 1992 (FGIC Insured) 5.50% 4/1/02 1,000 1,031
Florida State Board of Education Capital Outlay
Series A 5.60% 1/1/08 1,000 1,024
Jacksonville Florida Electric Authority Revenue
Refunding (St. Johns River Issue) 5.10% 10/1/10 500 481
------
2,536
------
Illinois -- 2.3%
State of Illinois Sales Tax Revenue Series O 5.90% 6/15/01 1,220 1,270
------
Kentucky -- 1.8%
Turnpike Authority of Kentucky, Economic
Development Road Revenue and Revenue
Refunding (Revitalization Projects)
Series 1993 (AMBAC insured) 5.30% 7/1/04 1,000 1,019
------
Louisiana -- 1.9%
City of New Orleans Audubon Park Commission
Aquarium Series 1993 (FGIC insured) 6% 10/1/08 1,000 1,045
------
Maine -- 1.8%
Maine Municipal Bond Bank Refunding 1993
Series A 5.20% 11/1/05 1,000 1,007
------
</TABLE>
15
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland -- 22.0%
Baltimore County, GO Pension Refunding 1991 6.70% 7/1/16 $ 1,000 $ 1,045
Cecil County, GO Consolidated Public Improvement
and Refunding 1993 (FGIC insured) 6.50% 12/1/99 850 894
Howard County, Consolidated Public Improvement
and Refunding 1993 Series A 4.80% 8/15/01 1,000 1,007
Maryland Department of Transportation Consolidated
Transportation Refunding
Series 1991 6% 9/1/00 1,000 1,043
Series 1993 4.375% 6/15/04 1,000 956
Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Johns Hopkins
University Issue Series 1988 7.50% 7/1/20 1,300 1,372
Maryland Transportation Authority, Transportation
Facilities Projects Revenue Series 1992 5.70% 7/1/05 1,000 1,042
Mayor and City Council of Baltimore
GO Consolidated Public Improvement
Refunding 1995 Series A (FGIC insured) 0% 10/15/06 750 461(B)
Project and Refunding Revenue (Water Projects)
Series 1990-A (MBIA insured)
(Pre-refunded 7/1/00) 6.50% 7/1/20 1,000 1,058(A)
Montgomery County, GO Consolidated Public
Improvement
Series B 6.80% 11/1/99 1,000 1,060
Series B (Pre-refunded 11/1/99) 6.80% 11/1/07 1,000 1,076(A)
Northeast Maryland Waste Disposal Authority Solid
Waste Revenue (Montgomery County Resource
Recovery Project) Series 1993 A AMT 5.60% 7/1/02 1,000 1,013
-------
12,027
-------
Missouri -- 0.9%
Missouri Health and Educational Facilities Authority
Refunding Revenue, (SSM Health Care)
Series 1992 A (MBIA insured) 4.90% 6/1/98 500 505
-------
Nebraska -- 1.9%
Nebraska Public Power District Revenue 5.70% 1/1/04 1,000 1,033
-------
Nevada -- 3.1%
Clark County, Nevada 5.50% 6/1/11 1,155 1,143
State of Nevada, GO LT (Nevada Municipal Bond
Bank Refunding Project No. 4) Series 1989 B 6.70% 2/1/01 500 533
-------
1,676
-------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
New Hampshire -- 1.9%
New Hampshire Municipal Bond Bank GO
Refunding 1991 Series H 5.70% 2/15/01 $ 1,000 $ 1,032
-------
New Jersey -- 3.9%
New Jersey Turnpike Authority, Turnpike
Revenue Series 1991 C (AMBAC insured) 6.40% 1/1/07 2,000 2,110
-------
North Carolina -- 2.6%
Durham, North Carolina GO Series 1986 4.90% 2/1/10 1,500 1,427
-------
Ohio -- 4.6%
City of Franklin, Ohio GO LT Series 1993 5.50% 12/1/11 2,000 2,000
State of Ohio Higher Education Facilities
Revenue Series 1988 A 7% 11/1/01 500 517
-------
2,517
-------
Pennsylvania -- 1.9%
Pennsylvania Intergovernmental Cooperation
Authority Special Tax Revenue
(City of Philadelphia Refunding
Program) Series 1992 (FGIC insured) 5.75% 6/15/99 1,000 1,029
-------
South Carolina -- 3.9%
Berkeley County Water and Sewer Revenue
Refunding and Improvement (MBIA insured) 6.50% 6/1/06 1,000 1,068
South Carolina Public Service Authority Revenue,
