Annual Report
March 31, 1999
Legg Mason
Tax-Free
Income Fund
Pennsylvania Tax-Free
Navigator Class
LEGG
MASON
FUNDS
LOGO
HOW TO INVEST (SM)
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Tax-Free Income Fund's annual
report for the Navigator Class of Pennsylvania Tax-Free Income Trust.
As of March 31, 1999, the Fund had an SEC yield* of 3.92% and an average
weighted maturity of 16.39 years.
The Fund seeks a high level of current income exempt from federal income tax.
The Fund purchases only securities which have received investment grade ratings
from Moody's Investors Service or Standard & Poor's or which are judged by their
investment adviser to be of comparable quality. Moody's ratings of securities
currently owned by the Fund are:
Pennsylvania
Tax-Free
---------------
Aaa 78.2%
Aa 17.1
A --
Baa --
Short-term securities 4.7
At March 31 the Navigator Class's net asset value per share was $16.53, a
modest decline from September 30, 1998, in response to rising interest rates.
For the 12 months ended March 31, 1999, the total return for Pennsylvania
Tax-Free Navigator Class was 5.79%. (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.) Past
performance does not guarantee future results.
Normally, the average weighted maturity for the Fund will be kept within a
range of 12 to 24 years. Because of its relatively long average weighted
maturity, the Fund offers potentially higher yields than short-term and
intermediate-term tax-free bond funds. However, the net asset value 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-
and intermediate-term average weighted maturities.
During 1998 and into 1999, the focus on the Year 2000 issue has increased
significantly. As you may know, the Year 2000 issue is a computer programming
problem that affects the ability of computers to correctly process dates of
January 1, 2000, and beyond. The Fund's Year 2000 project is well underway, and
is designed to ensure that the Year 2000 date change will have no adverse impact
on our ability to service our shareholders. The Fund is committed to taking
those steps necessary to protect our investors, including efforts to determine
that the Year 2000 problem will not affect such vital service functions as
shareholder transaction processing and recordkeeping. In addition, we are
continuously monitoring the Year 2000 efforts of our vendors, and will perform
tests with our critical vendors throughout 1999. Although the Fund is taking
steps to ensure that all of its systems will function properly before, during,
and after the Year 2000, the Fund could be adversely affected by
computer-related problems associated with the Year 2000. Contingency plans are
in place to ensure
- ---------
*SEC yields reported are for the 30 days ended March 31, 1999. If no fees had
been waived by the Adviser, the 30-day SEC yields for Pennsylvania Tax-Free
would have been 3.62%.
1
<PAGE>
that functions critical to the Fund's operations will continue without
interruption. We are on target to complete this important project and look
forward to continuing extensive testing (including industry-wide testing) with
our industry peers, regulators and vendors throughout 1999.
For several operational reasons, we are changing the capital gain
distribution payment schedule for this Fund. Our new schedule will be to make
capital gain distributions, if any, in June and December.
Some shareholders regularly add to their 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,Jr.
______________________
John F. Curley, Jr.
Chairman
May 17, 1999
2
<PAGE>
Portfolio Manager's Comments
Legg Mason Tax-Free Income Fund
Market Overview and Commentary
During the year ended March 31, 1999, municipal prices increased slightly and
tax-free yields fell modestly. The municipal bond market displayed little
volatility and broke out of a relatively tight trading range only twice during
the twelve-month period. During April 1998, tax-free bond prices fell as
municipal issuance set a near record pace. This surge in volume was expected
given the lower absolute level of interest rates, which induced municipalities
to refund higher yielding debt with bonds paying lower coupons. In addition, the
robust economy created large tax bills for many individuals, who liquidated
municipal holdings to pay income taxes. Without the benefit of individual buyers
during the tax season, the market stumbled on the enormous volume. However,
prices rebounded quickly, and by mid-May the market had recovered fully.
