Prospectus
May 1, 1995
Navigator
U.S. Government
Intermediate-Term
Portfolio
Putting Your Future First
<PAGE>
Table of Contents
Fund Expenses 2
Financial Highlights 4
Performance Information 6
The Fund's Investment Objective and Policies 7
How to Purchase and Redeem Shares 14
How Shareholder Accounts are Maintained 16
How Net Asset Value Is Determined 16
Dividends and Other Distributions 16
Tax Treatment of Dividends and Other Distributions 17
Shareholder Services 18
The Fund's Board of Directors, Manager and Investment Adviser 19
The Fund's Distributor 21
Description of the Corporation and its Shares 21
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 8000, Boston, MA 02266-8000
Counsel:
Kirkpatrick & Lockhart
1800 M Street, N.W., Washington, DC 20036
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
No person has been authorized to give any information or to make
any representations not contained in this Prospectus or the
Statement of Additional Information in connection with the
offering made by the Prospectus and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus
does not constitute an offering by the Fund or by the principal
underwriter in any jurisdiction in which such offering may not
lawfully be made.
LMF - 065A
<PAGE>
Navigator U.S. Government Intermediate-Term Portfolio
Prospectus
Shares of Navigator U.S. Government Intermediate-Term Portfolio
("Navigator Shares") represent a separate class ("Navigator Class") of
interests in the Legg Mason U.S. Government Intermediate-Term Portfolio
("Fund"), a professionally managed portfolio seeking to provide investors
with high current income consistent with prudent investment risk and
liquidity needs. The Fund is a separate portfolio of Legg Mason Income
Trust, Inc. ("Corporation"), a diversified open-end management investment
company which currently has four portfolios. In seeking to achieve the
Fund's objective, the Fund's investment adviser, Western Asset Management
Company ("Adviser"), under normal circumstances, invests at least 75% of
the Fund's total assets in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or instruments secured by
such securities. The Fund expects to maintain an average dollar-weighted
maturity of between three and ten years.
The Navigator Class of Shares, described in this Prospectus, is
currently offered for sale only to institutional clients of the Fairfield
Group, Inc. ("Fairfield") for investment of their own funds and funds for
which they act in a fiduciary capacity, to clients of Legg Mason Trust
Company ("Trust Company") for which the Trust Company exercises
discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and
accounts of such Clients are referred to collectively as "Customer
Accounts"), to qualified retirement plans managed on a discretionary basis
and having net assets of at least $200 million, and to The Legg Mason
Profit Sharing Plan and Trust. Navigator Shares may not be purchased by
individuals directly, but Institutional Clients may purchase shares for
Customer Accounts maintained for individuals.
Navigator Shares are sold and redeemed without any purchase or
redemption charge imposed by the Fund, although Institutional Clients may
charge their Customer Accounts for services provided in connection with
the purchase or redemption of shares. See "How to Purchase and Redeem
Shares." The Fund will pay management fees to Legg Mason Fund Adviser,
Inc., but Navigator Class pays no distribution fees.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION.
SHARES ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the
Fund that a prospective investor ought to know before investing. It should
be retained for future reference. A Statement of Additional Information
about the Fund dated May 1, 1995 has been filed with the Securities and
Exchange Commission ("SEC") and, as amended or supplemented from time to
time, is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request from Legg Mason
(address and telephone numbers listed below).
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: May 1, 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000
800-822-5544
2
<PAGE>
Fund Expenses
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares will bear directly or indirectly. The expenses and fees set forth
in the table are based on estimated expenses for the first year of
operation of the Navigator Class.
Shareholder Transaction Expenses
Maximum sales charge on purchases or
reinvested dividends None
Redemption and exchange fees None
Annual Fund Operating Expenses -- Navigator Shares
(as a percentage of average net assets)
Management fees(1) 0.33%
12b-1 fees None
Other expenses (estimated) 0.12%
----
Total operating expenses 0.45%
====
________________
(1) The expense ratio for Navigator Class would have been 0.67% had the
Fund's Manager not agreed to reimburse management fees and other expenses
pursuant to a voluntary expense limitation. The reimbursement agreement,
wherein the Manager has agreed to continue to reimburse management fees
and/or assume other expenses to the extent the Navigator Class's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses)
exceed during any month an annual rate of 0.45% of the Fund's average
daily net assets for such month, will remain in effect until October 31,
1995, or until the Fund's net assets reach $400 million, whichever occurs
first, and unless extended will terminate on that date.
For further information concerning Fund expenses, see "The Fund's
Board of Directors, Manager and Investment Adviser," page 19.
Example of Effect of Fund Expenses
The following example illustrates the expenses that you would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate
of return and (2) full redemption at the end of each time period. As noted
in the table above, the Fund charges no redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
$5 $14 $25 $57
This example assumes that all dividends and other distributions
are reinvested and that the percentage amounts listed under Annual Fund
3
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Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF AND DOES NOT REPRESENT THE
PROJECTED OR ACTUAL PERFORMANCE OF NAVIGATOR SHARES. THE ABOVE TABLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The actual
expenses attributed to Navigator Shares will depend upon, among other
things, the level of average net assets, the levels of sales and
redemptions of shares, and the extent to which Navigator Shares incur
variable expenses, such as transfer agency costs.
4
<PAGE>
Financial Highlights
Effective December 1, 1994, the Fund commenced the sale of
Navigator Shares. The information shown below for prior periods is for
Primary Shares and reflects 12b-1 fees paid by that class and not by
Navigator Shares.
The financial highlights for the period August 7, 1987
(commencement of operations) to December 31, 1987 and for the years ended
December 31, 1988 through 1994 have been derived from financial statements
which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The Fund's financial statements for the year ended December
31, 1994 and the report of Coopers & Lybrand L.L.P. thereon are included
in the Fund's annual report and are incorporated by reference in the
Statement of Additional Information. The annual report is available to
shareholders without charge by calling an investment executive at
Fairfield or Legg Mason or Legg Mason's Funds Marketing Department at
800-822-5544.