1991 Refunding and Improvement Series B 6.70% 7/1/02 1,000 1,088
-------
2,156
-------
Tennessee -- 3.7%
State of Tennessee GO, 1994 Series A 5.25% 3/1/02 1,000 1,024
Metropolitan Government Nashville and
Davidson County Tennessee Water & Sewer
Refunding (MBIA insured) 5.50% 1/1/13 1,000 990
-------
2,014
-------
Texas -- 7.3%
City of Austin Combined Utility Systems Revenue
Refunding Series 1992 A (MBIA insured) 6% 11/15/04 1,000 1,055
City of Houston Water and Sewer System
Junior Lien Revenue Refunding Series 1992 C
(MBIA insured) 5.40% 12/1/01 1,000 1,026
Texas Public Finance Authority, GO Refunding
(Superconducting Super Collider Project)
Series 1992 C (FGIC insured) 0% 4/1/02 1,000 783(B)
</TABLE>
17
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Tax-Free Income Fund
Tax-Free Intermediate-Term Income Trust -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Texas -- Continued
United Independent School District (Webb County
Texas) Unlimited Tax School Building Bonds,
Series 1995 (PSFG insured) 7.10% 8/15/06 $ 1,000 $ 1,140
-------
4,004
-------
Vermont -- 2.8%
State of Vermont, GO 1990 Series A
(Pre-refunded 2/1/00) 6.75% 2/1/03 1,400 1,506(A)
-------
Virginia -- 13.5%
Commonwealth of Virginia Transportation Board,
Transportation Contract Revenue Refunding
Series 1992 (Route 28 Project) 5.75% 4/1/00 1,000 1,032
Series 1992 (Route 28 Project) 6% 4/1/06 1,000 1,049
Fairfax County Public Improvement Refunding
Series 1994 A 7.25% 6/1/01 1,000 1,097
Series 1992 C 5.50% 10/1/03 2,000 2,049
Henrico County GO Public Improvement Refunding
Series 1993 5.25% 1/15/09 1,100 1,099
Virginia Public Building Authority State Building
Revenue Refunding Series 1992 B 5.625% 8/1/02 1,000 1,037
-------
7,363
-------
Washington -- 2.1%
Washington State Motor Vehicle Fuel Tax Revenue
Series D 6.50% 1/1/07 1,045 1,147
-------
Total Municipal Bonds (Identified Cost-- $51,860) 52,595
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C)-- 2.7%
Carlton Wisconsin Pollution Control Revenue
Power & Light Company Project B 4% 4/1/97 200 200
Emery County Utah Pollution Control Revenue
Adjusted Refund Pacificorp Projects 3.80% 4/1/97 600 600
Jackson County Mississippi Port Facilities Revenue
Adjusted Refund Chevron USA Inc. Project 3.80% 4/1/97 100 100
Sublette County Wyoming Pollution Control Revenue
Floating Rate-dates Exxon Project 3.80% 4/1/97 600 600
-------
Total Variable Rate Demand Obligations (Identified Cost-- $1,500) 1,500
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 98.8% (Identified Cost-- $53,360) 54,095
Other Assets Less Liabilities--1.2% 641
-------
Net assets-- 100.0% $54,736
=======
</TABLE>
18
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Net assets consisting of:
Accumulated paid-in capital
applicable to 3,596 shares outstanding $54,211
Accumulated net realized loss on investments (210)
Unrealized appreciation of investments 735
-------
Net assets-- 100.0% $54,736
=======
Net asset value and redemption price per share $15.22
======
Maximum offering price per share(D) $15.22
======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A)Pre-refunded bond -- Bonds are referred to as pre-refunded when an 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 "matures." 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, 1997, 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,
1997.
A guide to abbreviations follows Sector Diversification.
See notes to financial statements.