Three months later, the municipal bond market again broke out of its trading
range, this time with a strong rally. During August 1998, escalating global
economic unrest joined with sharp corrections in U.S. equity markets to drive
U.S. bond yields to historic lows. As Japan wrestled with its economic malaise,
the crisis in the rest of Asia spread to Russia and South America. In the U.S.,
extreme leverage combined with misplaced wagers inflicted crushing losses on
some large hedge funds. This raised concern about potential damage to U.S. banks
and world financial markets if these funds liquidated their huge investment
positions. On September 29th, this concern, combined with weakening domestic
economic data, led the U.S. Federal Reserve to cut the federal funds rate on
overnight loans between banks by a quarter point, to 5.25%. This was the first
interest rate cut since January 1996. Subsequently, the Fed eased twice more
before adopting a "wait and see" attitude in December 1998. This extremely
constructive environment benefited municipal bond prices, and the yield on
30-year tax-free bonds fell to 4.82%, the lowest in almost 30 years.
This market rally was not sustained, however, during the last months of 1998.
During November and December, the global and domestic forces which had acted in
concert to drive interest rates lower, gave way to conflicting signals and
higher yields by the end of 1998. During the first three months of 1999,
interest rates on Treasury bonds rose sharply. In contrast, the municipal bond
market displayed remarkable resilience. Tax-free bonds were helped by a 19% drop
in the pace of new issue supply versus last year. In addition, the relative
value of tax-free bonds increasingly attracted buyers to the market. Investors
reallocating funds out of taxable bonds into municipals did so at relative
values not seen in nearly a decade.
Pennsylvania Tax-Free Income Trust
For the fiscal year ended March 31, 1999, the Fund's total return was 5.79%.
The average maturity of the Fund decreased slightly to 16.39 years from 16.97
years over the last 12 months.
3
<PAGE>
Portfolio Manager's Comments -- Continued
Outlook
Over the near term, we believe the manufacturing and trade sectors of the
economy will continue to be soft due to global economic weakness. Consumer
spending should return to a level more reflective of the growth in income.
Inflation should be tempered by the weakness in the commodity-based economies in
Asia and Latin America. Longer term, we believe that the forces remain in place
to produce above-trend economic growth in a low inflationary environment.
Strategy
We continue to add to positions in bonds that we believe have good
performance characteristics in both up and down markets, and continue to favor
high quality bonds with good call protection. The average credit quality in the
Fund is currently AA or better. In most cases, we do not believe that the
incremental yield offered by bonds rated at the lower end of the investment
grade category is sufficient to compensate investors for the higher credit risk
they pose. In addition, we continue to be very selective with regard to holdings
in the hospital sector. Although we believe that attractive values may be
created as this area of the market comes under pressure, we remain cognizant of
the competitive and financial challenges facing many health care issuers. As
always, consistent with the Fund's prospectus guidelines, we are mindful of
maintaining as high a level of distributed income on the Fund as possible.
Therefore, we generally avoid selling bonds from the Fund which have high
coupons and are selling at a significant premium to our purchase cost. Their
sale would create sizable taxable gains and their high level of distributed
tax-free income would be difficult to replace in the current rate environment.
Jane E. Trust, CFA
Portfolio Manager
May 14, 1999
4
<PAGE>
Performance Information
Legg Mason Tax-Free Income Fund
Portfolio Manager's Comments
Performance Comparison of a $50,000 Investment as of March 31, 1999
The returns shown on these pages are based on historical results and
are not intended to indicate future performance. Total return measures
investment performance in terms of appreciation or depreciation in the
Fund's 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. The investment return and principal value of
an investment in the Fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in 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 the Fund's total returns against that of a
closely matched broad-based securities market index. The lines illustrate
the cumulative total return of an initial $50,000 investment for the
periods indicated. The line for the Fund represents the total return after
deducting all Fund investment management and other administrative expenses
and the transaction costs of buying and selling portfolio securities. The
line representing the securities market index does not include any
administrative expenses or transaction costs associated with buying and
selling securities in the index.