<TABLE>
<CAPTION>
NAVIGATOR PRIMARY CLASS
CLASS
For the Years Ended December 31,
1994 (1) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of
period $9.72 $10.43 $10.70 $10.77 $10.29 $10.20
Net investment income 0.05(3) 0.51(4) 0.53(4) 0.60(4) 0.72(4) 0.78(4)
Net realized and unrealized gain
(loss) on investments -- (0.71) 0.17 0.05 0.70 0.09
Total from investment operations 0.05 (0.20) 0.70 0.65 1.42 0.87
Distributions to shareholders:
Net investment income (0.05) (0.51) (0.53) (0.60) (0.72) (0.78)
Net realized gain on investments -- -- (0.39) (0.12) (0.22) --
In excess of net realized gain
on investments -- -- (0.05) -- -- --
Net asset value, end of period $9.72 $9.72 $10.43 $10.70 $10.77 $10.29
Total return
0.50%(5) -1.93% 6.6% 6.3% 14.4% 9.1%
5
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Ratios/Supplemental Data:
Ratios to average net assets:
Expenses .4%(3) .9%(4)(6) .9%(4)(6) .9%(4)(6) .8%(4)(6) .6%(4)(6)
Net investment income 6.4%(3) 5.1%(4) 4.8%(4) 5.5%(4) 6.7%(4) 7.7%(4)
Portfolio turnover rate 315.7% 315.7% 490.2% 512.6% 642.8% 67.0%
Net assets, end of period (in $4,024 $231,255 $299,529 $307,320 $211,627 $74,423
thousands)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PRIMARY CLASS
August 7,
For the Years Ended December 31, 1987(2) to
December 31,
1987
1989 1988
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of
period $9.79 $9.92 $10.00
Net investment income 0.80(4) 0.74(4) 0.30(4)
Net realized and unrealized gain
(loss) on investments 0.41 (0.12) (0.08)
Total from investment operations
1.21 0.62 0.22
Distributions to shareholders:
Net investment income (0.80) (0.74) (0.30)
Net realized gain on investments -- (0.01) --
In excess of net realized gain
on investments -- -- --
Net asset value, end of period $10.20 $9.79 $9.92
Total return
12.8% 6.4% 2.2%(5)
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses .8%(4)(6) 1.0%(4)(6) 1.0%(4)(6)(7)
Net investment income 7.9%(4) 7.4%(4) 7.4%(4)(7)
Portfolio turnover rate 57.3% 132.5% 66.3%(7)
Net assets, end of period (in $43,051 $27,087 $16,617
thousands)
</TABLE>
7
<PAGE>
_________________________
(1) For the period December 1, 1994 (commencement of operations) to
December 31, 1994.
(2) Commencement of operations.
(3) Net of fees waived and reimbursements made by the manager for expenses
in excess of voluntary limitation as follows: 0.45% until October 31,
1995.
(4) Net of fees waived and reimbursements made by the manger for expenses
in excess of voluntary expense limitations as follows: 1.0% until
September 10, 1989; 0.5% until March 31, 1990; 0.6% until December 31,
1990; 0.75% until April 30, 1991; 0.8% until December 31, 1991; 0.85%
until August 31, 1992; and 0.95% until October 31, 1995.
(5) Not annualized.
(6) Includes distribution fee of 0.5%.
(7) Annualized.
8
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Performance Information
From time to time the Fund may quote the total return of each
class of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's TOTAL RETURN is a measurement of the overall
change in value, including changes in share price and assuming
reinvestment of dividends and capital gain distributions of an investment
in the fund. CUMULATIVE TOTAL RETURN shows the fund's performance over a
specific period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Performance figures reflect past performance and are not intended to
indicate future performance. Average annual returns tend to smooth out
variations in the fund's return, so they differ from actual year-by-year
results.
Total returns of Primary Shares as of December 31, 1994 were as
follows:
Cumulative Average Annual
Total Return Total Return
One Year -1.93% -1.93%
Five Years +38.59% +6.75%
Life of Fund* +70.08% +7.43%
* Fund's inception - August 7, 1987.
No adjustment has been made for any income taxes payable by
shareholders. 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. Returns would have
been lower if the Manager had not waived/reimbursed certain fees and
expenses during the fiscal years 1987 through 1994. As of the date of this
prospectus, Navigator Shares have no material performance history.
Because Navigator Shares have lower total expenses, they will generally
have a higher return than Primary Shares.
The Fund also may advertise its yield or effective yield. Yield
reflects net investment income per share (as defined by applicable SEC
regulations) over a 30-day (or one-month) period, expressed as an
annualized percentage of net asset value at the end of the period. The
effective yield, although calculated similarly, will be slightly higher
than the yield because it assumes that income earned from the investment
is reinvested (i.e., the compounding effect of reinvestment). Yield
computations differ from other accounting methods and therefore may differ
from dividends actually paid or reported net income.
Further information about the Fund's performance is contained in
the annual report to shareholders, which may be obtained without charge by
calling an investment executive at Fairfield or Legg Mason or Legg Mason's
Funds Marketing Department at 800-822-5544.
9
<PAGE>
The Fund's Investment Objective and Policies
The investment objective of the Fund is to provide investors with
high current income consistent with prudent investment risk and liquidity
needs. The investment objective of the Fund may not be changed without a
vote of Fund shareholders; however, except as otherwise noted, the
investment policies of the Fund described below may be changed by the
Corporation's Board of Directors without a shareholder vote. There can be
no assurance that the Fund's investment objective will be achieved.
At least 75% of the Fund's total assets are, under normal
circumstances, invested in U.S. government securities or instruments
secured by such securities, including repurchase agreements. The Fund
expects to maintain an average dollar-weighted maturity of between three
and ten years. U.S. government securities include: 1) U.S. Treasury
obligations, which differ only in their interest rates, maturities and
times of issuance: U.S. Treasury bills (maturity of one year or less),
U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years); and 2) obligations
issued or guaranteed by U.S. government agencies and instrumentalities
which are supported by any of the following: a) the full faith and credit
of the U.S. Government (such as certificates of the Government National
Mortgage Association ("GNMA"), b) the right of the issuer to borrow an
amount limited to a specific line of credit from the U.S. Government (such
as obligations of the Federal Home Loan Banks), c) discretionary authority
of the U.S. Treasury to lend to the government agency or instrumentality
(such as the Federal National Mortgage Association), or d) only the credit
of the instrumentality (such as the Student Loan Marketing Association).