19
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
March 31, 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
------------------ ------------------ -------------------
% of Market % of Market % of Market
Net Assets Value Net Assets Value Net Assets Value
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Education Revenue 5.5 $ 8,063 17.6 $11,407 5.5 $ 3,030
Escrowed -- -- 2.7 1,727 -- --
General Obligation--Local 17.2 25,059 1.9 1,218 30.9 16,899
General Obligation--School -- -- 5.4 3,477 -- --
General Obligation--State 1.8 2,579 1.6 1,061 7.3 3,979
Health Care and Hospital Revenue 14.2 20,761 11.1 7,221 0.9 505
Housing Revenue 5.2 7,641 4.1 2,685 -- --
Lease Revenue 5.3 7,806 2.8 1,801 1.9 1,037
Other -- -- -- -- 4.2 2,299
Other Special Taxes -- -- 4.5 2,901 -- --
Parking Revenue 1.8 2,640 -- -- -- --
Port Facilities Revenue 4.5 6,516 -- -- -- --
Pre-refunded Bonds 17.1 25,000 16.6 10,801 9.6 5,263
Small Business Administration
Revenue -- -- 3.4 2,195 -- --
Solid Waste Revenue 2.7 3,968 -- -- 1.8 1,013
Student Loan Revenue -- -- 1.6 1,046 -- --
Transportation Revenue 6.1 8,885 8.4 5,443 17.9 9,779
Utilities 5.9 8,537 5.6 3,617 7.7 4,195
Water and Sewer Revenue 9.6 14,075 8.9 5,809 8.4 4,596
Short-Term Investments 1.6 2,300 2.5 1,650 2.7 1,500
Other Assets Less Liabilities 1.5 2,144 1.3 816 1.2 641
----- -------- ----- ------- ----- -------
100.0 $145,974 100.0 $64,875 100.0 $54,736
===== ======== ===== ======= ===== =======
</TABLE>
----------------------------------------------------------------
Guide to Investment Abbreviations
Legg Mason Tax-Free Income Fund
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
HOC Housing Opportunities Commission
IDA Industrial Development Authority
LT Limited Tax
MBIA Municipal Bond Insurance Association
PCR Pollution Control Revenue
PSFG Permanent School Fund Guaranty
20
<PAGE>
Statements of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 3/31/97
---------------------------------------------------
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Investment Income:
Interest $8,687 $3,897 $2,907
------ ------ ------
Expenses:
Investment advisory fee 818 366 314
Distribution and service fees 372 166 143
Custodian fee 93 70 68
Transfer agent and shareholder servicing expense 53 26 17
Audit and legal fees 37 25 34
Reports to shareholders 25 14 12
Registration fees 4 3 21
Trustees' fees 4 4 4
Organization expense 2 5 14
Other expenses 12 7 5
------ ------ ------
1,420 686 632
Less: fees waived (433) (244) (253)
compensating balance credits (2) (2) (2)
------ ------ ------
Total expenses, net of waivers and compensating
balance credits 985 440 377
------ ------ ------
Net Investment Income 7,702 3,457 2,530
------ ------ ------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on investments 482 (20) 18
Change in unrealized appreciation of investments (1,253) (422) (462)
------ ------ ------
Net Realized and Unrealized Gain (Loss) on Investments (771) (442) (444)
===========================================================================================================================
Change in Net Assets Resulting from Operations $6,931 $3,015 $2,086
====== ====== ======
</TABLE>
See notes to financial statements.