The Pennsylvania Tax-Free Income Trust has two classes of shares:
Primary Class and Navigator Class. Information about the Primary Class is
contained in a separate report to its shareholders.
Pennsylvania Tax-Free Income Trust -- Navigator Class
Cumulative Average Annual
Total Return Total Return
- -----------------------------------------------------
One Year +5.79% +5.79%
Life of Fund(dagger) +6.37 +.06
- -----------------------------------------------------
(dagger) Inception date -- March 10, 1998
GRAPH APPEARS HERE
Pennsylvania Tax-Free Lehman Brothers Municipal
Income Trust Bond Index (1)
3/10/98 $50,000 $50,000
3/31/98 50,274 50,045
6/30/98 51,055 50,805
9/30/98 52,460 52,365
12/31/98 52,722 52,680
3/31/99 53,185 53,145
(1) The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment grade tax-exempt bond market. Index
returns are for the periods beginning February 28, 1998.
5
<PAGE>
Statement of Net Assets
Legg Mason Tax-Free Income Fund
March 31, 1999
(Amounts in Thousands)
Pennsylvania Tax-Free Income Trust
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds -- 94.2%
Allegheny County, Airport Revenue
1992-B AMT (FSA insured) 6.625% 1/1/22 $1,000 $ 1,079
Allegheny County, Baldwin-Whitehall School
District, GO Series 1992-A (Pre-refunded 8/15/02)
(FGIC insured) 6.60% 8/15/10 1,000 1,092(A)
Allegheny County, Pennsylvania Higher Education
Duquesne University Project Refunding
(AMBAC insured) 5.125% 3/1/13 1,000 1,035
Allegheny County, West Jefferson Hills School
District, GO (Pre-refunded 2/1/01) (FGIC insured) 7.10% 2/1/11 1,000 1,062(A)
Allegheny County Hospital Development Authority,
Children's Hospital Refunding (MBIA insured) 6.875% 7/1/14 1,000 1,039
Allegheny County Hospital Development Authority,
Presbyterian University Health System, Inc.
Series 1992-B Refunding (MBIA insured) 6% 11/1/23 1,250 1,350
Beaver County, IDA Ohio Edison Company
PCR Refunding (FGIC insured) 7% 6/1/21 1,000 1,079
Berks County, Pennsylvania, GO Series
1995 Refunding (FGIC insured) 5.85% 11/15/18 1,000 1,062
Bucks County, Council Rock School District, GO
(Pre-refunded 3/1/01) (FGIC insured) 6.75% 3/1/11 250 265(A)
Chester County Health and Education Facilities
Authority, Jefferson Health SystemRevenue
Bonds Series 1997 B 5.375% 5/15/27 1,500 1,492
Commonwealth of Pennsylvania, GO
First Series 6.125% 9/15/03 1,000 1,077
Second Series (Pre-refunded 11/1/01) 6.50% 11/1/09 1,000 1,085(A)
Deer Lakes School District, Pennsylvania, GO
(MBIA insured) 6.45% 1/15/19 1,750 1,935
Delaware County Authority, University Revenue,
Villanova University (Pre-refunded 8/1/01)
(MBIA insured) 6.85% 8/1/11 500 536(A)
Delaware County Authority, University Revenue,
Villanova University (MBIA insured) 5.50% 8/1/23 2,000 2,060
Delaware County, GO (Pre-refunded 11/15/02) 6% 11/15/22 1,000 1,076(A)
Delaware County, GO Refunding 6% 11/15/22 220 233
Delaware River Port Authority (FGIC insured) 5.50% 1/1/26 1,000 1,047
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Erie County, Pennsylvania Sewer Authority,
Sewer Revenue Bonds Series 1997
(Pre-refunded 6/1/07) (AMBAC insured) 5.625% 6/1/17 $2,000 $ 2,195(A)
Lehigh County, Pennsylvania, Power & Light
Company Project 1994 Series A, IDA,
PCR Refunding (MBIA insured) 5.50% 2/15/27 1,000 1,033
Lower Merion School District
Montgomery County, Pennsylvania
GO Bonds, Series 1998 5% 5/15/23 1,000 986
Montgomery County, GO Series 1997 5.35% 9/15/17 1,000 1,027
Montgomery County Higher Education and Health
Authority, Saint Joseph's University Revenue,