In the case of obligations not backed by the full faith and credit of the
United States, the Fund must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its
commitments. The U.S. Government does not guarantee the market value of
the Fund's investments or the market value or yield of the Fund's shares,
which will fluctuate with market interest rates. Investments in
mortgage-related securities issued by governmental or government-related
entities, as described on the next page, will be included in the 75%
limitation.
The balance of the Fund, up to 25% of its total assets, normally
is invested in cash, commercial paper and investment grade debt securities
rated within one of the four highest grades assigned by Standard & Poor's
Ratings Group ("S&P") (AAA, AA, A or BBB), Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A or Baa), securities comparably rated by another
nationally recognized statistical rating organization, or unrated
securities judged by the Adviser to be of comparable quality. Debt
securities rated Baa are deemed by Moody's to have speculative
characteristics; changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity for the issuers of such
securities to make principal and interest payments than is the case for
high-grade debt securities. A further description of Moody's and S&P's
10
<PAGE>
ratings is included in the Appendix to the Statement of Additional
Information.
The market value of the interest-bearing debt securities held by
the Fund, and therefore the net asset value of Fund shares, is affected by
changes in market interest rates. There is normally an inverse
relationship between the market value of securities sensitive to
prevailing interest rates and actual changes in interest rates; i.e., a
decline in interest rates produces an increase in market value, while an
increase in rates produces a decrease in market value. Moreover, the
longer the remaining maturity of a security, the greater is the effect of
interest rate changes on the market value of such a security. In addition,
changes in the ability of an issuer to make payments of interest and
principal and in the market's perception of an issuer's creditworthiness
also affect the market value of the debt securities of that issuer.
Certain of the mortgage-backed and other securities in which the
Fund can invest pay interest at variable or floating rates. Variable rate
instruments reset at specified intervals, while floating rate instruments
reset whenever there is a change in a specified index rate. The more
closely these changes reflect current market rates, the more likely the
instrument will trade at a price close to its par value. Some instruments
do not directly track the underlying index, but reset based on formulas
that can produce an effect similar to leverage; others may provide for
interest payments that vary inversely with market rates; these instruments
are regarded as "derivatives," and may vary significantly in market price
when interest rates change.
The Fund has adopted certain fundamental investment limitations
that, like its investment objective, may not be changed without the
approval of the Fund's shareholders. A full description of these
investment limitations is included in the Statement of Additional
Information.
Corporate Debt Securities
Among the debt securities in which the Fund may invest are those
issued by corporations. In selecting corporate debt securities for the
Fund, the Adviser reviews and monitors the creditworthiness of each issuer
and issue. Interest rate trends and specific developments which the
Adviser believes may affect individual issuers are also analyzed.
Mortgage-Related Securities
The Fund normally may invest up to 50% of its total assets in
mortgage-related securities, including those issued by the governmental or
government-related entities referred to above. Mortgage-related securities
represent interests in pools of mortgages created by lenders such as
commercial banks, savings and loan institutions, mortgage bankers and
others. Mortgage-related securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies,
11
<PAGE>
mortgage bankers and other secondary market issuers. No more than 25% of
the Fund's total assets normally are invested in mortgage-related
securities issued by non-governmental entities.
Interests in pools of mortgage-related securities differ from
other forms of debt securities which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or
specified call dates. In contrast, mortgage-related securities provide
monthly payments which consist of interest and, in most cases, principal.
In effect, these payments are a "pass-through" of the monthly payments
made by the individual borrowers on their residential mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred.
Some mortgage-related securities are described as "modified pass-through."
These securities entitle the holders to receive all interest and principal
payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
The Adviser expects that governmental or private entities may
create new types of mortgage-related securities in response to changes in
the market or changes in government regulation of such securities. As new
types of mortgage-related securities are developed and offered to
investors, the Adviser will, consistent with the investment objective and
policies of the Fund, consider making investments in such new types of
securities.
As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although both government and
privately-issued mortgage-related securities are issued with stated
maturities of up to forty years, unscheduled or early payments of
principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. On the other hand, a
decrease in the rate of prepayments may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. Such a decrease in prepayments may result from an
increase in market interest rates, among other causes. The volume of
prepayments of principal on a pool of mortgages underlying a particular
mortgage-related security will influence the yield of that security, and
the principal returned to the Fund may be reinvested in instruments whose
yield may be higher or lower than that which might have been obtained had
such prepayments not occurred. When interest rates are declining, such
prepayments usually increase, with the result that reinvestment of such
principal prepayments will be at a lower rate than that on the original
mortgage-related security. Increased prepayment of principal may limit the
Fund's ability to realize the appreciation in the value of such securities
that would otherwise accompany declining interest rates. An increase in
mortgage prepayments could cause the Fund to incur a loss on a
mortgage-related security that was purchased at a premium. In determining
the Fund's average maturity, the Adviser must apply certain assumptions
12
<PAGE>
and projections about the maturity and prepayment of mortgage-related
securities; actual prepayment rates may differ.
Government Mortgage-Related Securities
GNMA is the principal federal government guarantor of
mortgage-related securities. GNMA is a wholly owned U.S. government
corporation within the Department of Housing and Urban Development. GNMA
pass-through securities are considered to have a very low risk of default
in that (i) the underlying mortgage loan portfolio is comprised entirely
of government-backed loans and (ii) the timely payment of both principal
and interest on the securities is guaranteed by the full faith and credit
of the U.S. Government--regardless of whether they have been collected.
GNMA pass-through securities are, however, subject to the same market risk
as comparable debt securities. Therefore, the effective maturity and
market value of the Fund's GNMA securities can be expected to fluctuate in
response to changes in interest rate levels.