21
<PAGE>
Statements of Changes in Net Assets
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Maryland Pennsylvania Tax-Free
Tax-Free Tax-Free Intermediate-Term
Income Trust Income Trust Income Trust
------------------ ------------------ ------------------
Years Ended Years Ended Years Ended
3/31/97 3/31/96 3/31/97 3/31/96 3/31/97 3/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Change in Net Assets:
Net investment income $ 7,702 $ 7,788 $ 3,457 $ 3,585 $ 2,530 $ 2,409
Net realized gain (loss) on investments 482 1,136 (20) 1,082 18 --
Change in unrealized appreciation of investments (1,253) 1,072 (422) (519) (462) 897
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 6,931 9,996 3,015 4,148 2,086 3,306
Distributions to shareholders:
From net investment income (7,702) (7,788) (3,457) (3,585) (2,530) (2,409)
From net realized gain on investments (672) (497) (778) (267) -- --
Change in net assets from Fund share transactions 772 2,620 820 1,050 (4,862) 10,308
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets (671) 4,331 (400) 1,346 (5,306) 11,205
Net Assets:
Beginning of year 146,645 142,314 65,275 63,929 60,042 48,837
------------------------------------------------------------------
End of year $145,974 $146,645 $64,875 $65,275 $54,736 $60,042
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
22
<PAGE>
Financial Highlights
Legg Mason Tax-Free Income Fund
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>
Investment Operations Distributions From:
-------------------------------------- -------------------------------------
In Excess
Net Asset Net Net Realized Total Net of Net Net Asset
Value, Investment and Unrealized From Net Realized Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Gain on Total End of
of Year (Loss) Investments Operations Income Investments Investments Distributions Year
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free Income Trust
Years Ended Mar. 31,
1997 $16.07 $.83(D) $(.09) $ .74 $(.83) $(.07) $-- $(.90) $15.91
1996 15.87 .86(D) .25 1.11 (.86) (.05) -- (.91) 16.07
1995 15.69 .83(D) .18 1.01 (.83) -- -- (.83) 15.87
1994 15.97 .84(D) (.27) .57 (.84) -- (.01) (.85) 15.69
1993 15.03 .88(D) .95 1.83 (.88) (.01) -- (.89) 15.97
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
------------------------------------------------------------------------------------
Net
Total Net Investment Net Assets
Expenses Expenses Income (Loss) Portfolio End of
Total to Average to Average to Average Turnover Year
Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
- -----------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free Income Trust
Years Ended Mar. 31,
1997 4.73% .67%(D) .66%(D) 5.18%(D) 6.0% $145,974
1996 7.11% .59%(D) .58%(D) 5.29%(D) 14.1% 146,645
1995 6.60% -- .54%(D) 5.32%(D) 9.5% 142,314
1994 3.51% -- .46%(D) 5.10%(D) 6.6% 145,578
1993 12.47% -- .40%(D) 5.61%(D) -- 128,566
</TABLE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
-------------------------------------- -------------------------------------
In Excess
Net Asset Net Net Realized Total Net of Net Net Asset
Value, Investment and Unrealized From Net Realized Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Gain on Total End of
of Year (Loss) Investments Operations Income Investments Investments Distributions Year
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Pennsylvania Tax-Free Income Trust
Years Ended Mar. 31,
1997 $16.10 $.83(E) $(.11) $ .72 $(.83) $(.19) -- $(1.02) $15.80
1996 16.02 .89(E) .15 1.04 (.89) (.07) -- (.96) 16.10
1995 15.80 .85(E) .22 1.07 (.85) -- -- (.85) 16.02
1994 16.03 .86(E) (.23) .63 (.86) -- -- (.86) 15.80
1993 14.99 .91(E) 1.04 1.95 (.91) -- -- (.91) 16.03
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
------------------------------------------------------------------------------------
Net
Total Net Investment Net Assets
Expenses Expenses Income (Loss) Portfolio End of
Total to Average to Average to Average Turnover Year
Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
- -----------------------------------------------------------------------------------------------
<S><C>
Pennsylvania Tax-Free Income Trust
Years Ended Mar. 31,
1997 4.61% .67%(E) .66%(E) 5.20%(E) 13.6% $64,875
1996 6.52% .54%(E) .53%(E) 5.42%(E) 17.2% 65,275
1995 7.03% -- .49%(E) 5.42%(E) 2.1% 63,929
1994 3.81% -- .40%(E) 5.16%(E) -- 62,904
1993 13.31% -- .32%(E) 5.74%(E) -- 49,959
</TABLE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
-------------------------------------- -------------------------------------
In Excess
Net Asset Net Net Realized Total Net of Net Net Asset