Series 1992 Refunding (Connie Lee insured) 6.25% 12/15/04 500 546
Montgomery County, IDA Philadelphia Electric
Company, Series 1991-B PCR Refunding
(MBIA insured) 6.70% 12/1/21 1,500 1,623
Montgomery County, Upper Gwynedd-Towamencin
Guaranteed Sewer Revenue, Series 1991-A
(MBIA insured) 6.75% 10/15/06 250 268
Montgomery Township Municipal Sewer Authority,
Guaranteed Sewer Revenue, Series 1991-A
(MBIA insured) 6.70% 5/15/21 250 259
Northampton County Higher Education Authority,
College Revenue Bonds (Lafayette College Project),
Series 1997 (MBIA insured) 5% 11/1/27 1,000 976
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue AMT, Series 1991-C
(AMBAC insured) 7.15% 9/1/21 1,000 1,083
Pennsylvania Higher Educational Facilities Authority,
Bryn Mawr College Revenue Bonds (MBIA insured) 5.625% 12/1/27 500 526
Pennsylvania Higher Educational Facilities Authority,
Drexel University Revenue Bonds, Series 1998
(MBIA insured) 4.80% 5/1/28 2,000 1,901
Pennsylvania Higher Educational Facilities Authority,
Temple University Revenue (MBIA insured)
First Series (Pre-refunded 4/1/01) 6.50% 4/1/21 250 269(A)
First Series 5% 4/1/29 1,000 975
</TABLE>
7
<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> <C> <C> <C>
Pennsylvania Higher Educational Facilities Authority,
University Revenue, Series H (AMBAC insured) 5.375% 6/15/18 $1,000 $ 1,016
Pennsylvania Higher Educational Facilities Authority,
University Revenue, University of Pennsylvania,
Series 1996-A Refunding 5.75% 1/1/22 1,000 1,030
Pennsylvania Economic Development Revenue IDA
Series 1991-A (Pre-refunded 7/1/01) 7% 1/1/11 1,000 1,092(A)
Series 1994-A Refunding (AMBAC insured) 5.50% 1/1/14 2,525 2,647
Pennsylvania Housing Finance Agency, Rental
Housing (FNMA insured)
Series 1993-C 5.80% 7/1/22 1,000 1,043
Series 1992-C 6.50% 7/1/23 750 800
Pennsylvania Housing Finance Agency, Single-
Family Mortgage
Series 1991-32 Refunding 7.15% 4/1/15 435 459
Series 1992-33 6.90% 4/1/17 320 338
Pennsylvania Infrastructure Investment Authority,
Revenue Series 1990-A (Pre-refunded 9/1/99) 7.15% 9/1/10 500 518(A)
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.60% 6/15/15 1,000 1,069(A)
Pennsylvania Intergovernmental Co-op Authority
(Pre-refunded 6/15/03) (MBIA insured) 5.60% 6/15/16 2,000 2,139(A)
Pennsylvania State University Refunding 5.50% 8/15/16 1,000 1,036
Pennsylvania State University Series A Refunding 5.10% 3/1/18 1,500 1,495
Pennsylvania Turnpike Commission, Oil
Franchise Tax Subordinated Revenue Bonds,
Series B of 1998 (AMBAC insured) 4.75% 12/1/27 2,000 1,886
Pennsylvania Turnpike Commission Revenue
Series N 5.50% 12/1/17 1,000 1,022
Philadelphia Gas Works Series B (MBIA insured) 7% 5/15/20 500 609
Philadelphia Hospitals and Higher Education
Facilities Authority, Hospital Revenue Refunding,
Children's Hospital Series 1993-A 5% 2/15/21 1,000 942
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B
(Pre-refunded 11/15/01) (FGIC insured) 7% 11/15/04 500 551(A)
Philadelphia Municipal Authority, Justice Lease
Revenue Series 1991-B
(Pre-refunded 11/15/01) (FGIC insured) 7.10% 11/15/05 500 553(A)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philadelphia Water and Wastewater
Refunding Series 1998 (AMBAC insured) 5.25% 12/15/12 $1,000 $ 1,053
Philadelphia Water and Wastewater Revenue
(MBIA insured) 5.60% 8/1/18 2,000 2,087
Sayre, Pennsylvania Healthcare Revenue Volunteer
Hospital Authority, Guthrie Healthcare System
(AMBAC insured) 7.20% 12/1/20 500 547
Schuylkill County, Pennsylvania,
Charity Obligation Group IDA,