Residential mortgage loans are also pooled by the Federal Home
Loan Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality
of the U.S. Government that was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. FHLMC issues mortgage participation certificates ("PCs") which
represent interests in mortgages from FHLMC's national portfolio. The
mortgage loans in FHLMC's portfolio are not government backed; rather, the
loans are either uninsured with loan-to-value ratios of 80% or less, or
privately insured if the loan-to-value ratio exceeds 80%. FHLMC, not the
U.S. Government, guarantees the timely payment of interest and ultimate
collection of principal on FHLMC PCs.
The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders.
It is subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers, which include savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
certificates ("FNMA certificates") issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA, not the U.S. Government.
Privately Issued Mortgage-Related Securities
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, or GNMA or by pools of conventional mortgages.
13
<PAGE>
CMOs are typically structured with two or more classes or series
which have different maturities and are generally retired in sequence.
Each class of obligations is scheduled to receive periodic interest
payments according to the coupon rate on the obligations. However, all
monthly principal payments and any prepayments from the collateral pool
are paid first to the "Class 1" bondholders. The principal payments are
such that the Class 1 obligations are scheduled to be completely repaid no
later than, for example, five years after the offering date. Thereafter,
all payments of principal are allocated to the next most senior class of
bonds until that class of bonds has been fully repaid. Although full
payoff of each class of bonds is contractually required by a certain date,
any or all classes of obligations may be paid off sooner than expected
because of an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and
government-related securities because there are no direct or indirect
government guarantees of payments in the former securities, resulting in
higher risks. However, many issuers or servicers of mortgage-related
securities guarantee timely payment of interest and principal on such
securities. Timely payment of principal may also be supported by various
forms of insurance, including individual loan, title, pool and hazard
policies. There can be no assurance that the private issuers or insurers
will be able to meet their obligations under the relevant guarantees and
insurance policies, and such guarantees and policies often do not cover
the full amount of the pool. Where privately issued securities are
collateralized by securities issued by FHLMC, FNMA or GNMA, the timely
payment of interest and principal is supported by the government-related
securities collateralizing such obligations.
Since the inception of the mortgage-related pass-through security
in 1970, the market for these securities has expanded considerably. The
size of the primary issuance market and active participation in the
secondary market by securities dealers and many types of investors make
government and government-related pass-through pools highly liquid.
Private conventional pools of mortgages (pooled by commercial banks,
savings and loan institutions and others with no relationship to
government and government-related entities) have also achieved broad
market acceptance, and consequently an active secondary market has
emerged. However, the market for conventional pools is smaller and less
liquid than the market for the government and government-related mortgage
pools.
The Fund may purchase some mortgage-related securities through
private placements. In such cases, the securities may be considered
illiquid and, if so, will be subject to the Fund's investment limitation
that no more than 10% of its net assets will be invested in illiquid
securities.
14
<PAGE>
Asset-Backed Securities
Asset-backed securities are securities that represent direct or
indirect participations in, or are secured by and payable from, assets
such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets
are securitized through the use of trusts and special purpose
corporations. The value of such securities partly depends on loan
repayments by individuals, which may be adversely affected during general
downturns in the economy. Payments or distributions of principal and
interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters
of credit. Like mortgage-related securities, asset-backed securities are
subject to the risk of prepayment. The risk that recovery on repossessed
collateral might be unavailable or inadequate to support payments on
asset-backed securities, however, is greater than is the case for
mortgage-backed securities.
Zero Coupon Bonds
Zero coupon bonds are debt obligations which make no fixed
interest payments but instead are issued at a significant discount from
face value. Like other debt securities, the price can also reflect a
premium or discount to the original issue discount reflecting the market's
judgment as to the issuer's creditworthiness, the interest rate or other
similar factors. The discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity or the
first interest payment date at a rate of interest reflecting the market
rate of the security at the time of issuance. Because zero coupon bonds do
not require the periodic payment of interest, their prices can be very
volatile when market interest rates change.
The original issue discount on zero coupon bonds must be included
in the Fund's income ratably as it accrues. Accordingly, to continue to
qualify for tax treatment as a regulated investment company and to avoid a
certain excise tax, the Fund may be required to distribute as a dividend
an amount that is greater than the total amount of cash it actually
receives. See "Additional Tax Information" in the Statement of Additional
Information. These distributions must be made from the Fund's cash assets
or, if necessary, from the proceeds of sales of portfolio securities. Such
sales could occur at a time which would be disadvantageous to the Fund and
when the Fund would not otherwise choose to dispose of the assets.
Convertible Securities
A convertible security is a bond, debenture, note, preferred
stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
15
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matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to non-convertible
debt securities in that they ordinarily provide a stable stream of income
with generally higher yields than those of common stocks of the same or
similar issuers, but lower than the yield on non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
non-convertible securities but rank senior to common stock in a
corporation's capital structure.
The value of a convertible security is a function of (1) its
yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege and (2) its
worth, at market value, if converted into the underlying common stock.
Convertible securities are typically issued by smaller capitalized
companies, whose stock prices may be volatile. The price of a convertible
security often reflects such variations in the price of the underlying
common stock in a way that non-convertible debt does not. A convertible
security may be subject to redemption at the option of the issuer at a
price established in the convertible security's governing instrument,
which could have an adverse effect on the Fund's ability to achieve its
investment objective. The Fund does not intend to exercise conversion
rights for any convertible security it owns and does not intend to hold
any security which has been subject to conversion.
Foreign Securities
The Fund may invest in U.S. dollar-denominated debt securities
issued by foreign companies and governments. The foreign government
securities in which the Fund invests generally consist of obligations
supported by national, state or provincial governments or similar
political subdivisions. The Fund also may invest in debt securities of
foreign "quasi-governmental agencies," which are issued by entities owned
by a national, state or equivalent government or are obligations of a
political unit that is not backed by the national government's full faith
and credit and general taxing powers.
Investment in foreign securities presents certain risks,
including those resulting from adverse political and economic
developments, reduced availability of public information concerning
issuers and the fact that foreign issuers generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic
issuers. Some foreign securities are subject to foreign taxes and
withholding. Because the foreign securities in which the Fund invests are
U.S. dollar-denominated, there is no risk of currency fluctuation.