Value, Investment and Unrealized From Net Realized Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Gain on Total End of
of Year (Loss) Investments Operations Income Investments Investments Distributions Year
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Tax-Free Intermediate-Term Income Trust
Years Ended Mar. 31,
1997 $15.34 $.68(F) $(.12) $ .56 $(.68) $ -- -- $(.68) $15.22
1996 15.06 .68(F) .28 .96 (.68) -- -- (.68) 15.34
1995 14.96 .72(F) .10 .82 (.72) -- -- (.72) 15.06
1994 15.06 .70(F) (.09) .61 (.70) (.01) -- (.71) 14.96
1993(G) 14.70 .28(F) .36 .64 (.28) -- -- (.28) 15.06
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
------------------------------------------------------------------------------------
Net
Total Net Investment Net Assets
Expenses Expenses Income (Loss) Portfolio End of
Total to Average to Average to Average Turnover Year
Return(A) Net Assets(B) Net Assets(C) Net Assets Rate (in thousands)
- -----------------------------------------------------------------------------------------------
<S><C>
Tax-Free Intermediate-Term Income Trust
Years Ended Mar. 31,
1997 3.71% .67%(F) .66%(F) 4.43%(F) 8.9% $54,736
1996 6.47% .57%(F) .56%(F) 4.41%(F) -- 60,042
1995 5.65% -- .34%(F) 4.83%(F) 24.8% 48,837
1994 3.99% -- .30%(F) 4.44%(F) 6.6% 54,032
1993(G) 4.35%(H) -- .20%(F,I) 4.71%(F,I) -- 37,138
</TABLE>
- --------------
(A) Excluding sales charge.
(B) Pursuant to Securities and Exchange Commission regulations effective
December 31, 1995, this ratio reflects total expenses before compensating
balance credits. Previously, credits were included in the ratio.
(C) This ratio reflects total expenses reduced by the impact of
compensating balance credits.
(D) Net of fees waived and reimbursements made by the Adviser in excess of
voluntary expense limitations as follows: 0.35% of average daily net
assets 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; 0.65% until December 31, 1996 and 0.70%
through July 31, 1997.
(E) Net of fees waived and reimbursements made by the Adviser in excess of
voluntary expense limitations as follows: 0.25% of average daily net
assets 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; 0.65% until December
31, 1996 and 0.70% through July 31, 1997.
(F) Net of fees waived and reimbursements made 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; 0.65% until December 31, 1996 and 0.70% through July 31, 1997.
(G) For the period November 9, 1992 (commencement of operations) to March
31, 1993.
(H) Not annualized
(I) Annualized
See notes to financial statements.
23
<PAGE>
Notes to Financial Statements
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Tax-Free Income Fund ("Trust"), consisting of the
Maryland Tax-Free Income Trust ("Maryland Tax-Free"), the Pennsylvania
Tax-Free Income Trust ("Pennsylvania Tax-Free") and the Tax-Free
Intermediate-Term Income Trust ("Tax-Free Intermediate"), (each separately
referred to as a "Fund" and collectively as the "Funds"), is registered
under the Investment Company Act of 1940, as amended, each as an open-end
management investment company. All series of the Trust are
non-diversified.
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. Fixed income securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
Maryland Tax-Free and Pennsylvania Tax-Free each follow an investment
policy of investing primarily in municipal obligations of one state.
Economic changes affecting either of those states and certain of its
public bodies and municipalities may affect the ability of issuers within
that state to pay interest, or repay principal of, municipal obligations
held by either of those Funds.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. 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. Distributions payable are recorded on
the ex-dividend date. At March 31, 1997 dividends payable of $280 were
accrued for Maryland Tax-Free, $126 for Pennsylvania Tax-Free and $91 for
Tax-Free Intermediate.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes.
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 Funds' 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. The Trusts' investment advisers,
acting under the supervision of their Board of Trustees, review the value
of the collateral and the creditworthiness of those banks and dealers with
which the Funds enter into repurchase agreements to evaluate potential
risks.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their shareholders. Unused
capital loss carryforwards for federal income tax purposes at March 31,
1997 were as follows: Pennsylvania Tax-Free, $21 which expire in 2005; and
Tax-Free Intermediate, $143 which expire in 2003 and $67 which expire in
2004.