Series A 5% 11/1/28 500 474
Somerset County General Authority, Commonwealth
Lease Revenue
(Pre-refunded 10/15/01) (FGIC insured) 7% 10/15/13 500 541(A)
Swarthmore Borough Authority, Swarthmore College
Refunding Revenue Series 1992
(Pre-refunded 9/15/02) 6% 9/15/12 180 196(A)
Unrefunded balance 6% 9/15/12 820 885
Swarthmore Borough Authority, Swarthmore College
Refunding Revenue Series 1992
(Pre-refunded 9/15/02) 6% 9/15/20 370 404(A)
Unrefunded balance 6% 9/15/20 1,630 1,760
Union County, Pennsylvania Higher
Educational Financing, Bucknell
University (MBIA insured) 4.50% 4/1/18 1,000 940
University of Pittsburgh
Commonwealth University
Capital Projects (FGIC insured) 5.125% 6/1/22 1,000 996
University of Pittsburgh Series 1992-A
(Pre-refunded 6/1/02) (MBIA insured) 6.125% 6/1/21 650 708(A)
University of Pittsburgh Series 1992-A
(MBIA insured) 6.125% 6/1/21 350 378
University of Pittsburgh Series 1997-B Refunding
(MBIA insured) 5% 6/1/21 1,000 983
Valley View, Pennsylvania School District, GO
Series A Refunding (FGIC insured) 5% 11/15/21 1,300 1,277
Washington County Hospital Authority,
Shadyside Hospital Project
Series 1992 Refunding (AMBAC insured) 6% 12/15/18 1,000 1,082
Westmoreland County GO (AMBAC insured) 0% 8/1/13 2,000 1,008(B)
</TABLE>
9
<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> <C> <C> <C>
Westmoreland County GO (AMBAC insured) 0% 8/1/14 $2,475 $ 1,178(B)
Wissahickon Pennsylvania School District GO 4.85% 5/15/13 1,000 1,003
---------
Total Municipal Bonds (Identified Cost-- $66,610) 71,016
- ----------------------------------------------------------------------------------------------------------------------
Variable Rate Demand Obligations(C) -- 4.7%
Allegheny County Hospital Development Authority
Presbyterian Hospital Series C and D 3.15% 4/1/99 1,200 1,200
Pennsylvania Higher Educational Facilities Authority
Carnegie Mellon University Series 1995 B 3.05% 4/1/99 1,000 1,000
Philadelphia, Pennsylvania Hospitals and Higher
Education Children Hospital Project Series A 3.05% 4/1/99 1,300 1,300
---------
Total Variable Rate Demand Obligations
(Identified Cost-- $3,500) 3,500
- ----------------------------------------------------------------------------------------------------------------------
Total Investments-- 98.9% (Identified Cost-- $70,110) 74,516
Other Assets Less Liabilities-- 1.1% 854
---------
Net assets consisting of:
Accumulated paid-in capital applicable to:
4,542 primary shares outstanding $70,619
17 navigator shares outstanding 276
Undistributed net realized gain on investments 69
Unrealized appreciation of investments 4,406
---------
Net assets-- 100.0% $75,370
=======
Net asset value, redemption price and maximum offering price per share:
Primary Class(D) $16.53
=======
Navigator Class $16.53
=======
<FN>
- ----------------------------------------------------------------------------------------------------------------------
(A) Pre-refunded bond -- Bonds are referred to as pre-refunded when the issue
has been advance refunded by a subsequent issue. The original issue is usually
escrowed with U.S. Treasury securities in an amount sufficient to pay the
interest, principal and call premium, if any, to the earliest call date. On the
call date, the bond "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, 1999, 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 November 3, 1997, to July 31,
1999. If the sales charge was in effect, the maximum offering price per share at
March 31, 1999, would have been $17.00.