Repurchase Agreements
A repurchase agreement is an agreement under which the Fund
acquires either U.S. government obligations or other high-quality, liquid
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debt securities from a securities dealer or bank subject to resale at an
agreed-upon price and date. The securities are held for the Fund by State
Street Bank and Trust Company ("State Street"), the Fund's custodian, as
collateral until resold and will be supplemented by additional collateral
if necessary to maintain a total value equal to or in excess of the value
of the repurchase agreement. The Fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its right to dispose
of the collateral securities, which may decline in value in the interim.
The Fund will enter into repurchase agreements only with financial
institutions which the Adviser believes present minimal risk of default
during the term of the agreement based on guidelines established by the
Corporation's Board of Directors. The Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% of its total
assets would be invested in such agreements and other illiquid
investments.
When-Issued Securities
The Fund may enter into commitments to purchase U.S. government
securities or other securities on a when-issued basis. The Fund may
purchase when-issued securities because such securities are often the most
efficiently priced and have the best liquidity in the bond market. As with
the purchase of all securities, when the Fund purchases securities on a
when-issued basis, it assumes the risks of ownership, including the risk
of price fluctuation, at the time of purchase, not at the time of receipt.
However, the Fund does not have to pay for the obligations until they are
delivered to the Fund, which is normally 7 to 15 days later, but could be
considerably longer in the case of some mortgage-backed securities. To
meet that payment obligation, the Fund will set aside cash or liquid,
high-quality debt securities equal to the payment that will be due.
Depending on market conditions, the Fund's when-issued purchases could
cause its net asset value to be more volatile, because they will increase
the amount by which the Fund's total assets, including the value of the
when-issued securities held by the Fund, exceed its net assets. The Fund
does not expect that its commitment to purchase when-issued securities
will at any time exceed, in the aggregate, 20% of its total assets.
Futures and Options Transactions
In an effort to protect against the effect of adverse changes in
interest rates, the Fund may purchase and sell interest rate futures
contracts and may purchase put options on interest rate futures contracts
and debt securities (practices known as "hedging"). A futures contract is
an agreement by the Fund to buy or sell securities at a specified date and
price. The purchase of a put option on a futures contract allows the Fund,
at its option, to enter into a particular futures contract to sell
securities at any time up to the option's expiration date.
The Fund may purchase put options on interest rate futures
contracts or sell interest rate futures contracts (that is, enter into a
futures contract to sell the underlying security) to attempt to reduce the
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<PAGE>
risk of fluctuations in its share value. The Fund may purchase an interest
rate futures contract (that is, enter into a futures contract to purchase
the underlying security) to attempt to establish more definitely the
return on securities the Fund intends to purchase. The Fund may not use
these instruments for speculation or leverage.
The Fund may seek to enhance its income or hedge the portfolio by
writing (selling) covered call options (i.e., the Fund will own the
underlying instrument while the call is outstanding) and covered put
options (i.e., the Fund will have cash, U.S. government securities or
other high-grade, liquid debt instruments in a segregated account in an
amount not less than the exercise price while the put is outstanding).
The Fund may write call options on securities in its portfolio in
an attempt to realize, through the premium the Fund receives, a greater
current return than would be realized on the securities alone. The Fund
may write put options in an attempt to realize enhanced income when it is
willing to purchase the underlying instrument for its portfolio at the
exercise price. The Fund may also purchase call options for the purpose of
acquiring the underlying instruments for its portfolio. At times, the net
cost of acquiring instruments in this manner (the exercise price of the
call option plus the premium paid) may be less than the cost of acquiring
the instruments directly.
The success of the Fund's hedging activities in reducing risks
depends on many factors, the most significant of which is the Adviser's
ability to predict market interest rate changes correctly. Generally
speaking, selling futures contracts, purchasing put options and writing
call options are strategies designed to protect against falling security
prices, and can limit potential gains if prices rise. Purchasing futures
contracts, purchasing call options and writing put options are strategies
whose returns tend to rise and fall together with security prices, and can
cause losses if prices fall. If security prices remain unchanged over
time, option writing strategies tend to be profitable, while option buying
strategies tend to decline in value. However, there may not be perfect
correlation between movements in the price of an option or futures
contract and movements in the price of the underlying security.
The Fund could also be exposed to risks if it could not close out
its futures or options positions because of an illiquid secondary market.
The Adviser attempts to minimize the possible negative effects of these
factors through careful selection and monitoring of the Fund's futures and
options positions. The Adviser is of the opinion that the Fund's
investments in futures transactions will not have a material adverse
effect on the Fund's liquidity or ability to honor redemptions.
The purchase and sale of options and futures contracts involve
risks different from those involved with direct investments in securities,
and also require different skills by the Adviser in managing the Fund's
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Fund, if the Adviser is not
successful in employing such instruments in managing the Fund's
18
<PAGE>
investments or in predicting interest rate changes, the Fund's performance
will be worse than if the Fund had not made such investments. In addition,
the Fund will pay commissions and other costs in connection with such
investments, which may increase the Fund's expenses and reduce its yield.
A more complete discussion of the possible risks involved in transactions
in options and futures contracts is contained in the Statement of
Additional Information. The Fund's current policy is to limit options and
futures transactions to those described above.
The Fund will not enter into any futures contracts or related
options if the sum of the initial margin deposits on futures contracts and
related options and premiums paid for related options the Fund has
purchased would exceed 5% of the Fund's total assets. The Fund will not
purchase futures contracts or related options if, as a result, more than
33-1/3% of the Fund's total assets would be so invested.
Portfolio Turnover
For the year ended December 31, 1994, the Fund's portfolio
turnover rate was 315.7% and the Fund anticipates that in the future its
portfolio turnover rate may exceed 300%. The portfolio turnover rate is
computed by dividing the lesser of purchases or sales of securities for
the period by the average value of portfolio securities for that period.
Short-term securities are excluded from the calculation. A portfolio
turnover rate in excess of 100% will involve correspondingly greater
transaction costs which will be borne directly by the Fund. It may also
increase the amount of short-term capital gains, if any, realized by the
Fund and will affect the tax treatment of distributions paid to
shareholders because distributions of net short-term capital gains are
taxable as ordinary income.