24
<PAGE>
- --------------------------------------------------------------------------------
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:
For the year ended March 31, 1997 investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds from Sales
- --------------------------------------------------------------------------------
Maryland Tax-Free $8,596 $9,108
Pennsylvania Tax-Free 8,553 9,935
Tax-Free Intermediate-Term 4,833 7,623
At March 31, 1997, cost, aggregate gross unrealized appreciation and
gross unrealized depreciation based on the cost of securities for federal
income tax purposes for each Fund were as follows:
Cost Appreciation Depreciation
- --------------------------------------------------------------------------------
Maryland Tax-Free $138,050 $6,288 $(508)
Pennsylvania Tax-Free 62,533 2,145 (619)
Tax-Free Intermediate-Term 53,360 937 (202)
3. Transactions with Affiliates:
Each 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 Funds. Pursuant to their
respective agreements, the Adviser provides the Funds with investment
advisory, management and administrative services for which each Fund pays
a fee, computed daily and payable monthly at an annual rate of 0.55% of
each Fund's average daily net assets.
The Adviser has agreed to waive its fees and to reimburse each Fund
for its 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 schedules:
for Maryland Tax-Free, 0.55% until July 31, 1995; 0.60% until March 31,
1996; 0.65% until December 31, 1996 and 0.70% through July 31, 1997, or
until the Fund's net assets reach $200 million, whichever occurs first.
For Pennsylvania Tax-Free, 0.50% until July 31, 1995; 0.55% through March
31, 1996; 0.65% until December 31, 1996 and 0.70% through July 31, 1997,
or until the Fund's net assets reach $125 million, whichever occurs first.
For Tax-Free Intermediate, 0.35% until July 31, 1995; 0.65% until December
31, 1996 and 0.70% through July 31, 1997, or until the Fund's net assets
reach $100 million, whichever occurs first. For the year ended March 31,
1997 advisory fees of $433, $244, and $253, respectively, were waived and
$37, $12, and $8 were due to the Adviser by Maryland Tax-Free,
Pennsylvania Tax-Free and Tax-Free Intermediate-Term, respectively.
Legg Mason, as distributor of the Funds, receives an annual
distribution fee and an annual service fee, computed daily and payable
monthly, from each of the Funds at an annual rate of 0.125% for each, of
average daily net assets. At March 31, 1997, distribution and service fees
due to the distributor were as follows: Maryland Tax-Free, $31;
Pennsylvania Tax-Free, $14; and Tax-Free Intermediate, $12.
25
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amounts by the transfer agent for the year ended March
31, 1997: Maryland Tax-Free, $18; Pennsylvania Tax-Free, $8; and Tax-Free
Intermediate, $6.
4. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in
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, 1997, the Funds had no borrowings under the line of
credit.
5. Fund Share Transactions:
At March 31, 1997, there were unlimited shares authorized at $.001
par value for all Funds of the Trust. Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ---------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Maryland Tax-Free
Year Ended March 31, 1997 881 $14,121 394 $6,311 (1,225) $(19,660) 50 $ 772
Year Ended March 31, 1996 966 15,669 379 6,159 (1,183) (19,208) 162 2,620
Pennsylvania Tax-Free
Year Ended March 31, 1997 418 6,655 192 3,059 (557) (8,894) 53 820
Year Ended March 31, 1996 458 7,487 163 2,654 (556) (9,091) 65 1,050
Tax-Free Intermediate
Year Ended March 31, 1997 858 13,139 128 1,969 (1,304) (19,970) (318) (4,862)
Year Ended March 31, 1996 1,315 20,254 119 1,831 (764) (11,777) 670 10,308
</TABLE>
26
<PAGE>
Report of Independent Accountants
To the Shareholders and Trustees of Legg Mason Tax-Free Income Fund:
We have audited the accompanying statements of net assets of the Legg Mason
Maryland Tax-Free Income Trust, Legg Mason Pennsylvania Tax-Free Income Trust
and Legg Mason Tax-Free Intermediate-Term Income Trust ("the Funds") as of March
31, 1997, and the related statements of operations, the statements of changes in
net assets and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Funds' 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, 1997, 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, Legg Mason Pennsylvania Tax-Free
Income Trust and Legg Mason Tax-Free Intermediate Term Income Trust as of March
31, 1997, and the results of their operations, the changes in their net assets,
and their financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
May 2, 1997