A guide to abbreviations follows Sector Diversification.
</FN>
</TABLE>
See notes to financial statements.
10
<PAGE>
Sector Diversification
Legg Mason Tax-Free Income Fund
March 31, 1999 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pennsylvania Tax-Free
Income Trust
------------------------------------------------
% of Market
Net Assets Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Education Revenue 23.2 $17,508
Escrowed 6.3 4,730
General Obligation--Local 3.1 2,323
General Obligation--School 4.3 3,267
General Obligation--State 1.4 1,077
Health Care and Hospital Revenue 10.6 7,955
Housing Revenue 3.5 2,641
Lease Revenue -- --
Other -- --
Parking Revenue -- --
Port Facilities Revenue -- --
Pre-Refunded Bonds 20.4 15,351
Small Business Administration
Revenue 3.5 2,646
Solid Waste Revenue -- --
Student Loan Revenue 1.4 1,083
Transportation Revenue 6.7 5,034
Utility 5.0 3,735
Water and Sewer Revenue 4.8 3,666
Short-Term Investments 4.7 3,500
Other Assets Less Liabilities 1.1 854
----- --------
100.0 $75,370
----- --------
</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
FNMA Fannie Mae
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
11
<PAGE>
Statement of Operations
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 3/31/99
----------------------
Pennsylvania
Tax-Free
Income Trust
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Interest $ 3,920
--------
Expenses:
Investment advisory fee $ 391
Distribution and service fees 177
Transfer agent and shareholder servicing expense 22
Audit and legal fees 26
Custodian fee 73
Registration fees 6
Reports to shareholders 7
Trustees' fees 5
Other expenses 3
--------
710
Less: Fees waived (213)
Compensating balance credits (3)
--------
Total expenses, net of waivers and compensating
balance credits 494
--------
Net Investment Income 3,426
--------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on investments 171
Change in unrealized appreciation (depreciation) of investments 198
--------
Net Realized and Unrealized Gain (Loss) on Investments 369
- ----------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $ 3,795
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
12
<PAGE>
Statement of Changes in Net Assets
Legg Mason Tax-Free Income Fund
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pennsylvania
Tax-Free
Income Trust
----------------------------
Years Ended
3/31/99 3/31/98
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Net Assets:
Net investment income $ 3,426 $ 3,318
Net realized gain (loss) on investments 171 213
Change in unrealized appreciation (depreciation) of investments 198 2,681
- ----------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 3,795 6,212
Distributions to shareholders:
From net investment income:
Primary Class (3,413) (3,318)
Navigator Class (13) Nil
From net realized gain on investments:
Primary Class (189) (103)
Navigator Class (1) NA
Change in net assets from Fund share transactions:
Primary Class 6,867 382
Navigator Class 186 90
- ----------------------------------------------------------------------------------------------------------------------
Change in net assets 7,232 3,263
Net Assets:
Beginning of year 68,138 64,875
- ----------------------------------------------------------------------------------------------------------------------
End of year $ 75,370 $ 68,138
- ----------------------------------------------------------------------------------------------------------------------
<FN>
NA Not applicable.
See notes to financial statements.