How to Purchase and Redeem Shares
Institutional Clients of Fairfield Group, Inc. may purchase
Navigator Shares from Fairfield, the principal offices of which are
located at 200 Gibraltar Road, Horsham, Pennsylvania 19044. Other
investors eligible to purchase Navigator Shares may purchase them through
a brokerage account with Legg Mason Wood Walker, Inc. ("Legg Mason").
(Legg Mason and Fairfield are wholly owned subsidiaries of Legg Mason,
Inc., a financial services holding company.)
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares and $100 for each subsequent investment. The Fund
reserves the right to change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in Accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within five business days to the selling organization.
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Beginning in June, 1995, payment must be made within three business days
to the selling organization. Orders received by Legg Mason or Fairfield
before the close of regular trading on the New York Stock Exchange, Inc.
("Exchange") (normally 4:00 p.m. Eastern time) ("close of the Exchange")
on any day the Exchange is open will be executed at the net asset value
determined as of the close of the Exchange on that day. Orders received
by Legg Mason or Fairfield after the close of the Exchange or on days the
Exchange is closed will be executed at the net asset value determined as
of the close of the Exchange on the next day the Exchange is open. See
"How Net Asset Value is Determined" on page 16. The Fund reserves the
right to reject any order for shares of the Fund, to suspend the offering
of shares for a period of time, or to waive any minimum investment
requirements.
In addition to Institutional Clients purchasing shares directly
from Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
No sales charge is imposed by the Fund in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in the Fund. Information
concerning these services and any applicable charges will be provided by
the Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone,
in accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by
calling Fairfield at 1-800-441-3885. Legg Mason clients should call their
investment executives or Legg Mason Funds Processing at 1-800-822-5544.
Callers should have available the number of shares (or dollar amount) to
be redeemed and their account number.
Orders for redemption received by Legg Mason or Fairfield before
the close of the Exchange on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Fund, for redemption at the net asset value per share determined as of
the close of the Exchange on that day. Requests for redemption received by
Legg Mason or Fairfield after the close of the Exchange will be executed
at the net asset value determined as of the close of the Exchange on its
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<PAGE>
next trading day. A redemption request received by Legg Mason or Fairfield
may be treated as a request for repurchase and, if it is accepted by Legg
Mason, your shares will be purchased at the net asset value per share
determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by
a direct wire to a domestic commercial bank account previously designated
by the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the Fund. Such payments will
normally be transmitted on the next business day following receipt of a
valid request for redemption. However, the Fund reserves the right to
take up to seven days to make payment upon redemption if, in the judgment
of the Adviser, the Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) The proceeds of your redemption or repurchase
may be more or less than your original cost. If the shares to be redeemed
or repurchased were paid for by check (including certified or cashier's
checks) within 15 business days of the redemption or repurchase request,
the proceeds may not be disbursed unless the Fund can be reasonably
assured that the check has been collected.
The Fund will not be responsible for the authenticity of
redemption instructions received by telephone, provided it follows
reasonable procedures to identify the caller. The Fund may request
identifying information from callers or employ identification numbers. The
Fund may be liable for losses due to unauthorized or fraudulent
instructions if it does not follow reasonable procedures. Telephone
redemption privileges are available automatically to all shareholders
unless certificates have been issued. Shareholders who do not wish to have
telephone redemption privileges should call their investment executive for
further instructions.
Because of the relatively high cost of maintaining small
accounts, the Fund may elect to close any account with a current value of
less than $500 by redeeming all of the shares in the account and mailing
the proceeds to the investor. However, the Fund will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value
per share. If the Fund elects to redeem the shares in an account, the
shareholder will be notified that the account is below $500 and will be
allowed 60 days in which to make an additional investment in order to
avoid having the account closed.
How Shareholder Accounts are Maintained
A shareholder account is established automatically for each
investor. Any shares the investor purchases or receives as a dividend or
other distribution will be credited directly to the account at the time of
purchase or receipt. No certificates are issued unless the shareholder
specifically requests them in writing. Shareholders who elect to receive
certificates can redeem their shares only by mail. Certificates will be
issued in full shares only. No certificates will be issued for shares
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<PAGE>
prior to 15 business days after purchase of such shares by check unless
the Fund can be reasonably assured during that period that payment for the
purchase of such shares has been collected. Fund shares may not be held
in, or transferred to, an account with any brokerage firm other than
Fairfield, Legg Mason or their affiliates.
Every shareholder of record will receive a confirmation of each
new share transaction with the Fund, which will also show the total number
of shares being held in safekeeping by the Fund's Transfer Agent for the
account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a
fiduciary, advisory, custodial, or other similar capacity on behalf of
persons maintaining Customer Accounts at Institutional Clients will
normally be held of record by the Institutional Clients. Therefore, in
the context of Institutional Clients, references in this Prospectus to
shareholders mean the Institutional Clients rather than their Customers.
Institutional Clients purchasing or holding Navigator Shares on behalf of
their customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to the Fund on a timely
basis.
How Net Asset Value Is Determined
Net asset value per share is determined daily as of the close of
the Exchange, on every day that the Exchange is open, by subtracting the
liabilities attributable to Navigator Shares from the total assets
attributable to such shares and dividing the result by the number of
Navigator Shares outstanding. Securities owned by the Fund for which
market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by the Corporation's Board of
Directors.
Dividends and Other Distributions
The Fund declares dividends to holders of Navigator Shares out of
its investment company taxable income attributable to those shares, which
consists of net investment income and net short-term capital gain.
Dividends from net investment income are declared daily and paid monthly.
Shareholders begin to earn dividends on their Fund shares as of settlement
date, which is normally the fifth business day after their orders are
placed with their investment executive. Beginning in June, 1995,
settlement date will normally be the third business day after orders are
placed with their investment executive. Dividends from net short-term
capital gain and distributions of substantially all net capital gain (the
excess of net long-term capital gain over net short-term capital loss)
generally are declared and paid after the end of the taxable year in which
the gain is realized. A second distribution of net capital gain may be
necessary in some years to avoid imposition of the excise tax described
under the heading "Additional Tax Information" in the Statement of
Additional Information. Shareholders may elect to:
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1. Receive both dividends and capital gain distributions in
Navigator Shares of the Fund;
2. Receive dividends in cash and capital gain distributions in
Navigator Shares of the Fund;
3. Receive dividends in Navigator Shares of the Fund and capital
gain distributions in cash; or
4. Receive both dividends and capital gain distributions in
cash.
In certain cases, shareholders may reinvest dividends and capital
gain distributions in shares of another Navigator fund. Please contact
your investment executive for additional information on this option.
Qualified retirement plans that obtained Navigator Shares through exchange
generally receive dividends and other distributions in additional shares.
If no election is made, both dividends and other distributions
will be credited to the Institutional Client's account in Navigator Shares
at the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also will be credited to the
account at that net asset value. If an investor elects to receive
dividends or other distributions in cash, a check will be sent. Investors
purchasing through Fairfield may elect at any time to change the
distribution option by notifying the Fund in writing at: Navigator U.S.
Government Intermediate-Term Portfolio, c/o Fairfield Group, Inc., 200
Gibraltar Road, Horsham, Pennsylvania 19044. Those purchasing through
Legg Mason should write to Navigator U.S. Government Intermediate-Term
Portfolio, c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore,
Maryland, 21203-1476. An election must be received at least 10 days
before the record date in order to be effective for dividends and capital
gain distributions paid to shareholders as of that date.
Tax Treatment of Dividends and Other Distributions
The Fund intends to continue to qualify for treatment as a
regulated investment company under the Code so that it will be relieved of
federal income tax on that part of its investment company taxable income
and net capital gain that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income
(whether paid in cash or reinvested in Navigator Shares) are taxable to
its shareholders (other than qualified retirement plans) as ordinary
income to the extent of the Fund's earnings and profits. Distributions of
the Fund's net capital gain (whether paid in cash or reinvested in
Navigator Shares), when designated as such, are taxable to those
shareholders as long-term capital gain, regardless of how long they have
held their Fund shares.
The Fund sends each shareholder a notice following the end of
each calendar year specifying the amounts of all dividends and capital
gain distributions paid (or deemed paid) during that year. The Fund is
required to withhold 31% of all dividends, capital gain distributions and
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redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. The Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of another Legg Mason fund
will generally have similar tax consequences. If Fund shares are
purchased within 30 days before or after redeeming other Fund shares
(regardless of class) at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
A dividend or capital gain distribution paid shortly after shares
have been purchased, although in effect a return of investment, is subject
to federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or capital gain distribution could cause the investor to incur
tax liabilities and should not be made solely for the purpose of receiving
the dividend or capital gain distribution.
The foregoing is only a summary of some of the important federal
tax considerations generally affecting the Fund and its shareholders; see
the Statement of Additional Information for a further discussion. In
addition to federal income tax, you may also be subject to state and local
income taxes on distributions from the Fund, depending on the laws of your
home state and locality, though the portion of the dividends paid by the
Fund attributable to direct U.S. government obligations is not subject to
state and local income taxes in most jurisdictions. The Fund's annual
notice to shareholders regarding the amount of dividends identifies this
portion. Prospective shareholders are urged to consult their tax advisers
with respect to the effects of this investment on their own tax
situations.
Shareholder Services
Confirmations and Reports
Shareholders will receive from the distributor a confirmation
after each transaction (except a reinvestment of dividends or capital
gains distributions). An account statement will be sent to each
shareholder monthly unless there has been no activity in the account, in
which case an account statement will be sent quarterly. Reports will be
sent to shareholders at least semiannually showing the Fund's portfolio
and other information; the annual report will contain financial statements
audited by the Corporation's independent accountants.
Confirmations for purchases and redemptions of Navigator Shares
made by Institutional Clients acting in a fiduciary, advisory, custodial,
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<PAGE>
or other similar capacity on behalf of persons maintaining Customer
Accounts at Institutional Clients will be sent to the Institutional
Client. Beneficial ownership of shares by Customer Accounts will be
recorded by the Institutional Client and reflected in the regular account
statements provided by them to their Customers.
Shareholder inquiries should be addressed to "Navigator U.S.
Government Intermediate-Term Portfolio, c/o Legg Mason Funds Processing,
P.O. Box 1476, Baltimore, Maryland 21203-1476" or "c/o Fairfield Group
Inc., 200 Gibraltar Road, Horsham, Pennsylvania 19044."
Exchange Privilege
Holders of Navigator Shares are entitled to exchange them for
Navigator Shares of the following funds, provided the shares to be
acquired are eligible for sale under applicable state securities laws:
Navigator Money Market Fund, Inc. -- Prime Obligations Portfolio
A money market fund seeking to provide as high a level of current
interest income as is consistent with liquidity and relative stability of
principal.
Navigator Tax-Free Money Market Fund, Inc. -- Navigator Tax-Free Money
Market Fund
A money market fund seeking to provide its shareholders with as
high a level of current interest income that is exempt from federal income
taxes as is consistent with liquidity and relative stability of principal.
Navigator Value Trust
A mutual fund seeking long-term growth of capital.
Navigator Special Investment Trust
A mutual fund seeking capital appreciation by investing
principally in issuers with market capitalizations of less than $2.5
billion.
Navigator Total Return Trust
A mutual fund seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk.
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current
income consistent with stability of principal.
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<PAGE>
Investments by exchange into the other Navigator funds are made
at the per share net asset value determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your investment
executive. To effect an exchange by telephone, please call your investment
executive with the information described in the section "How to Purchase
and Redeem Shares," page 13. The Fund reserves the right to modify or
terminate the exchange privilege upon 60 days' notice to shareholders.
There is no assurance that the money market funds will be able to
maintain a $1.00 share price. None of the funds is insured or guaranteed
by the U.S. Government.
The Fund's Board of Directors, Manager
and Investment Adviser
Board of Directors
The business and affairs of the Fund are managed under the
direction of the Corporation's Board of Directors.