</FN>
</TABLE>
13
<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
Net Asset Net Net Realized Total From Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Year (Loss) Investments Operations Income Investments Distributions Year
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free Income Trust
-- Navigator Class
Years Ended Mar. 31,
1999 $16.48 $.84(D) $ .10 $ .94 $(.84) $(.05) $ (.89) $16.53
1998(E) 16.44 .05(D) .04 .09 (.05) -- (.05) 16.48
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------
Net
Total Net Investment Net Assets,
Expenses Expenses Income 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> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free Income Trust
-- Navigator Class
Years Ended Mar. 31,
1999 5.79% .46%(D) .45%(D) 5.04%(D) 10.6% $277
1998(E) .55%(F) .45%(D,G) .45%(D,G) 4.82%(D,G) 14.1%(G) 90
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(A) Excluding sales charge. Sales charges are being waived for the period
November 3, 1997, to July 31, 1999.
(B) Pursuant to Securities and Exchange Commission regulations, this ratio
reflects total expenses before compensating balance credits.
(C) This ratio reflects total expenses reduced by the impact of compensating
balance credits and voluntary expense waivers described below.
(D) Net of fees waived by the Adviser in excess of voluntary expense limitations
as follows: 0.45% until July 31, 1999. If no fees had been waived by the
Adviser, the annualized ratio of expenses to average daily net assets for each
period would have been as follows: 1999, 0.75% and 1998, 0.75%.
(E) For the period March 10, 1998 (commencement of sale of Navigator Class) to
March 31, 1998.
(F) Not annualized.
(G) Annualized.
</FN>
</TABLE>
See notes to financial statements.
14
<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 a "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.
Pennsylvania Tax-Free consists of two classes of shares: Primary
Class, offered since August 1, 1991, and Navigator Class, commenced
operations on March 10, 1998.The Navigator Class of Maryland Tax-Free and
Tax-Free Intermediate has not commenced operations. The income and
expenses of a Fund are allocated proportionately to the two classes of
shares except for Rule 12b-1 distribution fees, which are charged only on
Primary Class shares, and transfer agent and shareholder servicing
expenses, which are determined separately for each class.
Security Valuation
Portfolio securities are valued based upon market quotations obtained
from an independent pricing service. 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.
Pennsylvania Tax-Free follows an investment policy of investing
primarily in municipal obligations of Pennsylvania. Economic changes
affecting Pennsylvania and certain of its public bodies and municipalities
may affect the ability of issuers within Pennsylvania to pay interest on,
or repay principal of, municipal obligations held by the Fund.
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 for financial reporting and income tax purposes.
Dividend income and distributions to shareholders are allocated at the
class level and are recorded on the ex-dividend date. Dividends from net
investment income will be declared daily and paid monthly. When available,
net capital gain distributions, which are calculated at the Fund level,
are declared and paid after the end of the tax year in which the gain is
realized. Distributions are determined in accordance with federal income
tax regulations, which may differ from those determined in accordance with
generally accepted accounting principles; accordingly, periodic
reclassifications are made within the Fund's capital accounts to reflect
income and gains available for distribution under federal income tax
regulations. At March 31, 1999, accrued dividends payable for Pennsylvania
Tax-Free were $152.
Security 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.
15
<PAGE>
Notes to Financial Statements -- Continued
- --------------------------------------------------------------------------------
At March 31, 1999, the receivable for securities sold and the payable
for securities purchased for Pennsylvania Tax-Free were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
--------------------------------------------------
$20 $--
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 substantially 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.
Other
Compensating balance credits reflect credits earned on daily,
uninvested cash balances at the custodian, and are used to reduce the
Fund's custodian expenses.
2. Investment Transactions:
For the year ended March 31, 1999, investment transactions (excluding
short-term investments) for Pennsylvania Tax-Free were as follows:
Purchases Proceeds FromSales
- -------------------------------------------------------------
$14,371 $7,171
At March 31, 1999, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for Pennsylvania Tax-Free were as follows:
Net Appreciation/
Cost Appreciation (Depreciation) (Depreciation)
------------------------------------------------------------------------------
$70,110 $4,446 $(40) $4,406
3. 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. The Fund's investment adviser,
acting under the supervision of the Board of Trustees, reviews the value
of the collateral and the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential
risks.