Manager
Pursuant to a management agreement with the Fund ("Management
Agreement"), which was approved by the Corporation's Board of Directors,
Legg Mason Fund Adviser, Inc., a wholly owned subsidiary of Legg Mason,
Inc., serves as the Fund's manager. The Manager manages the non-investment
affairs of the Fund, directs all matters related to the operation of the
Fund and provides office space and administrative staff for the Fund. The
Fund pays the Manager, pursuant to the Management Agreement, a fee equal
to an annual rate of 0.55% of the Fund's average daily net assets.
The Manager acts as manager, investment adviser or investment
consultant to fifteen investment company portfolios (excluding the Fund)
which had aggregate assets under management of over $3.8 billion as of
February 28, 1995. The Manager's address is 111 South Calvert Street,
Baltimore, Maryland 21202. The Fund's Manager has agreed that until
October 31, 1995 or when the Fund reaches net assets of $400 million,
whichever occurs first, it will continue to reimburse fees and/or assume
other expenses to the extent the Fund's expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) exceed during any month an
annual rate of 0.45% (Navigator Shares) of the Fund's average daily net
assets for such month.
Investment Adviser
Western Asset Management Company, another wholly owned subsidiary
of Legg Mason, Inc., serves as investment adviser to the Fund pursuant to
the terms of an Investment Advisory Agreement with the Manager, which was
approved by the Corporation's Board of Directors. The Adviser manages the
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<PAGE>
investment and other affairs of the Fund and directs the investments of
the Fund in accordance with its investment objective, policies and
limitations. For these services, the Manager (not the Fund) pays the
Adviser a fee, computed daily and payable monthly, at an annual rate equal
to 40% of the fee received by the Manager, or 0.22% of the Fund's average
daily net assets.
An investment committee has been responsible for the day-to-day
management of the Fund since its inception.
The Adviser also renders investment advice to eleven open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $2.3 billion as of
February 28, 1995. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $10.8
billion as of that date. The address of the Adviser is 117 East Colorado
Boulevard, Pasadena, California 91105.
The Adviser has managed fixed income portfolios continuously
since its founding in 1971, and has focused exclusively on such accounts
since 1984.
In managing fixed-income portfolios, the Adviser first studies
the range of factors that influence interest rates and develops a
long-term interest rate forecast. It then allocates available funds to
those sectors of the market (for example, government, corporate, or
mortgage-backed securities), which it considers most attractive. Then it
selects the specific issues which it believes represent the best values.
All three decisions are integral parts of the Adviser's portfolio
management process and contribute to its performance record.
The Fund's Distributor
Legg Mason is the distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Corporation. The Underwriting Agreement
obligates Legg Mason to pay certain expenses in connection with the
offering of shares of the Fund, including any compensation to its
investment executives, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at the Fund's
expense, and for any supplementary sales literature and advertising costs.
Legg Mason also receives a fee from BFDS for assisting it with
its transfer agent and shareholder servicing functions. For the period
ended December 31, 1994, Legg Mason received $2 for performing such
services in connection with this Fund.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason,
Inc., is a registered broker-dealer with principal offices located at 200
27
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Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield sells Navigator
Shares pursuant to a Dealer Agreement with the Fund's Distributor, Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Fund for selling Navigator Shares.
The Chairman, President and Treasurer of the Corporation are
employed by Legg Mason.
Description of the Corporation and its Shares
The Corporation is a diversified open-end investment company
which was incorporated in Maryland on April 28, 1987. The Articles of
Incorporation of the Corporation permit the Board of Directors to create
additional series (or portfolios), each of which issues a separate class
of shares. There are currently four portfolios of the Corporation,
including the Fund. While additional series may be created in the future,
there is no intention at this time to form any particular additional
series.
The Corporation has authorized one billion shares of common
stock, par value $.001 per share. The Fund currently offers two classes of
shares -- Navigator Class and Class A (known as "Primary Shares"). Each
class represents interests in the same pool of assets of the Fund. A
separate vote is taken by a class of shares of the Fund if a matter
affects just that class of shares. Each class of shares may bear
differing class-specific expenses. Salespersons and others entitled to
receive compensation for selling or servicing Fund shares may receive more
with respect to one class than another.
The initial and subsequent investment minimums for Primary Shares
are $1,000 and $100, respectively. Investments in Primary Shares may be
made through a Legg Mason or Affiliated Investment Executive, through the
Future First Systematic Investment Plan or through automatic investment
arrangements.
Holders of Primary Shares bear distribution and service fees
under Rule 12b-1 at the rate of 0.50% of the net assets attributable to
Primary Shares. Investors in Primary Shares may elect to receive
dividends and/or capital gain distributions in cash through the receipt of
a check or a credit to their Legg Mason account. The per share net asset
value of the Navigator Class of Shares, and dividends and distributions
(if any) paid to Navigator shareholders, are generally expected to be
higher than those of Primary Shares of the Fund, because of the lower
expenses attributable to Navigator Shares. The per share net asset value
of the classes of shares will tend to converge, however, immediately after
the payment of ordinary income dividends. Primary Shares of the Fund may
be exchanged for the corresponding class of shares of other Legg Mason
Funds. Investments by exchange into the Legg Mason Funds sold with an
initial sales charge are made at the per share net asset value, plus the
sales charge, determined on the same business day as redemption of the
Fund shares the investors in Primary Shares wish to redeem.
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The Fund's Manager has agreed that until October 31, 1995 or when
the Fund reaches net assets of $400 million, whichever occurs first, it
will continue to reimburse management fees and/or assume other expenses to
the extent the expenses of Primary Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during any month an annual
rate of 0.95% of the average daily net assets of Primary Shares for such
month. Reimbursement by the Manager reduces Fund expenses and increases
its yield and total return.
The Board of Directors of the Fund does not anticipate that there
will be any conflicts among the interests of the holders of the different
classes of Fund shares. On an ongoing basis, the Board will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholder meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Corporation will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to the Fund at 111 South Calvert Street,
Baltimore, Maryland 21202, stating the purpose of the proposed meeting and
the matters to be acted upon.
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