16
<PAGE>
- --------------------------------------------------------------------------------
4. Transactions With Affiliates:
The Fund has an investment advisory and management agreement with
Legg Mason Capital Management, Inc. ("Adviser"). Pursuant to its
agreement, the Adviser provides the Fund with investment advisory and
management services for which the Fund pays a fee, computed daily and
payable monthly at an annual rate of 0.55% of the Fund's average daily net
assets.
The Adviser has agreed to waive its fees in any month to the extent
the Fund's expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during that month an annual rate of .45% of
average daily net assets for Navigator shares and .70% of average daily
net assets for Primary shares. The following chart shows the annual rate
of management fees; the expense limit and its expiration date; total
management fees waived; and management fees payable for Pennsylvania
Tax-Free Primary and Navigator Classes:
<TABLE>
<CAPTION>
Year Ended
March 31, 1999 At March 31, 1999
------------------ -----------------
Advisory Advisory
Advisory Expense Expense Limitation Fees Fees
Fee Limitation Expiration Date Waived Payable
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0.55% 0.45% July 31, 1999, or until net $213 $16
assets reach $125 million
</TABLE>
Legg Mason Fund Adviser, Inc. ("LMFA") serves as administrator to the
Fund pursuant to an administration agreement with the Adviser. The Adviser
pays LMFA a fee, computed daily and payable monthly at an annual rate of
0.05% of the Fund's average daily net assets.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the
New York Stock Exchange, serves as distributor of the Fund. Legg Mason
receives an annual distribution fee and an annual service fee, from
Primary Class s hareholders, based on the Fund's Primary Class's average
daily net assets, computed daily and payable monthly as follows:
<TABLE>
<CAPTION>
At March 31, 1999
--------------------
Distribution Service Distribution and Service
Fund Fee Fee Fees Payable
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pennsylvania Tax-Free 0.125% 0.125% $16
</TABLE>
Legg Mason also has an agreement with the Fund's transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amount by the transfer agent for the year ended March
31, 1999: Pennsylvania Tax-Free, $2.
The Adviser, LMFAand Legg Mason are corporate affiliates and wholly
owned subsidiaries of Legg Mason, Inc.
17
<PAGE>
Notes to Financial Statements -- Continued
- --------------------------------------------------------------------------------
5. Line of Credit:
The Fund, along with certain other Legg Mason Funds, participates in
a $200 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, 1999, the Fund had no borrowings under the line of credit.
6. Fund Share Transactions:
At March 31, 1999, there were unlimited shares authorized at $.001
par value for the Navigator Class of Pennsylvania Tax-Free. Share
transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
------------------- ------------------ ---------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania Tax-Free
-- Navigator Class
Year Ended March 31, 1999 23 $ 373 -- $ 4 (11) $ (191) 12 $ 186
Year Ended March 31, 1998(A) 5 90 -- -- -- -- 5 90
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(A)For the period March 10, 1998 (commencement of sale of Navigator Class) to
March 31, 1998.
</FN>
</TABLE>
18
<PAGE>
Report of Independent Accountants
To the Board of Trustees of Legg Mason Tax-Free Income Fund and Shareholders of
Pennsylvania Tax-Free Income Trust:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Pennsylvania Tax-Free Income Trust (one of the Funds comprising Legg Mason
Tax-Free Income Fund, hereafter referred to as the "Fund") at March 31, 1999,
and the results of its operations, the changes in its net assets and the
financial highlights for each of the fiscal periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
April 30, 1999
19
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Legg Mason Capital Management, Inc.
Baltimore, MD
Board of Trustees
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., President
Richard G. Gilmore
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
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Incorporated
----------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
Printed on Recycled Paper
LMF-030
5/99
